Municipal Bond Snapshot August 2026

Key Takeaways:

• Municipals posted mixed returns in August, with gains in shorter maturities but losses out longer.
• The municipal curve steepened significantly, improving relative value and expected return in intermediate and longer maturities versus the front end.
• Munis enter September with attractive starting yields and a more favorable curve, though lighter reinvestment demand, heavy issuance, and Fed uncertainty may create additional volatility.

MUNICIPAL BOND MARKET UPDATE

• Treasury yields finished mixed, with short-to-intermediate rates modestly higher and the 30-year down slightly.
• Short rates were driven by a hawkish repricing of Fed expectations while long rates were influenced by the Treasury Department’s expansion of its bond buyback program.
• The direction of municipal yields varied across the curve, with tax-exempt yields inside 10 years falling 2 to 10 bps while yields in the 15- to 30-year range rose 9 to 19 bps.
• New issuance totaled nearly $60 billion, the highest August volume on record and fifth largest month ever.
• Demand remained strong with municipal funds recording inflows each week.
• Despite long-end volatility and a heavy calendar, market conditions remained orderly, with deals generally well absorbed.
• The municipal curve steepened, with 2s/10s widening 10 bps to +84 bps and 5s/15s widening 24 bps to +109 bps. Both ended well above their trailing 10-year averages.
• Beyond 15 years, the curve flattened modestly, though that portion of the curve remains historically steep.
• The 10-year muni/Treasury ratio held at 71%, while two- and five-year ratios fell to 58% and 63%, respectively, leaving the front end less attractive on a relative basis.
• Credit spreads were largely stable, while Moody’s upgraded Illinois GO to A1, citing improved governance, eight consecutive on-time balanced budgets and rebuilt reserves.
• Tax-equivalent yields remain near their highest levels of the year, while the steeper curve has improved opportunities for bond roll, particularly in the 10- to 15-year range.