Municipal Bond Snapshot January 2026

Key Takeaways:

• Municipals posted solid gains in January, with most of the rally occurring in the first half of the month, driven by strong reinvestment demand.
• The back-half of the curve remains exceptionally steep, more than two standard deviations above long-term historical averages.
• Entering February, the outlook for municipals remains favorable: supply and demand are broadly in balance, credit quality is strong, and tax-equivalent yields are attractive, particularly further out the curve.

MUNICIPAL BOND MARKET UPDATE

• Treasury yields moved higher in January as inflation remained above target and signs of labor market stabilization made near-term Fed rate cuts harder to justify.
• Tax-exempt yields declined 15-20 basis points (bps) across most of the curve, while long-end rates drifted modestly higher.
• Supply was robust at $34 billion, down 0% year-over-year but above the month’s 10-year average.
• Issuance was easily absorbed amid strong demand driven by elevated reinvestment needs and fund inflows, particularly into ETFs.
• Relative-value ratios richened as munis outperformed Treasuries in the short and intermediate part of the curve.
• Front-end slopes remain historically flat but continued to steepen from mid-fourth-quarter levels, with 2s10s ending the month at +45 bps and 5s10s at +39 bps.
• The back segments of the curve remain the steepest, both in absolute terms and relative to historical averages with 10s20s at +134 bps and 10s30s at +166 bps.
• Credit spreads were largely unchanged with little performance difference among investment-grade rating categories. High yield performed in line with its higher-rated peers as well.
• The muni market enters February on solid footing, echoing the setup at the start of last year, but with better trailing performance and firmer momentum.