The Week in Muniland

The muni market rebounded from a poor end to April. While outperforming US Treasuries for the week, AAA yields were down approximately 2 basis points (bps) across most of the curve. The Bloomberg Municipal Bond Index returned 0.20% last week, bringing the year-to-date return to 1.18%.

• Why it matters: Despite everything going on in the world, demand for municipal bonds has been insatiable. According to J.P. Morgan, year-to-date net inflows into the muni market have reached $33.5 billion, which is the third-highest year-to-date (YTD) inflow since recordkeeping began in 1992. This week saw $1.8 billion pour into munis, which is the strongest weekly inflow since late 2025 and twice the trailing 25-week average. The theme of where these flows are finding a home remains the same. This week, two-thirds of inflows have gone into long bonds, while nearly one-third went into high yield. So it shouldn’t come as a surprise to investors that long bonds have materially outperformed shorter bonds (Display 1) and that high yield has outperformed high grade. The Bloomberg Municipal Bond High Yield Index is up 2.36% YTD compared to 1.09% for the Bloomberg AAA Municipal Bond Index. We have recommended and continue to recommend owning both long-maturity bonds and high yield as part of an overall municipal bond allocation.
  
  

Sitting like an elephant on your bond positions is not the most effective way to manage a portfolio.

• Why it matters: Many intermediate-duration bond managers will build portfolios by owning bonds in the 6- to 15- year part of the yield curve. At times, that position may make sense, but does it always? Remember that there is a time and a place for every investment. Let’s drill down into 2026. The muni yield curve started the year steep and remains steep, just not as much. For example, the 10s/20s slope was nearly 140 bps earlier this year, when the historical average was 60 bps. So what should that signal to a manager? Own longer bonds. We are not suggesting owning only long bonds, but a combination of long and shorter bonds to reach an overall intermediate duration was absolutely the correct position to be in. As Display 1 indicates, the belly of the curve has meaningfully underperformed a combination of short and long. Display 3 provides a glimpse into what could be expected in terms of returns across the yield curve. Given the curve’s steepness, a 20-year bond has yield plus roll of roughly 5% compared to that of a 5-year bond (3%) and of a 10-year bond (less than 4%). This is the reason long bonds are in such high demand. We believe the opportunity is extremely attractive. Although an investor can never time the steepening or flattening of a yield curve, they can always count on an eventual reversion to the mean. And while you’re waiting, you’re being well compensated.
  
  

The April jobs report was stronger than expected, meaning that the labor market has so far held up despite the increase in energy costs due to the conflict in Iran.

• Why it matters: Payroll growth was solid in April, increasing by 115,000, alongside a modest downward revision of 16,000 to prior months’ totals. The unemployment rate was unchanged at 4.3%. Wage growth was slightly softer; however, from a take-home-pay perspective, an increase in hours worked offset much of that weakness. Overall, these data do not materially change our assessment of the economy and do not suggest that the Federal Reserve needs to begin cutting rates in the near term. Policymakers can afford to remain patient and assess the evolving effects of the Iran conflict over time without immediate concern that the labor market is deteriorating.