The Week in Muniland

It was a bumpy week in the municipal market, as it contended with a heavy new issue calendar combined with broader volatility across the fixed-income markets. For the week, two-year AAA yields were flat, while 10- and 30-year AAA yields rose 8 and 7 basis points (bps), respectively. The Bloomberg Municipal Bond Index (Index) returned –0.58% last week, bringing year-to-date returns to 0.65%.

• Why it matters: Fund flows remained supportive last week, with investors adding $839 million to the market, and extending the inflow streak to 18 consecutive weeks. However, the calendar and US Treasury volatility proved too much for the market to fully absorb, resulting in higher absolute yields and weaker relative performance versus US Treasuries. After-tax spreads widened across most tenors of the curve, with the biggest increase seen in 10- to 20-year bonds, which widened upwards of 11 bps. Short-maturity munis, however, continue to remain stubbornly expensive and investors may consider short-maturity US Treasuries in lieu of short tax-exempts. Looking forward, this week’s calendar looks more manageable, with $11–$12 billion of tax-exempts expected to price. For investors, while there is certainly the potential for short-term volatility, the market currently offers investors plenty of income, with the Index currently sporting a yield to worst of 3.90%, which is within a few basis points of the highest level we have seen this year. Not only that, but after-tax spreads look much more compelling, as shown in Display 2.
   

Municipal issuance remains on a record pace in 2026, but the supply story for investment-grade bonds has not been consistent across the curve. New-money borrowing has helped drive increased issuance in intermediate maturities, while longer-dated issuance has continued to decline.
 

• Why it matters: Not only has issuance in the 6–10-year maturity range increased 30% year over year, that growth has been led by new-money financing (rather than refunding activity), which has increased significantly in those tenors of the curve. By contrast, issuance in 21–30 year and 30+ years have declined 19% and 25%, respectively, driven by lower levels of new-money issuance. Heavier intermediate-maturity issuance has created pressure in the belly of the curve, while the scarcity of long-dated supply, combined with increased inflows into longer-dated products, has supported the long-end of the curve. As such, year-to-date performance across the curve has not been uniform, as shown in Display 1. But this underperformance in intermediate maturities has created opportunities—particularly in sectors such as prepay gas and alternative minimum tax (AMT) airport bonds, where the inverted AMT spread curve adds additional potential for price appreciation in the belly.
   

Downgrades outpaced upgrades in the second quarter of 2026, according to a recently released Moody’s report.
 

• Why it matters: Per the report, downgrades accounted for slightly more than half of all rating actions, with 116 obligors downgraded compared to 96 that were upgraded. Importantly, the negative rating activity remained largely confined to sectors facing well-anticipated headwinds (as we noted early last year) as opposed to broadbased fundamental weakness. Higher education, K–12 education and not-for-profit healthcare experienced the most downgrades as demographic, enrollment and operating headwinds continue to create some ratings pressure. In our view, the report reinforces themes that we have been mentioning for some time. Higher education and healthcare are not necessarily sectors to avoid entirely, but rather areas where issuer selection and fundamental analysis are critical. At the same time, Moody’s also noted, and we would agree, that the broader municipal credit landscape remains resilient, with many issuers continuing to demonstrate solid financial performance and balance-sheet flexibility despite a more challenging backdrop.