The Week in Muniland

While it was a relatively sanguine week in the muni market, it remained on solid footing and generated positive returns for a second consecutive week. Two- and 10-year yields each fell 1 basis point (bp) respectively, while 30-year yields fell 6 bps. The Bloomberg Municipal Bond Index (Index) returned 0.15% last week, bringing month-to-date returns to 0.80%.
 

• Why it matters: While absolute returns were positive, relative performance versus US Treasuries was mixed.Short and intermediate maturities modestly underperformed, with after-tax spreads widening up to 6 bps in those parts of the curve. Long maturities, however, saw after-tax spreads tighten slightly. It is unsurprising to see some underperformance in shorter maturities given how expensive they have become. That said, the drumbeat of demand continued, with investors adding $633 million inflows to the market last week, marking the 10th consecutive week of inflows. The calendar this week looks extremely light—particularly so for this year—with just ~$5 billion expected to price. This should be more than digested by the market as July 1 reinvestment cash from coupons and maturities hits the market this week.
   

The first half of 2026 demonstrated the resilience of the municipal market. The Index has seen a respectable 2.15% return so far this year, as investors absorbed elevated issuance through historically strong fund flows and persistent demand for tax-exempt income.
 

• Why it matters: At the start of the year, many investors, including ourselves, expected another challenging supply backdrop, and those expectations have largely proved correct. Issuance this year sits around $250 billion, marking a 6% increase over 2025’s high watermark, and a 40% increase versus the five-year average. Demand, however, has been just as significant as supply. Year-to-date inflows into mutual funds and exchange-traded funds now sit at $50 billion and continue to track at the second-highest pace on record. However, as we detail in our third section below and in Display 2, relative performance has been mixed across the curve. Both short- and long maturity municipals have significantly outperformed comparable maturity Treasuries, while intermediate maturities have underperformed. From a credit perspective, lower-rated bonds have lead the way, with the Bloomberg Municipal HY Index returning 3.87% this year, outpacing the 1.97% return of the Bloomberg AAA Index. While supply overall has been significant, high-yield supply has been relatively subdued, particularly given the increase in flows to high-yield mandates this year. Turning the page to July and August, we do expect the technical backdrop to strengthen further, with only ~$4 billion in net supply expected.
   

As markets shift, active managers must adjust their positioning accordingly.
 

• Why it matters: A barbell maturity structure has significantly outperformed this year (Display 1), and the belly of the curve has underperformed. Not only have intermediate maturities underperformed in absolute terms, but they have also widened relative to US Treasuries, with 10-year AAA after-tax spreads increasing 7 bps year to date. Some of the weakness in the belly of the curve can be attributable to the shift in issuance. For example, issuance in the six-to-10-year maturity range is up a staggering 34% compared to last year, while issuance in the 21-to-30 year maturity range has decreased 19%. Not only that, but demand patterns have also shifted, with flows into longer-maturity products up 18% year over-year. Given the barbell outperformance, it may make sense to reduce (but not eliminate) the magnitude of the barbell maturity structure to capture attractive opportunities—such as prepay gas and AMT airports—in the belly of the curve. To be clear, the long end of the curve still looks attractive, and a barbell may still make sense for investors, albeit to a lesser degree than at the beginning of this year.