The Week in Muniland

Another week, another strong performance out of the municipal market as technicals remained firm. For the week, two- and 30-year AAA yields fell 3 and 6 basis points (bps), respectively, while 10-year yields were unchanged. The Bloomberg Municipal Bond Index (the Index) returned 0.33% last week, bringing year-to-date returns to 2.20%.

• Why it matters: While relative performance versus US Treasuries was relatively soft across the curve, the market continues to deliver strong returns to municipal investors. Demand remained a significant tailwind, with investors adding $1 billion to the market last week, per Lipper. This marks the 14th consecutive week of inflows, and 21 out of the last 22 weeks have seen inflows. Year-to-date fund flows have been significant at $17.6 billion, which is tracking to be the third highest on record to start a year. As we have mentioned, demand for tax-exempt income has more than offset the record-breaking amount of issuance this year. Issuance this week is estimated at ~$11 billion and should not be problematic as March reinvestment cash hits the market.
  
  

With the Index returning 1.25% in February, municipal bonds delivered strong returns, extending the rally that began earlier in the year as demand continued to overwhelm supply.

• Why it matters: Persistent fund flows have absorbed new issuance and reinforced positive momentum throughout the market. Despite record-breaking supply, the market has enjoyed tailwinds from record February reinvestment cash and inflows that are more than double compared with last year. Against this strength, two-, 10- and 30-year AAA yields fell 15, 11 and 12 bps in February. And while demand has been quite significant, it has been primarily concentrated in the belly and shorter end of the curve, causing the yield curve to steepen and driving valuations in short-to-intermediate bonds to expensive levels, as shown in Display 2. Looking forward, investors should remember that there is some seasonality in the muni market. Historically, the spring months tend to feature weaker fund flows (as investors sell for tax purposes) and elevated supply when compared to the winter months. To be clear, we do not expect any technical shift to drive a material sell-off in municipal bonds, but rather provide an opportunity to purchase tax-exempts at more favorable valuations. And with after-tax spreads at expensive levels in the belly of the curve, we believe investors should consider allocating a small portion of their portfolio in US Treasuries until valuations become more attractive.
  
  

Credit upgrades continued to outpace downgrades in both the fourth quarter and calendar year 2025, according to a recently released Moody’s report.

• Why it matters: This marks the fifth consecutive year where upgrades have exceeded downgrades. To be fair, however, the margin of upgrades versus downgrades narrowed in 2025 compared to prior years. This is not unexpected, as revenue growth has begun to normalize following years of record-breaking strength. As we have consistently highlighted, today is an environment for active credit research as the fundamental backdrop becomes more uneven with winners and losers. For example, the higher education sector saw more downgrades than upgrades in 2025, while state and local governments saw more upgrades compared to downgrades. More broadly, municipal credit has delivered strong returns in 2026, with the Bloomberg Municipal High Yield Index returning 2.67% and outperforming the 2.20% return of the Index. The longer-duration nature of muni credit offers investors a compelling blend of duration and income, with the Bloomberg Municipal High Yield Index currently sporting a yield to worst of 5.38%.