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Municipal bonds

Municipal bonds

June 2026 review and outlook

Market review

In June, the Bloomberg AAA-rated Tax-Exempt Municipal Bond Index’s performance was positive across the curve, with strength most pronounced in longer maturities. The Bloomberg Municipal Bond Index returned 0.96% for the month, outperforming the Bloomberg US Treasury Index, which returned 0.28% in June. The Bloomberg Municipal High Grade Tax-Exempt Index’s yield curve steepened as the 2-year AAA yield declined by 7bp to 2.35%, while the 30-year yield fell 15bp to 4.19%. By contrast, the US Treasury yield curve bear-flattened, led by a 17bp increase in the 2-year Treasury yield, while the 30-year Treasury yield declined modestly.

Municipal/Treasury ratios remained rich and generally moved lower during the month, with the 5-year ratio declining one percentage point, the 10-year ratio unchanged, and the 30-year ratio declining two percentage points, ending June at approximately 62%, 67%, and 85%, respectively. Total return performance was strongest in the long end of the curve, led by the long end at 1.76% and the 20-year maturity bucket at 1.53%, while the 1-year and 3-year maturity buckets lagged at 0.38% and 0.41%, respectively.

Revenue sector performance was broadly positive, led by Hospital, Special Tax and Resource Recovery, while Industrial Development Revenue/Pollution Control Revenue, Tobacco and Housing were the weakest relative performers. By quality, BBB-rated municipals were the strongest performers, followed by AAA, A and AA-rated municipals, respectively.

The Bloomberg US Aggregate-Eligible Taxable Municipal Bond Index generated a total return of 0.64% in June. Spreads for the Bloomberg Taxable Municipal Bond Index tightened by 1bp, while the Bloomberg US Investment Grade Corporate Index’s spreads widened modestly during the month.

Monthly municipal issuance was approximately $61bn, above the recent five-year June average of roughly $43bn. Taxable municipal issuance represented about 5% of June supply. Municipal fund flows were positive for the month, totaling approximately $6.3bn, driven primarily by inflows into national, ETF and long-term funds.

High yield municipals also posted a strong month, with the Bloomberg Municipal High Yield Index returning 1.33% in June and 4.09% year to date. Performance was broadly constructive across lower-quality credit, supported by positive fund flows, resilient credit fundamentals, and strong returns in Education, Puerto Rico and Housing.

Market technicals remained supportive despite elevated supply. Net issuance totaled approximately $18bn in June, while investors received roughly $17bn in coupon payments and an estimated $43bn in redemptions. Barclays expects July supply of roughly $53bn to $59bn, with approximately $13bn of net issuance before coupon payments, suggesting that reinvestment demand should continue to help absorb primary market activity.

From a broader positioning perspective, the month reinforced the value of income and roll-down in municipals. Longer maturities benefited most from the decline in tax-exempt yields, but ratios remain historically rich, suggesting that future returns may depend more on carry, curve positioning, and disciplined security selection than on further broad-based valuation improvement.

Outlook

We remain positive on the municipal market. The balance, which has turned more positive for investors, between supply and healthy reinvestment demand will likely, in our view, remain an important driver of near-term performance.

The macro backdrop remains mixed. While softer payroll data reduced the likelihood of an immediate Fed hike but did not eliminate policy uncertainty given inflation remains above target. The front end of the Treasury curve remains particularly sensitive to incoming inflation and labor-market data, while municipals continue to benefit from attractive tax-exempt income and strong demand from mutual fund and ETF buyers.

We believe municipal credit conditions remain generally strong, but geopolitical and energy-related risks continue to warrant close monitoring. For municipal issuers, this environment keeps the focus on sectors most exposed to energy costs, trade flows, travel demand and operating flexibility, including airports, toll roads, seaports, utilities and transit systems.

Market technicals remain supportive but not without some slight pressure from issuance. At the same time, redemptions, coupon payments and continued fund inflows should help absorb supply. We believe periods of heavier issuance or geopolitical risk-related volatility may create opportunities to add high-quality credits at potentially more attractive levels, particularly where spreads compensate for liquidity or structural complexity.

Our municipal bond portfolios remain positioned to deliver compelling tax-exempt income while maintaining disciplined credit diversification and liquidity. We continue to prefer durable revenue-backed structures, including essential-service credits such as water and sewer and public power, while selectively using higher-yielding sectors such as healthcare, prepay gas and housing where credit fundamentals and structure are attractive. Our duration stance is neutral to modestly long versus benchmarks, with a preference for maintaining flexibility amid elevated rate volatility. The intermediate portion of the curve remains attractive, in our view, as it offers meaningful tax-exempt income, potential roll-down benefit, and a more defensive profile than the longest maturities.

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