The Week in Muniland

It was another rollercoaster week, as geopolitical volatility continued to dominate the fixed-income markets. For the week, two-, 10- and 30-year AAA yields rose 12, 13, and 8 basis points (bps), respectively. The Bloomberg Municipal Bond Index (the Index) returned –0.49% last week, bringing year-to-date returns to 0.23%.

• Why it matters: As we have mentioned, the muni market will not be entirely insulated from broader moves in the US Treasury market. But in addition to the move higher in yields last week, we did see some modest underperformance versus US Treasuries, with after-tax spreads widening a few basis points across the curve. On a more positive note, the market did feel relatively orderly as inflows continue to hit the market. Investors added $1.8 billion to the market last week, according to Lipper. This marks the 17th consecutive week of inflows, and 24 out of the last 25. Year-to-date inflows now sit at ~$24.6 billion and have been crucial in digesting the record-breaking issuance this year. This week’s calendar will be sizeable, with nearly $15 billion expected to price. As a result of the selloff this month, we believe high-grade valuations have become more attractive (Display 2). If next week’s supply drives after-tax spreads even wider, it could provide an opportunity for investors to add to their exposure at much more compelling valuations.
  
  

The FOMC left its policy rate unchanged at 3.50% to 3.75%, as had been widely expected.

• Why it matters: In their accompanying statement, the Fed—as one should expect—noted that the war in Iran’s impact on the economy is “uncertain.” Given this, the growth and inflation forecasts are tentative at best until the effects of the war filter through the economy. Fed Chair Jerome Powell did comment that the Fed believes itself to be well-positioned to react once those effects become clearer. If we take the Fed’s assessment as describing the economy before the oil shock, the likely path of interest rates over the medium term is toward very gradual rate cuts—roughly 50 bps or so. No members of the committee foresee a rate hike this year, and only one does next year. Powell also indicated that the key variable in the near term—leaving aside the oil shock—is the behavior of core goods prices, which the Fed expects to moderate as tariffs fall out of the calculation. In that scenario, the Fed will need to decide how to respond if higher oil prices begin to push inflation higher. All that said, we continue to expect a total of 50 bps of cuts over the medium term, which would bring the policy rate down to 3.00% to 3.25%, a reasonable estimate of the neutral rate. If the war persists, the Fed could remain on hold for longer, but it is too early to make that determination with confidence.
  
  

The belly of the yield curve has seen some weakness over the last few weeks in the municipal market.

• Why it matters: This weakness has shown up both in absolute terms and relative to US Treasuries. From an absolute perspective, 10-year AAA yields have risen 48 bps this month compared to the 26 bps increase both in 2- and 20-year AAA yields. Furthermore, after-tax spreads in the intermediate part of the curve have widened up to 23 bps this month (Display 2). While certainly not the sole contributor to this weakness, it is worth noting that we have seen an increase in issuance in the belly of the curve, with supply in the 5- to 15-year spot compromising ~43% of year-to-date issuance, marking both a 5% increase versus 2025 and versus the trailing 10-year average. Despite the recent weakness, we continue to advocate for a barbell maturity structure, as it allows investors to capitalize on attractive yield plus roll (Display 3).