Municipal bonds posted solid gains in the second quarter, overcoming a backdrop that offered little in the way of help. Treasury weakness, April 15 tax selling, and near-record new issue supply all pushed against the market. In the end, however, it didn’t matter. Municipal bonds rallied steadily from start to finish. Much of the groundwork for that strength was laid by March’s correction, which had pushed absolute and relative yields to their most attractive levels in months, setting up a natural launching pad for demand. Investors came off the sidelines in a big way, with mutual fund and ETF inflows finishing the first half on pace for the second-highest annual total on record. Pockets of heavy issuance produced a few rough patches along the way, but once supply was absorbed, the appetite for municipal bonds reemerged. By quarter-end, tax-exempt yields had fallen 6 to 26 basis points across the curve, with the long end posting the largest declines.
Treasuries moved in the opposite direction over the quarter, with a surge in short rates sharply flattening the curve. The main driver was a change in leadership at the Fed. New Chair Kevin Warsh ran his first meeting in June, and the takeaway was more hawkish than expected, with the market bracing for the coming of tighter policy and less forward guidance. By quarter end, futures had erased the 30% odds of a year-end rate cut that we saw in March and instead priced in the chance of a quarter-to-half-point hike. Long rates finished the quarter essentially unchanged, buoyed by the Fed’s hawkish tilt and encouraged by the progress in the Middle East. The Iran peace negotiations swung between hostile brinksmanship and diplomatic breakthroughs, and while the interim framework ended the quarter feeling shaky, significantly lower oil prices reflected market optimism that a lasting deal was close at hand.
The heavy new issue calendar created plenty of opportunities to add value in the second quarter. This continued a theme we have seen all year — namely, large deals requiring concessions to clear the market and then trading up significantly soon after. Year-to-date, we have purchased 30 different sizeable deals (over $500 million). On average, they have tightened 10 basis points through the end of the second quarter, with some as much as 20 basis points. Rather than limiting purchases to available cash, we aggressively sold existing holdings to maximize our participation in the most attractive offerings. Sales focused mainly on tight-spread, lower-yielding names where the return potential had run its course. We are constantly trying to upgrade the performance profile of all of our bonds and the second quarter was no exception.
Municipal bonds enter the second half of the year on firm footing. Second quarter gains more than reversed the first quarter’s losses, providing momentum for a market that often takes its cues from recent performance. Tax-equivalent yields remain near their highest levels of the year, even with ratios still relatively expensive. Near-term supply looks set to take its usual July breather just as the summer reinvestment cycle kicks into full gear. Meanwhile, the macro picture looks more contained, with each new Iran flareup moving the market less than the last and Warsh’s task forces still months away from major policy changes. Municipal bonds also appear better insulated than other markets from any disruptive fallout from the relentless AI buildout. Against that backdrop, compelling tax-equivalent yields should continue to attract investors and support the market through the back half of the year.
This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.
Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.
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Municipal Bond Snapshot June 2026
Municipal Bond | Insight
Municipals posted modest gains in June as strong investor demand more than offset another heavy month of supply.
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Municipal Bond Market Commentary – 2Q 2026
Municipal bonds posted solid gains in the second quarter, overcoming a backdrop that offered little in the way of help. Treasury weakness, April 15 tax selling, and near-record new issue supply all pushed against the market. In the end, however, it didn’t matter. Municipal bonds rallied steadily from start to finish. Much of the groundwork for that strength was laid by March’s correction, which had pushed absolute and relative yields to their most attractive levels in months, setting up a natural launching pad for demand. Investors came off the sidelines in a big way, with mutual fund and ETF inflows finishing the first half on pace for the second-highest annual total on record. Pockets of heavy issuance produced a few rough patches along the way, but once supply was absorbed, the appetite for municipal bonds reemerged. By quarter-end, tax-exempt yields had fallen 6 to 26 basis points across the curve, with the long end posting the largest declines.
Treasuries moved in the opposite direction over the quarter, with a surge in short rates sharply flattening the curve. The main driver was a change in leadership at the Fed. New Chair Kevin Warsh ran his first meeting in June, and the takeaway was more hawkish than expected, with the market bracing for the coming of tighter policy and less forward guidance. By quarter end, futures had erased the 30% odds of a year-end rate cut that we saw in March and instead priced in the chance of a quarter-to-half-point hike. Long rates finished the quarter essentially unchanged, buoyed by the Fed’s hawkish tilt and encouraged by the progress in the Middle East. The Iran peace negotiations swung between hostile brinksmanship and diplomatic breakthroughs, and while the interim framework ended the quarter feeling shaky, significantly lower oil prices reflected market optimism that a lasting deal was close at hand.
The heavy new issue calendar created plenty of opportunities to add value in the second quarter. This continued a theme we have seen all year — namely, large deals requiring concessions to clear the market and then trading up significantly soon after. Year-to-date, we have purchased 30 different sizeable deals (over $500 million). On average, they have tightened 10 basis points through the end of the second quarter, with some as much as 20 basis points. Rather than limiting purchases to available cash, we aggressively sold existing holdings to maximize our participation in the most attractive offerings. Sales focused mainly on tight-spread, lower-yielding names where the return potential had run its course. We are constantly trying to upgrade the performance profile of all of our bonds and the second quarter was no exception.
Municipal bonds enter the second half of the year on firm footing. Second quarter gains more than reversed the first quarter’s losses, providing momentum for a market that often takes its cues from recent performance. Tax-equivalent yields remain near their highest levels of the year, even with ratios still relatively expensive. Near-term supply looks set to take its usual July breather just as the summer reinvestment cycle kicks into full gear. Meanwhile, the macro picture looks more contained, with each new Iran flareup moving the market less than the last and Warsh’s task forces still months away from major policy changes. Municipal bonds also appear better insulated than other markets from any disruptive fallout from the relentless AI buildout. Against that backdrop, compelling tax-equivalent yields should continue to attract investors and support the market through the back half of the year.
Disclosures
This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.
Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.