The Week in Muniland

It was a relatively unassuming week in the municipal market, as the market digested the Fed’s decision and began to look forward to 2026. Yields remained relatively unchanged across the curve. Two-year AAA yields were flat, while 10- year yields fell 1 basis point (bp), and 30-year yields rose 3 bp. The Bloomberg Municipal Bond Index (the Index) returned -0.04% last week, bringing month-to-date and year-to-date returns to -0.16% and 3.99%, respectively.
 

• Why it matters: Relative performance versus Treasuries was mixed last week. Short-maturity municipals modestly underperformed with 2-year after-tax spreads widening a few basis points. Further out the curve, however, after-tax spreads were unchanged week over week. Flows in the market were much more muted last week, with only $16 million of inflows according to Lipper. Of note, open-ended funds saw $394 million of outflows, while exchange-traded funds (ETFs) saw $410 million of inflows—potentially indicative of year-end tax trading as investors swap between mutual funds and ETFs. Supply will continue to slow down next week, with just $6 billion expected to price.
   

The FOMC cut its benchmark interest rate last week by 25 bps to 3.50%–3.75% as was widely expected.
 

• Why it matters: In its statement, the Fed hinted that a pause is likely in January, stating that the “extent and timing” of any additional move on rates would depend on data—words that were not included in the last meeting’s statement, and words that historically have signaled an intention to pause. Its intention to pause was reinforced during Chair Jerome Powell’s press conference. He mentioned repeatedly that with the policy rate now within a broad range of estimates of the neutral policy rate, the Fed is “well positioned to wait and see how the economy evolves.” To be clear, that does not mean that the Fed won’t cut rates in January, but it is relatively clear that its base case is to pause at the next meeting. We believe that additional weakness in the labor market would entice the Fed to cut. And to be fair, the last payrolls report was released in September, and if the data we receive between now and the end of January suggest that the labor market has weakened further, the FOMC could very well cut rates once again. Our belief is that the labor market will continue to soften to the point that it makes sense for the Fed to cut rates closer to 3% in the coming months—and eventually below that. That said, investors should remember to take the long view—whether or not the Fed cuts rates again in January, it is likely to cut rates throughout 2026. The dot plot shows most members of the committee anticipate lowering rates in 2026, although by varying degrees. If the labor market happens to hold up, then the pace of easing will be determined by the degree that inflation falls. And as the impact of tariffs falls out of the year-over-year equation, inflation should resume its downward trend, opening the way for cuts.
   

With the Index up 3.99% this year, it has been a relatively solid year of performance for the municipal market. However, there has been significant volatility throughout the year creating what we believe is an opportunity for proactive tax management strategies.
 

• Why it matters: As we highlight in our recent blog, 2025 is a perfect example as to why waiting to year-end may not always be advantageous for tax-loss harvesting. Fifteen-year municipal bond yields began the year at 3.27%, then rose to 4.24% by mid-April, only to drop back down to 3.71% a few weeks later and then climbed to 4% in July. These significant moves in yields created many opportunities for managers to harvest losses. However, longer-maturity yields have dropped significantly since August, eroding many of the tax-loss harvesting opportunities for the year.