Municipals Weekly: Reading the muni tea leaves

Research evidence excerpt

Municipals Weekly: Reading the muni tea leaves

s30s Treasury steepening over the

past several weeks is losing its momentum, falling back to 47bp this week.

As expected, muni yields climbed quite a bit since mid-July, mostly attributable to a

bearish Treasury market. The 10yr AAA benchmark has set a new high for the year, while

the 30yr AAA yield remains comfortably below its highs in March and May. The 10s30s

AAA flattened further to 117bp this week, and our reference of the 10s30s Treasury

remained comfortably below 60bp. Muni/Treasury ratios cheapened some around the

10yr area and credit spreads narrowed.

We continue to emphasize the importance of hedging during the summer as the macro

rates market moves through a lengthy range bound period. Our expectation of a Fall rally

remains unchanged. If that is hard to see in the general macro market at this time, the

muni market itself likely already offered a clue. In our past two Weeklies, we highlighted

the negative growth of new money issuance in 1H26, and its continuation into July. It is

a clear theme now. While we focused on the positive implications of supply/demand

dynamics for the muni market, this offers some macro insight as well, i.e. economic

activity may not be as robust as the resilient labor market and 2.0%+ GDP

growth forecasts would otherwise suggest.

In our view, when muni new financing activity turns from double-digit growth for the

past few years to an outright 3% decline YTD in 2026 nominally, something is

inconsistent, especially when taking inflation into consideration. In real terms, muni new

financing volume is down more than 5% y/y. It may very well show issuers’ defensive

posture, despite a resilient labor market and economists’ growth expectations in the

general economy remaining high.