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Municipal bonds

Municipal bonds

May 2026 review and outlook

Market review

For May, AAA-rated tax-exempt municipal (muni) bond performance was positive across the curve. The high-grade tax-exempt yield curve steepened, while the US Treasury curve flattened. The ratio of AAA-rated tax-exempt municipal yields to US Treasury yields was tighter across the front and middle of the yield curve and flat at the long end. The yield ratios decreased by four ratios in five years, decreased by 0.5 ratios at 10 years and there was no change at 30 years.

The best performing municipal states were Iowa, Wyoming and Rhode Island. The weakest performers were South Carolina, Oklahoma and Minnesota. The highest performing revenue sectors were Tobacco and Housing, while the weakest performers were Resource Recovery, Leasing and Water and Sewer. By quality, BBB-rated were the strongest performers, followed by A, AA and AA-rated municipals, respectively.

The Bloomberg US Aggregate-Eligible Taxable Municipal Bond Index generated a total return of 0.46%. Spreads for the taxable municipal index were wider by 1bp and spreads for the credit long index tightened by 7bp.

Monthly municipal issuance was $51bn, above the average for the month over the past five years. Taxable municipal issuance represented 5% of May’s supply.

Muni fund flows were positive for May, with inflows averaging $1.75bn per week. ETF fund flows were also positive for May.

Outlook

We believe bond market volatility is likely to continue as the market digests competing themes of a slowing economy and higher energy prices. We remain constructive on the municipal market as new issue supply should remain steady but manageable, supported by continued solid demand from retail investors via flows into mutual funds and ETFs.

Municipal credit conditions remain strong. The disruption of traffic through the Strait of Hormuz has pushed energy prices higher, raising operating costs for transit systems and utilities, and pressuring household budgets – effects that can soften broad based tax collections. The US-Iran deal has the potential to ease this risk, although markets will likely treat the successful resumption of traffic through the Strait of Hormuz as the acid test. Cybersecurity risk has also increased, with US public finance issuers facing elevated vulnerability to retaliatory attacks tied to the conflict.

We continue to prioritize issuers with strong balance sheets, robust liquidity, and meaningful operating flexibility. Climate risks also remain central to our process, as both physical and carbon transition exposures increasingly shape long term credit resilience.

We believe the municipal intermediate maturity segment (10 to 20 years) which is steep, remains attractive. We believe, this portion of the yield curve may capture the largest roll down benefit, may provide meaningful tax-exempt income.

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