Thoughts from the Muni Desk

Tim: Volatility has picked back up in the financial markets due to conflict in the Middle East. Even munis have been affected. What’s your take?

Mark: Yes, investors are worried that the geopolitical crisis could fuel an increase in inflation. Specifically, higher oil prices and the conflict’s impact on economic conditions have led some investors to push out their expectations for additional Federal Reserve easing, perhaps into 2027.¹ Treasury yields rose, with muni yields generally following suit. As we speak, 10-year AAA muni bond yields have had their sharpest increase since July.² I expect muni prices to rebound once the geopolitical uncertainty ebbs, much as they did after the tariff-driven selloff last April. We recognize that headlines can feel unsettling in the moment, but historically these episodes have tended to be short-lived, with fundamentals ultimately reasserting themselves. We feel the focus should remain on looking through near-term noise and relying on an established process to deliver long-term value to shareholders.

Tim: Speaking of up markets, munis had some nice gains in February, with the Bloomberg Municipal Bond Index returning 1.25% and the Bloomberg Municipal High Yield Bond Index up 1.67%.³

Mark: That’s right. Strong market technicals drove the advance, as significant reinvestment capital was put back to work in the muni market amid manageable supply. Additionally, we’ve seen healthy demand continue, as evidenced by the 15th straight week of positive inflows for the week ended March 4.⁴ Year-to-date inflows total more than $18 billion,⁴ putting them on track to reach their third-largest year-to-date total on record.⁴ This is pretty impressive given that gross new issuance year to date in 2026 is about 8% higher than the record pace set during the same period in 2025.5 Of that total, long-term muni new issuance recorded a fresh high of $40 billion for the month of February, eclipsing the $37 billion issued in February 2007 and $36 billion issued in February 2025.⁵

Tim: The favorable market technicals could shift in March and April. Those months are historically weak, as reinvestment capital dries up and investors tend to free up assets to pay their tax bills. What do you think the impact of tax season will be on the muni market this year? 

Mark: I think the impact could be more muted in 2026 than it has been historically. First, I believe tax refunds could be larger, mainly because of legislation enacted in 2025, and that may reduce the amount of money investors need to pull out of the muni market to cover their tax liabilities. Second, the macro environment remains uncertain, and some recent economic reports suggest that the labor market may not be as resilient as we’d thought. For example, the employment report released on March 6, indicated that the US lost 86,000 jobs in February, and the unemployment rate ticked up to 4.4% from 4.3%.⁶ A weakening job market could keep rates in check on expectations of future monetary easing. Finally, negative muni performance in March and April isn’t a foregone conclusion. Examples of positive returns over the last 10 years include 2024, 2023, 2019, 2017, and 2016.⁷

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