The Week in Muniland

The municipal market continued to stabilize following a challenging July and generated another week of positive performance. For the week, both two- and 10-year AAA yields fell 2 basis points (bps), while 30-year AAA yields were flat. The Bloomberg Municipal Bond Index (Index) returned 0.12% last week, bringing year-to-date returns to 1.23%.
 

• Why it matters: At the risk of sounding like a broken record, flows continued to flood the muni market. Last week, investors added $759 million to the market, according to Lipper. This extended the streak of inflows to 17 weeks, although last week’s flows did moderate—particularly compared to the week prior—with last week’s flows representing 0.7 times the 25-week trailing average. Year-to-date flows sit at $64.7 billion, continuing to hold as the second-highest pace on record behind 2021. Those flows helped drive relative outperformance, with after-tax spreads tightening in most tenors of the curve. But with market yields remaining attractive and intermediate and long maturity after-tax spreads still offering reasonable value, the market continues to offer opportunities for longterm investors. This week’s calendar is sizeable, with ~$17 billion expected to price, but August 15th reinvestment cash and any additional inflows should further support the market.
   

US CPI for July was in line with expectations, with core CPI rising 0.2% month over month and 2.5% year over year, while headline inflation was up 0.1% month over month and 3.4% year over year.
 

• Why it matters: This data does not swing the pendulum closer or further away from a rate hike. That decision is very much still pending, although our expectation is that they will stay on hold for the remainder of the year. With core CPI at 2.5%, it is tied for the lowest level since the pandemic, although it is still elevated relative to the Fed’s target. Shelter inflation remained relatively contained and, given its lagging relationship with home prices, should slow further in the upcoming months. To be fair, it is important to remember that the Fed’s preferred measure is core PCE, which is an outlier. It has moved higher in recent months despite core CPI and other measures easing. That gap explains the range of views within the FOMC. Members that maintain a firm focus on the target believe persistent inflation (measured by PCE) warrant tighter policy, while members who take a broader view of inflation do not. Fed Chair Kevin Warsh appears to be in the latter camp, although it is hard to know for sure given the limited detail he has offered so far. Looking forward, there is plenty for investors to watch, between his speech at Jackson Hole later this month, where he may provide more insight into his perspective of the economy, the Fed’s reaction function, and tools he would use to slow inflation if needed. After that, there is still another payrolls report and another CPI report before the next Fed meeting. 
   

Despite record levels of tax-exempt issuance this year, supply growth has not been evenly distributed across the entire market.
 

• Why it matters: High-yield supply has been muted relative to the surge in investment-grade supply. Year to date, HY issuance has accounted for ~6% of total tax-exempt issuance, near the lows reached in 2023. But this trend is not new. From 2019-2021, HY issuance represented ~9-13% of overall supply, but has dropped to 5-8% of issuance over the last five years. The composition of issuance has also shifted. Since 2025, over half of HY issuance has been 20-year maturities or longer, compared with just 25% during the 2013-2019 period. That said, the combination of constrained supply and strong investor demand for credit has created a strong technical tailwind for lower-rated bonds, propelling the Bloomberg Municipal High Yield Index to a 3.43% year-to-date return versus the 1.23% return of the Index.