The Week in Muniland

It was another soft week as supply continued to weigh on the market. Short maturities remain stubbornly resistant, with two-year AAA yields unchanged last week, while 10- and 30-year AAA yields rose 2 and 3 basis points (bps), respectively. The Bloomberg Municipal Bond Index (Index) returned –0.16% last week, bringing year-to-date returns to 0.49%.
 

• Why it matters: Despite the modestly negative performance, inflows continued to flood the market, with $1.4 billion of inflows last week according to Lipper. Last week’s flows were an uptick relative to weeks prior at 1.4 times the trailing 25-week average, and also extended the inflow streak to 19 weeks. However, the heavy primary calendar once again reared its head. Tax-exempts generally underperformed Treasuries and after-tax spreads widened in maturities outside of five years, with the 15–20-year spot seeing the biggest increase of upward of 12 bps. As mentioned, short-maturity tax-exempts continued to buck the trend, with two-year after-tax spreads tightening 7 bps versus the widening seen further out the curve. With $14 billion expected to price, this week’s calendar looks heavy once again, but should be somewhat offset by September 1st reinvestment cash.
   

The Index’s unassuming month-to-date return of 0.06% does not fully capture the movement under the hood.
 

• Why it matters: There was no summer slowdown in August from a supply perspective. Issuance in August is tracking to be approximately $56 billion—essentially tied with the all-time high of $56.7 billion that was set in October 2024. This would also make August 2026 one of the six months ever on record to surpass $50 billion of issuance in a single month. As has been the case for most of the year, performance across the curve was not uniform in August as the yield curve continued to shift. After months of flattening, the curve steepened in August. Two- and 10-year AAA yields have fallen 12 and 4 bps respectively, while 20-year yields have risen 8 bps. Furthermore, relative performance versus Treasuries has been bifurcated across the curve. Two- and 10-year after-tax spreads have tightened 17 and 5 bps, respectively, while 20-year after-tax spreads have risen 12 bps as shown in Display 2. As we turn the page to September, investors may be wondering what to expect as we begin the fall. From a technical perspective, things do look modestly more challenging, with net supply in September and October estimated at +$17 billion and +$25 billion, respectively. That said, the market is entering this period with after-tax spreads already looking fairly attractive, which may provide some degree of an offset. However, we would view any short-term volatility this fall as an even more attractive entry point for investors looking to add to their exposure, as technicals typically firm up toward the end of the year.
   

Fed Chair Kevin Warsh gave his first major speech at the Jackson Hole conference since his appointment.
 

• Why it matters: Historically, Jackson Hole is used as an opportunity to adjust market pricing of the path of interest rates or describe significant changes to the way the Fed is likely to act in the short-term. Unsurprisingly, Chair Warsh did not follow precedent given his strong aversion to forward guidance. He did, however, use it as an opportunity to reinforce that PCE is the target measure for inflation, and that interest rates are the Fed’s primary tool. Those comments make his speech more hawkish compared to his prior remarks, and should also offer some relief to the long end of the curve. All that said, our view remains consistent that the next CPI print will likely be the determinant in the Fed’s September rate decision. While it is just one CPI print, it does carry increased significance given the Federal Open Market Committee is evenly split between those who are ready to raise rates and those who are not. If the inflation print is soft, the case for holding will likely prevail. If the print is firm, a hike seems much more likely.