Municipal Bond Snapshot September 2026

Key Takeaways:

  • Municipals sold off sharply in September as Treasury volatility and heavy tax-loss selling created significant pressure across the market.
  • The repricing materially improved valuations with the 10-year AAA yield hitting its highest level since 2008, ending the month at 4.10%.
  • Munis enter October with higher starting yields and improved relative value, though continued tax-loss selling and Treasury volatility could keep markets unsettled.

MUNICIPAL BOND MARKET UPDATE

 

  • Treasury yields rose sharply in September as higher oil prices, strong economic data and fiscal concerns were compounded by the Fed’s first rate hike since 2023.
  • Municipals underperformed Treasuries, with tax-exempt yields rising 50 to 100 bps across the curve as selling pressure intensified through the month.
  • Issuance remained elevated throughout September, totaling $55 billion for the month, continuing the robust pace seen all year.
  • Fund flows reflected tax-harvesting behavior, with open-ended funds shifting to outflows while ETFs continued to see inflows.
  • Secondary market liquidity deteriorated as tax-loss selling accelerated, though new issues continued to be well received as investors bought in size to replace positions sold for tax purposes.
  • The municipal curve bear flattened, with two- and five-year yields rising 101 and 90 bps, compared with 73 bps for the 10-year and 53 bps for the 30-year.
  • By month-end, 2s/10s had flattened 28 bps to +56 bps and 5s/15s 24 bps to +85 bps, though both remain above their five-year averages.
  • Relative value improved across the curve, with the 10-year muni/Treasury ratio rising to 78% from 71% in August and the 30-year ratio ending at 91%.
  • Credit spreads held firm despite the market dislocation, with performance broadly similar across rating categories.
  • Higher yields have materially improved the income backdrop and entry point, with the 10-year AAA yield at 4.10% and long-end yields above 5%.
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Disclosures

All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. This represents the views and opinions of GW&K and does not constitute investment advice, nor should it be considered predictive of any future market performance.

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