Municipal Bond Snapshot July 2026

Key Takeaways:

• Municipals sold off in July, with intermediate bonds posting their first negative July since 2013, as rising Treasury yields and rich starting valuations outweighed strong technicals.
• The correction materially improved valuations, with the 10-year AAA yield ending at 3.37%, a 15-month high, and the 10-year muni/Treasury ratio returning to its five-year average.
• Munis enter August with higher starting yields and strong reinvestment demand, but heavy issuance, geopolitical risk, and uncertainty around the Fed could keep volatility elevated.

MUNICIPAL BOND MARKET UPDATE

• Treasury yields rose sharply in July as renewed conflict with Iran pushed oil prices higher, and less transparent messaging from the FOMC added to the sell-off.
• Municipals underperformed Treasuries, as tight starting ratios left the market more exposed to heightened Treasury volatility, pushing tax-exempt yields 30 to 40 bps higher across most of the curve.
• New issuance totaled $45 billion, down 20% year-over-year, but still the third-highest July total on record.
• Demand remained strong, with the municipal fund inflow streak extending to 15 weeks and 2026 still on pace for the second-highest annual total on record.
• Despite the sharp rise in yields, the market functioned in an orderly manner, with issuance well absorbed and performance relatively uniform across sectors.
• The belly of the municipal curve steepened, with 2s/10s widening 14 bps to +74 bps and 5s/15s steepening 11 bps to +85 bps. Both ended above their trailing 10-year averages.
• The 10s/20s slope flattened 9 bps to +74 bps, in line with its historical average.
• The 10-year muni/Treasury ratio ended July at 71%, up from 66% at June’s close and in line with its five-year average.
• Credit spreads were largely stable, with similar performance across rating categories.
• At current levels, tax-equivalent yields of 6% to 8% for investors in high-tax states provide a compelling income backdrop.