Municipal Bond Market Commentary – 3Q 2026

Municipal bonds posted sharp losses in the third quarter, with the bulk of the damage arriving in September. Tax-exempt yields had been grinding higher since July alongside a weakening Treasury market, with historically rich relative value ratios leaving little margin for error and a building new issue calendar weighing on sentiment. The selloff changed character in mid-September, when an industry-wide push to harvest tax losses flooded the secondary market with bid lists. Falling prices created new losses to harvest, which brought out more sellers, which drove prices lower still. Bid-wanted volumes reached record levels. Even so, the market never stopped functioning. In fact, new issues often priced well through prevailing secondary levels, as sellers used the primary to source size at known prices to replace what they’d sold. The dynamic at play was purely technical — credit quality was never in question. By quarter-end, the 10-year AAA yield had risen 115 basis points to 4.10%, its highest level since 2008.

The selloff had its origins in the Treasury market, where yields climbed throughout the quarter. Higher oil prices, a resilient economy and mounting fiscal concerns were all contributing factors. The Treasury Department attempted to slow the momentum by expanding its long-end buyback program, arguing that yield levels did not reflect fundamentals. The market, however, was unconvinced, subsequently pushing the 10-year Treasury yield above 5% for the first time in nearly two decades. The Federal Reserve raised rates at the September FOMC meeting and signaled more to come. A market that began the year expecting two cuts in 2026 instead absorbed a hike and finished the quarter pricing three more by next spring. The 10-year Treasury rose 82 basis points for the quarter, closing at a near 20-year high.

Our trading activity in the quarter was shaped by the tax-loss harvesting that gripped the market in September. For most of this year, the new issue calendar had been the best source of value, as record supply forced issuers into meaningful concessions. That reversed over the quarter. With the primary getting bid up to replace tax sales, the better opportunities were available in the secondary, where we sourced the bulk of our purchases, getting paid to provide liquidity to motivated sellers. To fund those purchases, we sold shorter maturities and short-call structures, a cohort that held up better through the selloff, drawing competitive bids even on the sloppiest days. Most of those sales realized losses that clients can put to work at tax time. In that way the dislocation worked in our favor, letting us exit from a position of strength and buy where others were forced to sell. We ended the quarter with more yield, more spread and more roll than we started with.

Municipal bonds enter the fourth quarter with the most attractive entry point in nearly two decades and a technical picture still working itself out. Tax-equivalent yields above 7.5% for investors in the top bracket are difficult to ignore for an asset class of this quality, and relative value ratios have cheapened considerably after screening rich for most of the year. The complication is that tax-loss harvesting will extend through year-end even as seasonal headwinds build, neither of which helps a market still trying to find its footing. New money has already begun to return, helping to bid up new issues and block-sized, ETF-eligible paper. Meanwhile, the secondary remains cheap under the weight of bonds out for the bid. We expect a value gap to persist and will look to take advantage while it lasts. The adjustment may take some time, but investors who can tolerate price fluctuation are being offered a level of income that has not been available since the financial crisis.