To achieve the efficient resource utilization of municipal sludge and promote the sustainability of pavement materials, this study employed liquefaction technology to process municipal sludge. The resulting liquefied-sludge-derived heavy oil was blended with 50# asphalt to prepare a bio-asphalt that can replace petroleum asphalt. Firstly, orthogonal experiments were conducted to analyze the effects of the solid–liquid ratio (dried sludge:anhydrous ethanol), liquefaction temperature, and reaction time on the yield of the sludge-derived heavy oil. Then, the basic characteristics of the sludge-derived heavy oil were studied using an elemental analyzer, gel permeation chromatography, thermal analysis, gas chromatography–mass spectrometry, and Fourier transform infrared spectroscopy, and the differences between the sludge-derived heavy oil and petroleum asphalt were compared. Finally, to determine the appropriate content range of sludge-derived heavy oil in bio-asphalt, a comprehensive evaluation of the three major indicators, aging resistance, storage stability, low-temperature performance, and high-temperature performance was carried out for the prepared bio-asphalts. The results indicated that the optimal preparation process for liquefied sludge oil involves a liquefaction temperature of 275 °C, a solid–liquid ratio of 1:15, and a reaction time of 1 h, resulting in an oil production rate of 22.36%. The sludge-derived heavy oil demonstrated good thermal stability, with its primary components being aliphatic compounds (carboxylic acids, ketones, aldehydes, alcohols, alkanes, esters, etc.), with esters being the most abundant. Furthermore, the sludge-derived heavy oil was highly compatible with 50# asphalt, but no chemical reaction occurred between them. When the sludge-derived heavy oil content ranged from 5% to 20%, bio-asphalt showed favorable aging resistance and storage stability. As the content of the sludge-derived heavy oil increased, its low-temperature performance improved, but there was a slight decrease in high-temperature performance. Additionally, correlation analysis highlighted that the influence of sludge-derived heavy oil content on the high-temperature performance of bio-asphalt was notably greater than on other properties. Therefore, the recommended dosage of sludge-derived heavy oil should be between 5% and 10%.