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Municipal bonds

Municipal bonds

July 2026 review and outlook

Market review

The Bloomberg AAA-rated Tax-Exempt Municipal Index yields rose materially across the curve in July, resulting in the worst monthly performance in July for the municipal market since 2003. Rising Treasury yields and rich municipal valuations entering the month weighed on performance despite July historically being one of the strongest seasonal periods for the asset class. Municipals underperformed US Treasuries, with AAA municipal-to-Treasury yield ratios rising across the curve. Ratios increased by four percentage points in the 5-year maturity, five percentage points in the 10-year maturity, and one percentage point in the 30-year maturity.

Performance weakness was concentrated in the long end of the curve, which underperformed shorter and intermediate maturities. At the state level, Wyoming, Arkansas, and New Hampshire were the weakest-performing markets, while Puerto Rico, New Mexico, and Hawaii were the strongest performers. Within revenue sectors, Gas Forward, Industrial Development Revenue (IDR), and Tobacco bonds led performance, while Special Tax, Hospital, and Education sectors lagged. By credit quality, BBB-rated municipals outperformed, followed by A-rated, AA-rated, and AAA-rated municipals.

The Bloomberg US Aggregate-Eligible Taxable Municipal Index returned -1.66% during the month. Option-adjusted spreads (OAS) for taxable municipals were unchanged, while OAS spreads for the Bloomberg US Aggregate Corporate Index widened by 4bp.

Monthly municipal issuance was approximately $45bn, down 19% from July 2025. Taxable municipal issuance represented 2.5% of overall monthly supply. Municipal fund flows were positive for the month, totaling approximately $8.5bn, relatively evenly split between municipal bond funds and ETFs. The solid inflow activity reflects continued interest in the asset class from individual investors seeking a stable, high-quality investment with a potentially attractive tax-exempt income stream.

High yield municipals also had a challenging performance month, with the Bloomberg Municipal High Yield Index returning -1.51% in July although year-to-date returns remained in positive territory at 2.52%. Performance was broadly constructive across lower-quality credit, with strong returns in tobacco, airport and housing revenue sectors.

Outlook

Looking ahead, the near-term backdrop for the municipal bond market remains constructive amid expectations for solid reinvestment flows and seasonal supply contraction. Heading toward year, however, we believe the prospect for elevated issuance, and ongoing rate uncertainty should likely lead yield carry to dominate returns, with a potential cheapening of the asset class offering a possible better entry point toward year-end.

Municipal credit fundamentals remain broadly resilient, supported by healthy reserve levels, stable revenue collections, and disciplined financial management across most sectors. While uncertainty surrounding geopolitical developments, energy markets, inflation, and cybersecurity remain elevated, we believe the municipal market is generally well positioned to navigate these risks. We continue to closely monitor sectors that may be more sensitive to changes in fuel costs, trade activity, travel demand, or operational disruptions, including transportation, utilities, and certain economically sensitive revenue-backed issuers.

From a duration perspective, we maintain a neutral to modestly long position relative to benchmarks. While the timing and pace of future Federal Reserve policy adjustments remain uncertain, we believe current municipal yield levels continue to offer attractive long-term value. We remain constructive on the intermediate portion of the yield curve, particularly the 10- to 20-year maturity range, where we believe investors can potentially benefit from attractive tax-exempt income, favorable roll-down opportunities, and lower price volatility than the longest maturities.

We expect municipal market technicals to remain supportive. Demand for tax-exempt income remains strong, while issuance is likely to remain manageable relative to investor cashflows. Combined with generally sound municipal credit fundamentals, we believe these conditions should continue to support opportunities for active management and disciplined security selection across the municipal market.

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