The Week in Muniland

It was another week of strong performance in the muni market, as demand continued to drive the market forward. For the week, two-, 10- and 30-year AAA yields fell 4, 7, and 3 basis points (bps), respectively. The Bloomberg Municipal Bond Index (the Index) returned 0.38% last week, bringing year-to-date returns to 1.63%.
 

• Why it matters: Last week’s performance was even more notable, as it came in the face of a heavy week of issuance, with ~$13 billion pricing last week. Demand continued to flood the market, with investors adding $1.6 billion last week according to Lipper. These inflows are on the heels of two consecutive weeks of inflows each above $2 billion—something not seen in the market since February of 2009. The muni market so far this year has been the top-performing US fixed-income asset class, with the Index’s 1.63% and Bloomberg Municipal High Yield Index’s 1.92% year-to-date returns outpacing the pre-tax 1.28% return of the Bloomberg US Aggregate and the 0.73% return of the Bloomberg US Corporate High Yield Index. Supply next week is expected to remain light given the shortened week, with ~$7 billion expected to price.
   

US Core CPI for January rose 0.3% month over month and 2.5% year over year—both of which were in line with expectations.
 

• Why it matters: The release showed a return to the pre-shutdown trend. The government shutdown in 4Q complicated the data collection and seems to have distorted the data for October and November relative to the underlying trend. Currently, each of the 3-, 6-, and 12-month run rates of inflation are hovering around 2.5%—which is close, but not quite at, the Fed’s 2% target. This data release makes it clear that the extremely low inflation prints in 4Q were statistical noise rather than a meaningful signal. With inflation holding modestly above the Fed’s target and the labor market still showing resilience, the Fed has ample justification to proceed slowly with rate cuts. We do not expect a rate cut in March, and unless the labor market weakens significantly, we anticipate it will take a few months of slower inflation to entice the Fed to restart its easing cycle. We think that will happen over time as the impact of tariffs gradually fades from the calculation, and thus, we continue to expect two rate cuts, totaling 50bps, later this year.
   

While tax-exempt issuance continues to make headlines, investors should not underestimate the impact of demand.
 

• Why it matters: Supply is once again breaking records, with year-to-date issuance exceeding 2025’s pace. Perhaps more importantly, returns so far this year are a reminder that significant supply does not necessarily equate to poor market performance. Not only has the Index returned a very solid 1.63% this year, but the market has also been remarkably consistent. The Index has posted negative daily returns just two days this year. Municipals have also performed well relative to Treasuries—particularly in short and intermediate maturities—with after-tax spreads in those parts of the curve tightening upwards of 28 bps, as shown in Display 2. Reinvestment cash from coupons and maturities, coupled with strong demand, have been crucial in taking down the wave of issuance this year. The market has seen 12 consecutive weeks of inflows and 19 weeks of inflows out of the last. 20. To be fair, it is unlikely to see this level of return consistency persist throughout the year. If (or when) demand does soften, it would likely cause some underperformance in the market—particularly given how expensive municipals have become in certain parts of the curve. As such, we believe investors should consider allocating a small portion of their portfolio to US Treasuries until valuations become more attractive.