The Week in Muniland

The muni market posted another negative performance week, with broader macro events and significant new issue supply continuing to weigh on the market. The muni yield curve steepened with two-, 10- and 30-year AAA yields up 11, 14 and 15 basis points (bps), respectively. The Bloomberg Municipal Bond Index (the Index) returned –0.81% last week, bringing year-to-date returns to –0.33%.
 

• Why it matters: The recent muni market sell-off has been orderly, suggesting investors are not exiting the market. In fact, demand remains positive, though it has slowed: Lipper reported $138 million of inflows, just 14% of the 25-week average. Year-to-date net inflows now total $69.3 billion, the second-highest level on record behind only 2021’s $81.1 billion. Next week’s sizable $15 billion new issue calendar could create another challenging return environment. Heavy September supply is common, and the market has averaged a –0.66% return for the month over the past 10 years. Still, performance has typically improved into the fourth quarter, making September weakness a potential opportunity for investors to add exposure.
   

How should investors think about investing in a muni market that has posted two consecutive months of negative performance with sizable new issuance on the horizon.
 

• Why it matters: Investors should consider using any near-term weakness in the municipal bond market as an opportunity to begin dollar-cost averaging. While technical conditions may be more challenging in the fall with sizable net supply expected in September and October, that potential volatility can create more attractive entry points rather than a reason to remain on the sidelines. Current valuations already offer a compelling starting point: the Index yield has risen to 4.07%, translating to a taxable-equivalent yield (TEY) of 6.88%, a level not seen since July 2025. Following that prior peak, yields later declined meaningfully, underscoring the risk of waiting too long for a perfect entry point. Through another lens, the yield on the Bloomberg Corporate High Yield Index is 7.37%, which is only 49 bps above the TEY of the Index with a lot more credit risk. Dollar-cost averaging allows investors to participate in today’s elevated income levels while preserving flexibility. With the average price of the Index slightly below par, munis have become more attractively valued on both an absolute and relative basis, particularly after cheapening materially versus US Treasuries since June 30 (Display 2). Municipal credit (A, BBB and high yield) has outperformed high–grade bonds (Display 1), while the long–end of the yield curve, specifically the 11- to 13-year range, offers meaningful roll potential of nearly +100 bps (Display 3). We’ve seen prior periods when munis become relatively cheap and absolute yields too high only for munis to rally. Nothing stays cheap forever.
   

Labor market resilience keeps Fed hike in play.
 

• Why it matters: The August labor report showed a clear rebound in the US job market, with payrolls rising by 162,000 and July’s initially negative figure revised up to a gain of 21,000. Together, the data indicate that the labor market remains solid, giving the Federal Reserve room to raise rates if inflation warrants it. The economy has added roughly 100,000 jobs per month over the past three months, enough to keep labor market conditions balanced. The unemployment rate remains low by historical standards and below the Fed’s forecast, although weaker labor force participation may be overstating the apparent strength of the job market. Participation improved slightly in August but remains subdued, partly due to demographics and migration policy. Overall, the report suggests the labor market is resilient and stable, leaving the September Fed decision highly dependent on the next core CPI reading. In our opinion, a monthly increase of 0.30% or higher would likely prompt a hike, while below 0.20% would likely lead to a pause.