Municipals Thoughts from the Municipal Bond Desk

Tim: March was a tough month for municipal bonds, with the Bloomberg Municipal Bond Index returning –2.32%.² What do you think accounted for the weakness?

Mark: I think it was due to several challenges that hit all at once. Rising geopolitical tensions drove oil prices higher, spurring renewed inflation worries. As inflation expectations increased, investors demanded higher yields across fixed income assets, which put downward pressure on bond prices, including munis. Rapid shifts in investor sentiment, driven by those same geopolitical headlines, added to the volatility. Yields on a 10-year AAA general obligation bond, for example, climbed more than 60 basis points (bps) in March, hitting 3.11% on March 27 — their highest level since September 2025.³ At the same time, seasonal pressures worked against the muni market. Investment flows declined as investors prepared to fulfill their April tax obligations. Meanwhile, new issuance remained high, and reinvestment capital dried up. Combined, these factors led to negative total returns for munis, resulting in their weakest month in more than two years.⁴

Tim: This dramatic rise in yields has had some repercussions for muni issuance, hasn’t it?

Mark: It has. March can be one of the trickier months for issuers due to weaker market technicals. Since supply outweighs demand, issuers need to offer higher yields in order to attract buyers. Now, we’ve had to add rate volatility from inflationary fears and geopolitical uncertainty into the equation, which has affected several new deals. Illinois and New York City were two examples of issuers having to reduce their deal sizes in late March.⁵ In response, a major bank revised its 2026 muni supply forecast down by roughly 6%, lowering it to $600 billion from a previous estimate of $640 billion.⁵ It’s worth noting that $600 billion would still be a year of record issuance, following last year’s record total issuance of more than $585 billion.⁶

Tim: Congratulations to our entire Invesco Municipal Bond team! They were recently honored with five 2026 LSEG Lipper Fund Awards,¹ recognizing the strong risk-adjusted 2025 performance delivered by our portfolio managers and analysts.

Mark: I’m incredibly proud of our muni bond team and this latest recognition of their depth of talent and experience. For more than 30 years, the LSEG Lipper Awards have acknowledged the funds and management firms demonstrating consistently high risk-adjusted performance over three, five, and 10-year periods compared with their peers. Based on Lipper’s proprietary quantitative methodology, these awards represent an objective and independent evaluation of fund performance.

Read the complete article, including munis by the numbers.