The Week in Muniland

The municipal market was not entirely insulated from the geopolitical volatility that struck all markets last week. For the week, two-, 10-, and 30-year AAA yields rose 10, 18, and 9 basis points (bps), respectively. The Bloomberg Municipal Bond Index (the Index) returned –0.78% last week, bringing year-to-date returns to 1.41%.

• Why it matters: It was quite a run of stability for the municipal market. Prior to March 2nd, the Index had not only generated positive returns for 27 consecutive days, but it had only seen two days of negative absolute performance all year. Last week was also only the second week of negative performance all year. We did also see after-tax spreads widen – particularly in short and intermediate maturities. But perhaps most importantly, last week’s volatility felt relatively orderly in the municipal market as inflows continued to be supportive. Per Lipper, investors added $1.4 billion to the market last week, marking the 15th consecutive week of inflows. Year to date, investors have added a whopping $18.4 billion to the market. This demand has been a key catalyst in municipal outperformance this year, with short and intermediate maturity after-tax spreads tightening upwards of 31 bps, as shown in Display 2. Supply is expected to pick up this week, with ~$13 billion expected to price. As we have previously mentioned, in the event heavy new-issue supply injects periodic volatility, it can provide investors with an attractive opportunity to enter the market or add to their exposure at more attractive valuations.
  
  

The U.S. economy lost 92,000 jobs in February, falling well short of the expected gain of 50,000.

• Why it matters: While some of the weakness is a reflection of strike activity in the medical sector, downward revisions to the prior two months removed an additional 69,000 from reported payrolls, and the unemployment rate rose by a tenth of a percentage point to 4.4% despite a decline in labor force participation. In short, the report was weak across every meaningful dimension. In a vacuum, one weak payrolls report is unlikely to be sufficient to prompt the Federal Reserve to cut rates this month—particularly with oil prices surging and prices rising at the gas pump, which pose risks to inflation and inflation expectations. That said, the Fed is likely to acknowledge that if the labor market weakness proves durable—this is the only weak payrolls print so far this year—they are in a good position to respond with rate cuts, if necessary. The Fed will not (nor should it) overreact to one month’s print in what tends to be a volatile data series.
  
  

Despite a more challenging budget environment, state rainy day funds remained near all-time highs entering fiscal 2026, according to NASBO.

• Why it matters: Per the report, a modest change in reserve ratios is a reflection of a slight uptick in general fund spending rather than widespread drawdowns of savings. In fact, most states continued to increase rainy-day fund balances in fiscal 2025 and enacted fiscal 2025 budgets point to further strengthening, with many states planning additional deposits or maintaining balances at elevated levels. In scenarios in which states are considering the usage of reserves, it is planned, intentional and limited in scope. Generally, states are not tapping reserves to cover routine operating gaps and are treating their reserves as shock absorbers, not revenue substitutes. Overall, states’ strong reserve positions remain an important source of credit support and help cushion states against near-term economic uncertainty.