CONTRIBUTORS
Samuel Weitzman, CFA
Product Specialist
Key takeaways
- Munis posted positive returns last week, outperforming taxable fixed income.
- Technicals strengthened following improved demand and lighter new-issue supply.
- Following the strong performance recorded since the significant drawdown last quarter, we touch on historical municipal recovery activity.
Municipal Yield Changes and Returns
AAA Muni vs. Treasury Yield Changes and Ratios
As of October 16, 2026
|
Tenor |
AAA |
Δ bps |
UST |
Δ bps |
Ratio |
10Y avg |
|
2-year |
3.11% |
−22 |
4.71% |
−8 |
66% |
74% |
|
5-year |
3.27% |
−23 |
4.87% |
−15 |
67% |
72% |
|
10-year |
3.74% |
−22 |
5.08% |
−17 |
74% |
79% |
|
30-year |
4.97% |
−17 |
5.42% |
−17 |
92% |
92% |
Source: Bloomberg. BVAL AAA callable curve and Treasury generics as of October 16, 2026; change vs. October 9, 2026. Ratio = AAA muni yield ÷ Treasury yield; 10-year average of daily ratios. Bps represents basis points. UST equals US Treasuries.
Index Returns and Yields
As of October 16, 2026
|
Bloomberg Index |
1 wk |
YTD |
YTW |
TEY |
|
Municipal |
1.31% |
−2.24% |
4.48% |
7.57% |
|
High Yield Muni |
1.46% |
0.19% |
6.02% |
10.17% |
|
U.S. Corporate |
0.86% |
−1.82% |
5.89% |
5.89% |
|
U.S. Treasury |
0.91% |
−1.54% |
4.96% |
4.96% |
|
Global Aggregate |
0.89% |
−1.88% |
4.32% |
4.32% |
Source: Bloomberg. One-week return vs. October 9, 2026. TEY equals taxable-equivalent yield at a 40.8% top marginal rate.
Source: LSEG Lipper weekly reporting funds, week to October 14, 2026, As of October 16, 2026. Issuance: Bloomberg cumulative year-to-date issuance. Visible supply: The Bond Buyer 30-day visible supply.
Markets Last Week
Fixed income volatility persisted last week amid heightened artificial intelligence profitability concerns that contributed to a flight to quality, which contended with hotter-than-expected inflation data. The September Consumer Price Index (CPI) surprised to the upside, increasing 3.7% year-over-year (Y/Y), versus 3.4% for the prior month. Core CPI also surprised to the upside, ticking higher to 2.6% from 2.4%. Hotter-than-anticipated Producer Price Index data followed Thursday, with headline producer prices up 6.3% Y/Y, while the core measure excluding food, energy and trade services rose to 5.0%.
All told, the Treasury curve moved lower, dominated by the flight-to-quality sentiment, moving 8 basis points (bps) lower in 2-year maturities and 17 bps lower in 30-year maturities. High-grade municipals rallied past Treasuries during the week amid improved technical conditions: AAA yields moved 22 bps lower in 2-years and 17 bps lower in 30-years. The Bloomberg Municipal Bond Index returned 1.31%, outperforming both the Treasury (0.91%) and corporate bond (0.86%) indexes.
Supply and Demand Technicals
Weekly reporting municipal funds recorded US$1.6 billion of net inflows during the week ended October 14, up from US$1.1 billion the prior week, with inflows observed across the curve. Notably, ETFs recorded a second consecutive record week of US$5.0 billion of net inflows, while open-end funds recorded US$3.4 billion of net outflows as tax-loss harvesting activity continued. Inflows were driven entirely by investment-grade funds (US$2.2 billion) as high-yield funds recorded US$540 million of outflows. Year-to-date (YTD) net inflows stand at US$75.7 billion, the second-highest level on record for the comparable period and US$33.1 billion ahead of last year's pace.
Municipal new-issue supply of US$11.8 billion during the week was 29% below the prior week's US$16.6 billion but lifted YTD issuance to US$503 billion, 11% ahead of last year's record pace. The 30-day visible supply edged up to US$19.8 billion, 11% above the prior week and in line with the US$20.0 billion visible at the same point last year.
This Week in Munis: Market Rebounds
- The recent municipal selloff was rare by historical standards. Amid interest-rate volatility, heavy issuance and tax-loss selling pressure, the Bloomberg Municipal Bond Index declined 7.0%, its seventh-largest peak-to-trough drawdown and part of the market's weakest quarter since 1981. It has since recovered roughly 2.7% through October 15. With the rebound still early, the historical context is especially relevant as investors consider potential entry points amid the volatility.
Municipal Bond Index: Seven Largest Drawdowns
As of October 16, 2026
Percent Change from Prior Peak
Source: Bloomberg, Bloomberg Municipal Bond Index. Each panel is rebased to the pre-drawdown peak and runs through 60 calendar days after recovery to the prior peak level; the 6 July 2026 drawdown is ongoing. Drawdowns, left to right: (1) 1/31/1980 peak, 3/31/1980 trough, 5/30/1980 recovery (−12.6%); (2) 6/30/1980, 8/31/1981, 8/31/1982 (−22.4%); (3) 1/31/1994, 11/30/1994, 3/31/1995 (−8.3%); (4) 9/11/2008, 10/16/2008, 2/12/2009 (−11.2%); (5) 3/9/2020, 3/23/2020, 7/31/2020 (−10.9%); (6) 8/4/2021, 10/26/2022, 9/10/2025 (−13.4%); (7) 7/6/2026 peak, 9/29/2026 trough, ongoing (−7.0%). Past performance is not indicative of future results.
- Historical recoveries following municipal drawdowns have been strong, with much of the rebound occurring early. The 10 largest drawdowns of the Bloomberg Municipal Bond Index prior to the current episode averaged -10.5%, ranging from -6.5% to -22.4%. In the 12 months following each trough, the index typically returned more than its drawdown, considering an average rebound of 15.6%. Notably, returns averaged 9.6% in the first six months, representing the majority of the recovery and underscoring how quickly recoveries can unfold.
Ten Largest Municipal Drawdowns and Subsequent 12-Month Recoveries
1980-2026
Percent
Source: Bloomberg. As of October 16, 2026. Bloomberg Municipal Bond Index; drawdown periods as defined above. Past performance is not indicative of future results.
- Waiting for stability can come at the expense of attractive tax-exempt income opportunities. Investors waiting for volatility to subside risk missing not only a potential rebound but also the higher starting tax-exempt yields available during a selloff. Across the recoveries following the 10 largest selloffs, the Bloomberg Municipal Bond Index yield-to-worst declined by an average of 1.26%. At an assumed 40.8% tax rate, this translates to an average taxable-equivalent yield decline of 2.13%. We believe investors waiting for clearer signs of stability may forgo the opportunity to lock in attractive long-term tax-exempt income that could enhance after-tax returns.
Municipal Bond Index Yield After Selloff and After Recovery
|
Period |
Average |
1980 |
1981 |
1984 |
1987 |
1994 |
2008 |
2011 |
2013 |
2020 |
2022 |
|
Yield after selloff |
6.88% |
9.92% |
12.91% |
10.73% |
8.01% |
6.53% |
5.45% |
4.05% |
3.43% |
3.52% |
4.22% |
|
Yield after recovery |
5.62% |
7.92% |
10.61% |
10.07% |
7.18% |
5.70% |
3.91% |
3.44% |
2.54% |
1.20% |
3.64% |
1980-2022
Basis Points (bps)
Source: Bloomberg. As of October 16, 2026. Bloomberg Municipal Bond Index yield-to-worst at the drawdown trough ("after selloff") and after recovery to the prior peak; bars show the decline between the two in basis points. An average 126 bp decline equates to roughly 213 bps of taxable-equivalent yield at a 40.8% rate. Drawdown periods as defined above. Past performance is not indicative of future results.
- We believe several factors support a particularly constructive outlook following the recent municipal selloff. Starting yields near multidecade highs offer attractive tax-exempt income and a stronger foundation for prospective total returns, while sound municipal credit fundamentals reinforce a longer-term risk-adjusted appeal amid broader market volatility. Demand has also remained positive despite recent negative performance, in contrast to the fund outflow cycles that accompanied some prior drawdowns. Should this demand persist, an easing of seasonal tax-loss selling following year-end could provide a more supportive technical backdrop. Together, these factors offer reasons for optimism about the potential recovery ahead.
Municipal Starting Yields Historically Have a Strong Relationship to Forward Returns
1980-2025
Percent
Source: Bloomberg. As of October 16, 2026. Bloomberg Municipal Bond Index starting yield-to-worst versus the subsequent five-year annualized return, monthly observations; the five-year return series ends in October 2021, the last start date with a full five years of returns. Past performance is not indicative of future results.
Key Market Themes
1) Municipal taxable-equivalent yields remain near their highest level in over a decade.
Muni and Taxable-Equivalent Muni Yield-to-Worst
2010-2026
Yield-to-Worst Percent
Source: Bloomberg. As of October 16, 2026. Bloomberg Municipal Bond Index yield-to-worst, weekly, December 31, 2010, to October 16, 2026. Taxable-equivalent yield uses the top marginal federal rate in effect each year (35% through 2012, 43.4% for 2013–2017, 40.8% from 2018).
2) Munis offer attractive after-tax yield pickup vs. taxable alternatives.
After-Tax Yield Pickup vs. Taxable Comparables
Basis Points
Source: Bloomberg. As of October 16, 2026. Treasury rows use the BVAL AAA callable curve and Treasury generics; quality rows use Bloomberg municipal and corporate quality indices. After-tax yields at a 40.8% rate.
3) After-tax income opportunities remain attractive across the curve.
AAA Municipal vs. After-Tax Treasury Yield, with After-Tax Spread
Source: Bloomberg BVAL AAA callable curve; Treasury generics. After-tax Treasury yield at a 40.8% rate; spread = AAA municipal yield less after-tax Treasury yield.
Market Monitor
30-Day Visible Supply, and Cumulative Year-to-Date Fund Flows vs. Five-Year Average
As of October 16, 2026
Sources: Bloomberg. The Bond Buyer (visible supply) and Lipper (weekly fund and ETF flows). Five-year average is the mean cumulative total for 2021–2025 at each week of the year.
Quality Spreads to AAA
2010-2026
Basis Points
Source: Bloomberg. As of October 16, 2026. Bloomberg Municipal AA, A, BBB and High Yield Index yields-to-worst less the Bloomberg AAA Municipal Index yield-to-worst; daily data shown monthly, January 2011 to October 16, 2026. Five-year averages in the legend.
Municipal vs. Taxable Yields, National, High-Yield and key States
As of October 16, 2026
Yield-to-Worst, Percent
Source: Bloomberg. National and high yield use the Bloomberg Municipal and High Yield Municipal Indices; states use the Bloomberg state municipal indices (CA, NY, NJ, OR, MN, MA). Taxable-equivalent yields assume a 40.8% top federal rate plus each state's top marginal rate. Taxable: Bloomberg U.S. Treasury, U.S. Aggregate, U.S. Corporate and U.S. Corporate High Yield Indices.d
Market Monitor: Municipal Credit Curves
Municipal Credit Curves, Nominal
As of October 16, 2026
Percent
Source: Bloomberg. AAA callable, AA general obligation, A revenue and BBB general obligation curves AAA prior week Markers and values at 5, 10 and 30 years.
Taxable-Equivalent Municipal Credit Curves vs. Treasury
As of October 16, 2026
Percent
Source: Bloomberg. Taxable-equivalent yields at a 40.8% top marginal rate; Treasury generics with linear interpolation between published tenors.
Sources and Definitions
Municipal yields: Bloomberg Valuation Service (BVAL) AAA callable municipal curve; Treasury yields: Bloomberg generic Treasury yields, with linear interpolation between published tenors. Index returns and yields: Bloomberg. Fund flows: Lipper weekly reporting municipal funds (open-end, ETF and total) via Bloomberg. Issuance: Bloomberg cumulative year-to-date issuance series (total and taxable), differenced week over week. Visible supply: The Bond Buyer 30-day visible supply. After-tax pickup table: 10- and 30-year rows use the BVAL AAA municipal curve and the U.S. sovereign curve; quality rows compare Bloomberg municipal AA, A, BBB and High Yield indices with the same-rated Bloomberg corporate indices; pickup is the municipal yield less the after-tax yield of the comparable index. Credit curves: Bloomberg Valuation Service (BVAL) AAA, AA, A and BBB general obligation curves, populated with pricing from uninsured GO bonds. Taxable-equivalent yield (TEY) assumes the top marginal federal rate of 37% plus the 3.8% Medicare tax on investment income (40.8%); state figures add top marginal rates of 13.3% (California) and 10.9% (New York). Individual tax rates vary; TEY does not account for the alternative minimum tax or capital gains taxes.
Indexes referenced: Bloomberg Municipal Bond Index which represents the US tax-exempt investment-grade municipal bond market; Bloomberg High Yield Municipal Bond Index which tracks the US municipal non-investment grade tax-exempt bond market; Bloomberg California and New York Municipal Bond Indices which track the performance of a diversified portfolio of investment‐grade, tax‐exempt municipal bonds issued by the states of California and New York; Bloomberg Municipal AAA, AA, A and BBB Indices which represent the credit quality specific benchmark that track the performance of US tax-exempt investment-grade bonds within each rating category; Bloomberg US Corporate is an investment-grade US dollar denominated benchmark covering corporate bonds; Bloomberg AA, A and BBB Corporate Indices represents the credit quality specific benchmark that track the performance of investment-grade corporate bonds within each rating category; Bloomberg US Corporate High Yield Index which tracks the US non-investment grade corporate bond market. Indexes are unmanaged, do not reflect fees, expenses or sales charges, and one cannot invest directly in an index.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Fixed income securities involve interest rate, credit, inflation, and reinvestment risks, as well as possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity, and the possibility of default. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer, or guarantor, may affect the bond’s value. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance. An investor may be subject to the federal alternative minimum tax, and state and local taxes may apply. Diversification does not guarantee a profit or protect against a loss.