The Week in Muniland

The muni market ended the month of July with positive performance, although last week ended on a sour note. Two and 10-year AAA yields rose 2 basis points (bps) and 1 bps, respectively, while 30-year yields fell 1 bps. The Bloomberg Municipal Bond Index returned 0.13% last week, bringing month-to-date returns to –1.85%. Year-to-date returns now sit at 0.43%.

• Why it matters: Following a brutal first three weeks of July, the muni market found some relief with a slight bounce back. With yields spiking and munis becoming relatively more attractive versus US Treasuries, investors found an opportunity to become liquidity providers. What will challenge the market next week is an expected $17–$19 billion new issue calendar. This sizable new issue calendar could rank within the top three or four weeks of all time. At the beginning of the summer, August was anticipated to have a favorable supply/demand technical backdrop. However, elevated supply has brought that into question. Nevertheless, with yields materially higher (Display 1), munis relatively cheaper (Display 2) and August reinvestment hitting the market, there is a case to be made that munis will settle down.
  
  

Investing in a volatile environment is not always easy. Investors need to understand the data, and position appropriately.

• Why it matters: There is still value out in the longer end of the yield curve, given its steepness and the value of roll (Display 3). We’re not recommending investing in just long bonds, but rather to pair them with short bonds to build a barbell structure. The short and long ends of the yield curve have been the best performing, with the belly of the curve lagging. Given the recent underperformance within the belly of the curve, there are opportunities t find value. We have recommended reducing the barbell to take advantage of these opportunities, especially in prepay energy and airport bonds, particularly those that are subject to the alternative minimum tax (AMT). The AMT curve is inverted, creating more value in the belly rather than out long. On the other hand, investors want to be careful in the charter school sector, which is under pressure from a declining K–12 population due to in large part to declining birth rates. Staying with the education sector, lower-rated private higher education is also under stress due to declining enrollment and high costs. With Medicaid cuts likely over the next few years, hospitals reliant on this funding with little flexibility to adapt will likely find themselves under fiscal stress. Finally, investors should consider investing in short-maturity US Treasuries, if able, given how expensive munis have become on the shorter end of the curve (Display 2).
  
  

The Federal Open Market Committee (FOMC) held rates steady, while 2Q:26 GDP slowed relative to both 1Q:26 and expectations.

• Why it matters: The report of 2Q:26 GDP showed that the economy expanded at an annualized 1.5%, slightly slower than the 2.1% annualized rate in the first quarter and slightly below expectations. Despite the slowdown in the headline measure, the underlying details were much stronger. Private consumption and fixed investment, which tend to be more persistent from quarter to quarter, both accelerated in the second quarter, while net trade and inventories detracted from growth. The economy remains resilient with household consumption and AI investment, keeping growth on solid footing. On the rate front, the FOMC left its target interest-rate range unchanged at 3.50%–3.75%, with three members voting to raise rates by 25 bps. We believe that Chair Warsh is largely correct—underlying inflation dynamics aren’t particularly troublesome. Once (if) the shocks that have buffeted the economy pass, inflation will come back toward target in a way that allows the Fed to stay on hold.