The Long View Podcast

Episode: Lyle Fitterer – The State of the Municipal Bond Market Today
Hosts: Christine Benz, Amy Arnott (Morningstar)
Date: December 16, 2025

Overview

This episode features a detailed discussion with Lyle Fitterer, senior portfolio manager and co-lead of the municipal bond sector at Baird Advisors, on the complexities, risks, opportunities, and evolving nature of the municipal (muni) bond market. Fitterer, who brings 36 years of industry experience, shares practical insights into muni bond due diligence, current market valuations, technology and AI in analysis, climate and geographic risks, indexing versus active management, and the mechanics of portfolio construction for individual and institutional investors.

Key Discussion Points & Insights

1. Understanding and Analyzing the Municipal Bond Market

Fragmentation, Inefficiency, and Due Diligence

The muni market is large but more fragmented and less transparent than the broader taxable bond markets.
Fitterer’s team uses a proprietary credit scoring system to triage 5,000 obligors into “strong,” “core,” and “watch” buckets—narrowing to about 400 bonds requiring close monitoring.
All team members are cross-trained (analysts, portfolio managers, traders), promoting market coverage and efficiency.
Tech tools scrape nationwide news and help catch local developments early.
High-yield credits are not their focus due to the research time required.

“It's one of the most inefficient markets out there. So the ability to add alpha as an active manager, we think, is enhanced.”
— Lyle Fitterer [02:13]

2. The Role of Artificial Intelligence in Muni Bond Analysis

AI tools are increasingly used to summarize offering statements, compare covenants, and extract credit characteristics.
Younger team members often drive AI adoption and innovation.

“It's the younger people…they tend to come up with more and more ideas. And then, you know, the old guys like myself tend to just copy those.”
— Lyle Fitterer [08:37]

3. The M/T (Muni-to-Treasury) Ratio & Its Interpretation

(M/T) ratio compares yields of AAA-rated munis to Treasuries; typically, the higher your tax bracket, the more attractive muni bonds become.
Important to consider long-term averages over attempts to “time” entry.
Yield differentials along the curve explained by callable vs. bullet structures and changing tax rates.

“If you're in that 40% tax bracket, it’s almost always better to be in munis from a long term perspective.”
— Lyle Fitterer [12:23]

4. Current Valuations and Market Dynamics

Significant yield volatility occurred in 2025, especially in the long end due to ETFs enabling shorting and introducing more turnover.
30-year muni ratios approached 100% relative to Treasuries, presenting relative value—especially in longer maturities.
Today, two-year and 15–20 year parts of curve offer better value; overall rates are much more attractive now than in recent years.

“You can buy a 15 to 20 year muni at 4% absolute yield…for the top marginal taxpayer, that gets you to maybe six and three quarter percent.”
— Lyle Fitterer [16:35]

5. The Active vs. Passive Debate: Muni Index Funds and ETFs

Fixed income, especially munis, remains a fertile ground for active management due to inefficiencies.
Certain passive options like Vanguard’s intermediate muni fund have performed well, but active funds have historically added 25–50 bps in excess return.
Long-end ETFs often have benchmarks that exclude higher-income sectors, leading to lower long-term returns.

“We would still say that you’re better off from a long term perspective being with an active manager…within that intermediate [index fund] category…they’ve actually done a pretty good job of mimicking that index.”
— Lyle Fitterer [20:53]; [18:50]

6. Revenue Bonds vs. General Obligation (GO) Bonds

GO bonds: Backed by the full faith and taxing power of the issuing municipality. Historically seen as safer, but limits exist (e.g., Detroit’s experience).
Revenue bonds: Backed by specific revenue streams (utilities, healthcare, higher-ed fees). In some bankruptcies, revenue bondholders have fared better than GO holders.
Fitterer’s current allocations: overweight local GOs, underweight state GOs, neutral on revenue bonds—a quality-focused stance.

“It ebbs and flows over time…based upon valuations or relative value in the market.”
— Lyle Fitterer [26:37]

7. Secular Risks: Specific Issuers and Sectors to Avoid

Ongoing concerns around Chicago, Chicago Board of Education, and some Illinois entities due to pension issues and declining tax bases.
Carefully selected local credits (“good credits in a bad credit environment”) can still be attractive.
High caution for unenhanced multifamily housing, certain project finance deals, and tobacco bonds (unless state-enhanced).

“If the yield looks too good…there’s probably a reason behind it. So just be careful and do your due diligence.”
— Lyle Fitterer [33:55]

8. The Threat of Losing Muni Tax Exemption

Perennial political debates; complete elimination unlikely due to importance in funding infrastructure and services.
Selective, targeted changes are more plausible than sweeping repeal.

“In most cases it presents an opportunity for investors and so we don’t get overly excited about it from a long term perspective.”
— Lyle Fitterer [35:55]

9. Tobacco Bonds Explained

Arise from a master settlement agreement—backed by future payments tied to cigarette consumption.
With smoking rates declining faster than expected, repayment risk has grown and prices fallen.
Some are safer due to additional state guarantees; “do your homework.”

“The problem has been that cigarette consumption hasn’t been declining at 3 to 4%. More recently it’s been declining at say 7 to 10%...”
— Lyle Fitterer [37:08]

10. Climate/ESG Risks in Muni Portfolios

Difficult to predict events; focus is on diversification and issuer quality rather than location-specific avoidance.
Overconcentration risks are especially acute for smaller, less-diversified individual portfolios.

“I think we think about it more in terms of you need to build a broadly diversified portfolio…you do want to assign some sort of…slight premium to investing in areas where maybe statistically there’s a higher probability.”
— Lyle Fitterer [41:00]

11. Individual Bonds vs. Funds: Tax, Diversification, and Liquidity

Owning individual bonds can make sense for state tax benefits, but avoid overconcentration in one state due to local risks.
Combining state-specific SMA and national funds may provide an optimal blend.
Fixed-maturity pooled vehicles don’t guarantee par return like an individual bond does.

“We would argue no [to 100% in-state]. …Put part of your money in that pooled vehicle and then that also give you some liquidity.”
— Lyle Fitterer [45:18]

12. Trading Costs for Individual Investors

Costs have dropped due to electronic/algorithmic platforms, but still notable—especially for entire portfolio liquidations or bad market days.

“Instead of it being…a point or two points, maybe it’s a half a point or maybe it’s even a quarter of a point…”
— Lyle Fitterer [49:36]

13. Munis as “Shock Absorbers” and Downside Protection

Munis have historically lower volatility than corporates on a tax-adjusted basis.
Near-term volatility can spike due to supply/demand, ETF flows, or shocks.
High-quality, diversified portfolios with liquidity at their core are critical for sleep-at-night buffers.

“If you want an asset class where…this is supposed to be a hey sleep at night part of your portfolio and also a place to get liquidity in times of distress…that’s the reason why we manage the portfolios the way that we do…”
— Lyle Fitterer [53:55]

Notable Quotes & Memorable Moments

| Timestamp | Quote | Speaker | | --------- | ----- | ------- | | 02:13 | “It's one of the most inefficient markets out there. So the ability to add alpha as an active manager, we think, is enhanced.” | Lyle Fitterer | | 08:37 | “It's the younger people…they tend to come up with more and more ideas. And then, you know, the old guys like myself tend to just copy those.” | Lyle Fitterer | | 12:23 | “If you're in that 40% tax bracket, it’s almost always better to be in munis from a long term perspective.” | Lyle Fitterer | | 20:53 | “We would still say that you’re better off from a long term perspective being with an active manager…within that intermediate [index fund] category…they’ve actually done a pretty good job of mimicking that index.” | Lyle Fitterer | | 26:37 | “It ebbs and flows over time…based upon valuations or relative value in the market.” | Lyle Fitterer | | 33:55 | “If the yield looks too good…there’s probably a reason behind it. So just be careful and do your due diligence.” | Lyle Fitterer | | 35:55 | “In most cases it presents an opportunity for investors and so we don’t get overly excited about it from a long term perspective.” | Lyle Fitterer | | 41:00 | “I think we think about it more in terms of you need to build a broadly diversified portfolio…you do want to assign some sort of…slight premium to investing in areas where maybe statistically there’s a higher probability.” | Lyle Fitterer | | 45:18 | “We would argue no [to 100% in-state]. …Put part of your money in that pooled vehicle and then that also give you some liquidity.” | Lyle Fitterer | | 49:36 | “Instead of it being…a point or two points, maybe it’s a half a point or maybe it’s even a quarter of a point…” | Lyle Fitterer | | 53:55 | “If you want an asset class where…this is supposed to be a hey sleep at night part of your portfolio and also a place to get liquidity in times of distress…that’s the reason why we manage the portfolios the way that we do…” | Lyle Fitterer |

Key Timestamps for Important Segments

01:27 – 06:48: How Baird analyzes the muni market and conducts due diligence
06:48 – 08:59: Use of technology and AI tools in muni bond research
08:59 – 13:38: Understanding and utilizing the muni-to-Treasury ratio
13:38 – 17:44: Valuations, opportunity shifts, and recent yield volatility
17:44 – 21:54: Active vs. passive management; indexing opportunities and pitfalls
21:54 – 27:30: Revenue vs. General Obligation bonds – risks and merits
28:01 – 34:10: Municipalities and sectors to avoid today; credit-specific stories
34:10 – 36:23: Threats to muni tax exemption – real or overblown?
36:23 – 39:31: Why tobacco bonds are in muni funds—and their challenges
39:31 – 44:28: Assessing and managing climate and ESG risks
44:28 – 48:59: Individual bonds vs. funds: considerations for tax, liquidity, and diversification
48:59 – 50:44: Trading costs for individual munis and changes over time
50:44 – 55:31: Downside protection, volatility, and constructing “sleep at night” portfolios

Final Takeaways

The muni market remains a fertile ground for active managers, especially given the potential for alpha through careful credit analysis and smart portfolio construction.
Technology and AI are enhancing due diligence, but expertise and experience are irreplaceable.
Valuation opportunities shift frequently, and careful attention to yield curves and sector dispersion is key.
Investors must weigh individual bonds for state tax benefits against overconcentration and liquidity risks—hybrid approaches often work best.
Diversification and quality remain paramount, especially with unpredictable climate, demographic, and socioeconomic trends.
Despite perennial political threats, the tax exemption for muni interest is likely to persist.
Both individual and institutional investors benefit from understanding nuances—whether it’s trading costs, credit structures, or ESG risks.

For further inquiries or to request follow-up discussions, Lyle Fitterer welcomes contact.

The Long View Podcast

Episode: Lyle Fitterer – The State of the Municipal Bond Market Today
Hosts: Christine Benz, Amy Arnott (Morningstar)
Date: December 16, 2025

Overview

Key Discussion Points & Insights

1. Understanding and Analyzing the Municipal Bond Market

Fragmentation, Inefficiency, and Due Diligence

The muni market is large but more fragmented and less transparent than the broader taxable bond markets.
Fitterer’s team uses a proprietary credit scoring system to triage 5,000 obligors into “strong,” “core,” and “watch” buckets—narrowing to about 400 bonds requiring close monitoring.
All team members are cross-trained (analysts, portfolio managers, traders), promoting market coverage and efficiency.
Tech tools scrape nationwide news and help catch local developments early.
High-yield credits are not their focus due to the research time required.

“It's one of the most inefficient markets out there. So the ability to add alpha as an active manager, we think, is enhanced.”
— Lyle Fitterer [02:13]

2. The Role of Artificial Intelligence in Muni Bond Analysis

AI tools are increasingly used to summarize offering statements, compare covenants, and extract credit characteristics.
Younger team members often drive AI adoption and innovation.

“It's the younger people…they tend to come up with more and more ideas. And then, you know, the old guys like myself tend to just copy those.”
— Lyle Fitterer [08:37]

3. The M/T (Muni-to-Treasury) Ratio & Its Interpretation

(M/T) ratio compares yields of AAA-rated munis to Treasuries; typically, the higher your tax bracket, the more attractive muni bonds become.
Important to consider long-term averages over attempts to “time” entry.
Yield differentials along the curve explained by callable vs. bullet structures and changing tax rates.

“If you're in that 40% tax bracket, it’s almost always better to be in munis from a long term perspective.”
— Lyle Fitterer [12:23]

4. Current Valuations and Market Dynamics

Significant yield volatility occurred in 2025, especially in the long end due to ETFs enabling shorting and introducing more turnover.
30-year muni ratios approached 100% relative to Treasuries, presenting relative value—especially in longer maturities.
Today, two-year and 15–20 year parts of curve offer better value; overall rates are much more attractive now than in recent years.

“You can buy a 15 to 20 year muni at 4% absolute yield…for the top marginal taxpayer, that gets you to maybe six and three quarter percent.”
— Lyle Fitterer [16:35]

5. The Active vs. Passive Debate: Muni Index Funds and ETFs

Fixed income, especially munis, remains a fertile ground for active management due to inefficiencies.
Certain passive options like Vanguard’s intermediate muni fund have performed well, but active funds have historically added 25–50 bps in excess return.
Long-end ETFs often have benchmarks that exclude higher-income sectors, leading to lower long-term returns.

“We would still say that you’re better off from a long term perspective being with an active manager…within that intermediate [index fund] category…they’ve actually done a pretty good job of mimicking that index.”
— Lyle Fitterer [20:53]; [18:50]

6. Revenue Bonds vs. General Obligation (GO) Bonds

GO bonds: Backed by the full faith and taxing power of the issuing municipality. Historically seen as safer, but limits exist (e.g., Detroit’s experience).
Revenue bonds: Backed by specific revenue streams (utilities, healthcare, higher-ed fees). In some bankruptcies, revenue bondholders have fared better than GO holders.
Fitterer’s current allocations: overweight local GOs, underweight state GOs, neutral on revenue bonds—a quality-focused stance.

“It ebbs and flows over time…based upon valuations or relative value in the market.”
— Lyle Fitterer [26:37]

7. Secular Risks: Specific Issuers and Sectors to Avoid

Ongoing concerns around Chicago, Chicago Board of Education, and some Illinois entities due to pension issues and declining tax bases.
Carefully selected local credits (“good credits in a bad credit environment”) can still be attractive.
High caution for unenhanced multifamily housing, certain project finance deals, and tobacco bonds (unless state-enhanced).

“If the yield looks too good…there’s probably a reason behind it. So just be careful and do your due diligence.”
— Lyle Fitterer [33:55]

8. The Threat of Losing Muni Tax Exemption

Perennial political debates; complete elimination unlikely due to importance in funding infrastructure and services.
Selective, targeted changes are more plausible than sweeping repeal.

“In most cases it presents an opportunity for investors and so we don’t get overly excited about it from a long term perspective.”
— Lyle Fitterer [35:55]

9. Tobacco Bonds Explained

Arise from a master settlement agreement—backed by future payments tied to cigarette consumption.
With smoking rates declining faster than expected, repayment risk has grown and prices fallen.
Some are safer due to additional state guarantees; “do your homework.”

“The problem has been that cigarette consumption hasn’t been declining at 3 to 4%. More recently it’s been declining at say 7 to 10%...”
— Lyle Fitterer [37:08]

10. Climate/ESG Risks in Muni Portfolios

Difficult to predict events; focus is on diversification and issuer quality rather than location-specific avoidance.
Overconcentration risks are especially acute for smaller, less-diversified individual portfolios.

“I think we think about it more in terms of you need to build a broadly diversified portfolio…you do want to assign some sort of…slight premium to investing in areas where maybe statistically there’s a higher probability.”
— Lyle Fitterer [41:00]

11. Individual Bonds vs. Funds: Tax, Diversification, and Liquidity

Owning individual bonds can make sense for state tax benefits, but avoid overconcentration in one state due to local risks.
Combining state-specific SMA and national funds may provide an optimal blend.
Fixed-maturity pooled vehicles don’t guarantee par return like an individual bond does.

“We would argue no [to 100% in-state]. …Put part of your money in that pooled vehicle and then that also give you some liquidity.”
— Lyle Fitterer [45:18]

12. Trading Costs for Individual Investors

Costs have dropped due to electronic/algorithmic platforms, but still notable—especially for entire portfolio liquidations or bad market days.

“Instead of it being…a point or two points, maybe it’s a half a point or maybe it’s even a quarter of a point…”
— Lyle Fitterer [49:36]

13. Munis as “Shock Absorbers” and Downside Protection

Munis have historically lower volatility than corporates on a tax-adjusted basis.
Near-term volatility can spike due to supply/demand, ETF flows, or shocks.
High-quality, diversified portfolios with liquidity at their core are critical for sleep-at-night buffers.

“If you want an asset class where…this is supposed to be a hey sleep at night part of your portfolio and also a place to get liquidity in times of distress…that’s the reason why we manage the portfolios the way that we do…”
— Lyle Fitterer [53:55]

Notable Quotes & Memorable Moments

Key Timestamps for Important Segments

01:27 – 06:48: How Baird analyzes the muni market and conducts due diligence
06:48 – 08:59: Use of technology and AI tools in muni bond research
08:59 – 13:38: Understanding and utilizing the muni-to-Treasury ratio
13:38 – 17:44: Valuations, opportunity shifts, and recent yield volatility
17:44 – 21:54: Active vs. passive management; indexing opportunities and pitfalls
21:54 – 27:30: Revenue vs. General Obligation bonds – risks and merits
28:01 – 34:10: Municipalities and sectors to avoid today; credit-specific stories
34:10 – 36:23: Threats to muni tax exemption – real or overblown?
36:23 – 39:31: Why tobacco bonds are in muni funds—and their challenges
39:31 – 44:28: Assessing and managing climate and ESG risks
44:28 – 48:59: Individual bonds vs. funds: considerations for tax, liquidity, and diversification
48:59 – 50:44: Trading costs for individual munis and changes over time
50:44 – 55:31: Downside protection, volatility, and constructing “sleep at night” portfolios

Final Takeaways

The muni market remains a fertile ground for active managers, especially given the potential for alpha through careful credit analysis and smart portfolio construction.
Technology and AI are enhancing due diligence, but expertise and experience are irreplaceable.
Valuation opportunities shift frequently, and careful attention to yield curves and sector dispersion is key.
Investors must weigh individual bonds for state tax benefits against overconcentration and liquidity risks—hybrid approaches often work best.
Diversification and quality remain paramount, especially with unpredictable climate, demographic, and socioeconomic trends.
Despite perennial political threats, the tax exemption for muni interest is likely to persist.
Both individual and institutional investors benefit from understanding nuances—whether it’s trading costs, credit structures, or ESG risks.

For further inquiries or to request follow-up discussions, Lyle Fitterer welcomes contact.

Lyle Fitterer: The State of the Municipal Bond Market Today

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Summary

The Long View Podcast

Overview

Key Discussion Points & Insights

1. Understanding and Analyzing the Municipal Bond Market

2. The Role of Artificial Intelligence in Muni Bond Analysis

3. The M/T (Muni-to-Treasury) Ratio & Its Interpretation

4. Current Valuations and Market Dynamics

5. The Active vs. Passive Debate: Muni Index Funds and ETFs

6. Revenue Bonds vs. General Obligation (GO) Bonds

7. Secular Risks: Specific Issuers and Sectors to Avoid

8. The Threat of Losing Muni Tax Exemption

9. Tobacco Bonds Explained

10. Climate/ESG Risks in Muni Portfolios

11. Individual Bonds vs. Funds: Tax, Diversification, and Liquidity

12. Trading Costs for Individual Investors

13. Munis as “Shock Absorbers” and Downside Protection

Notable Quotes & Memorable Moments

Key Timestamps for Important Segments

Final Takeaways

Summary

The Long View Podcast

Overview

Key Discussion Points & Insights

1. Understanding and Analyzing the Municipal Bond Market

2. The Role of Artificial Intelligence in Muni Bond Analysis

3. The M/T (Muni-to-Treasury) Ratio & Its Interpretation

4. Current Valuations and Market Dynamics

5. The Active vs. Passive Debate: Muni Index Funds and ETFs

6. Revenue Bonds vs. General Obligation (GO) Bonds

7. Secular Risks: Specific Issuers and Sectors to Avoid

8. The Threat of Losing Muni Tax Exemption

9. Tobacco Bonds Explained

10. Climate/ESG Risks in Muni Portfolios

11. Individual Bonds vs. Funds: Tax, Diversification, and Liquidity

12. Trading Costs for Individual Investors

13. Munis as “Shock Absorbers” and Downside Protection

Notable Quotes & Memorable Moments

Key Timestamps for Important Segments

Final Takeaways