Municipals Thoughts from the Municipal Bond Desk

Tim: Volatility seems to have been the defining theme of the first half of 2026. However, the muni market remained relatively resilient, don’t you think?

Mark: Yes, I think munis held up rather well. Consider what they had to deal with! A partial federal government shutdown, shifting and sometimes contradictory economic data, and the US-Iran war and its impact on inflation and oil prices, which raised questions about the path of Federal Reserve policy action. Yields rose, with the 10-year Treasury yield reaching 4.67% in May — a level not seen since 2024 and 2025 — before falling back to about 4.40% by the end of June.¹ Muni yields also rose, but generally less than Treasuries,² largely due to strong investment inflows. Although new issuance remained near record highs, inflows totaled more than $50 billion, which is close to five times more than last year’s flows over the same period.³ Looking ahead, I believe the opportunity is about getting paid to wait in our market. Tax-exempt yields have remained attractive, especially for higher-tax-bracket investors who may want to lock in longer-term, high-quality muni income. Overall, I think munis offer a compelling mix of carry and tax-efficient income. I also see a number of select opportunities for those who do their research.

Tim: Many of those opportunities come from the new issuance calendar. States and municipalities have continued to tap the muni market for financing as they seek to fund necessary and important infrastructure work.

Mark: On America’s 250th birthday, it is worth recognizing how muni bonds have helped shape the nation’s history. After all, infrastructure projects begin with capital. The Erie Canal is a notable example. When New York state issued bonds in the early 19th century to finance the canal, it funded the construction of an asset that connected Lake Erie to the Hudson River, strengthened New York City’s role as a commercial gateway, and helped reshape the US economy.⁴ These bonds demonstrated how private investment could be mobilized for the public purpose. Recent studies have shown that the municipal bond market finances roughly 90% of all US public capital expenditures.⁵ Regulated funds have made the system stronger by broadening participation. Through these funds, muni bonds, previously the province of high-income individuals, have become accessible to everyday investors. At year-end 2010, regulated funds held 25% of muni bonds, but at year-end 2025, that share had increased to 29%.⁶

Tim: Fun fact, I drive over the Erie Canal on my way to the office each day. Munis can also adapt to the needs of the moment. Case in point: Prepaid energy bonds, which are frequently issued to support infrastructure that powers artificial intelligence (AI).

Mark: I agree. Prepaid energy bonds have become part of the conversation about powering the AI economy. As demand for computing grows, financing reliable energy may be just as important as financing chips, servers, and software. Prepaid energy bonds help utilities pay upfront for long-term supplies of natural gas or electricity, often at lower costs, potentially supporting more stable power prices. Meanwhile, companies involved in the transactions may gain access to cheaper financing. That matters to AI developers, because building and running data centers takes enormous amounts of power, and energy costs can quickly become a major constraint. The sector has grown quickly, with issuance reaching about $19 billion, up 100% year over year.⁷ These securities are typically highly rated and may offer attractive yields, which can make them appealing to many municipal investors.⁸

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