The Week in Muniland

What a difference a week makes. The muni market rebounded this week with positive returns across the curve. Two-, 10- and 30-year yields fell 15, 16 and 16 basis points (bps), respectively. The Bloomberg Municipal Bond Index (Index) returned 1.03% last week, bringing month-to-date returns to 0.37%. Year-to-date returns now sit at 1.34%.

• Why it matters: A better tone in the US Treasury market, a lighter new issue supply calendar and anticipated June 1 coupon payments resulted in a significant performance rebound week. Credit and longer-duration bonds outperformed. The Bloomberg BBB index returned 1.25% versus 1.02% for the AAA index, while the 20-year index returned 1.51% and the 5-year index 0.57%. This outcome is a microcosm of 2026. As seen in Display 1, the longer end of the muni curve has significantly outperformed shorter maturities. On the credit side, for the year to date the Bloomberg BBB index and Muni High Yield index are up 2.10% and 2.72%, respectively, compared to the AAA index up just 1.12%. Demand for muni bonds remains insatiable, which has also supported our market. According to J.P. Morgan, LSEG Lipper reported inflows of $2.3 billion into weekly reporting municipal funds, which is the second-highest weekly inflow dating back to 1992. Flows continue to favor investment grade at $2 billion and long bonds at $1.6 billion. An interesting note is that tax-exempt money-market funds realized outflows of $1.4 billion. Perhaps investors are beginning to realize the value in extending duration and investing in longer bonds.
  
  

Performance for the month of May was certainly a roller-coaster ride. Just last week it seemed as though May’s performance would be a repeat of March.

• Why it matters: Through May 8, the month-to-date return of the Index was up 0.21% and just seven trading days later on May 19, the Index was down 0.85%—a 1.06% swing. Eight trading days later on May 29, the Index was up 0.37%, which is another 1.22% swing. These types of swings can be stomach churning for many retail investors. One of the reasons we recommend being patient during volatile periods or being a liquidity provider when bonds sell off sharply is because, eventually, bonds will rally. And while you’re waiting for that rally you are earning an attractive yield. On May 19, the yield to worst of the Index was 3.85% (6.5% taxable equivalent). Since that date, performance was a positive 1.22% as yields fell to 3.7%. The key is to stay invested and pick your spots. When yields jump nearly 20 bps in two weeks, that’s likely an indication to begin putting cash to work.
  
  

Positioning in today’s market can be challenging given the macro uncertainty and overall volatility. However, sitting like an elephant is no way to manage a portfolio.

• Why it matters: Most importantly in today’s environment, we recommend a barbell maturity structure. Such a structure will lean into a combination of longer maturity bonds (15–20 year) and shorter maturity bonds (one–five year). We like this structure today because the longer end of the yield curve offers the most value (Display 3). However, in an intermediate portfolio you can’t buy all long bonds because the overall duration will be too long, so you buy shorter-maturity bonds to shorten the portfolio’s overall duration. As seen in Display 1, so far this year this positioning has clearly provided a better outcome. For an investor in the top tax bracket, we recommend an alltax- exempt portfolio given munis are fair value to cheap relative to US Treasuries (Display 2). We also recommend an allocation to credit (A, BBB and high yield) not only because you can earn an additional 40 bps to 200 bps in yield above an AAA muni, but because given strong demand and an economy that is doing just fine, the upside potential above the yield is potentially meaningful. As mentioned earlier, credit is meaningfully outperforming high-grade bonds this year and we expect that to continue for the remainder of the year.