Macros, Markets and Munis
Municipals posted negative returns last week and underperformed Treasuries as geopolitical developments remained in focus with the US moving to reinstate a blockade of the Strait of Hormuz. Meanwhile, inflation data helped ease market concerns, with headline Consumer Price Index (CPI) declining 0.4% month-over-month, well below expectations and marking the largest decline in more than six years. Core CPI also decelerated over the month, remaining unchanged and below expectations. Treasury yields moved lower across most maturities with a steepening bias. Munis sold off 6-11 basis points across the curve, pressured by heavy supply and tight headline valuations. Supply remained elevated amid steady demand. This week we touch on summer technical dynamics.
Supply and Demand Remained Elevated Last Week
Fund Flows ($1.4 billion of net inflows): During the week ending July 15, weekly reporting municipal mutual funds recorded $1.4 billion of net inflows, in line with the prior week and marking the 13th consecutive week of inflows, according to Lipper. The intermediate-term category led demand with $596 million of inflows. The long-term category recorded $467 million of inflows and the short-term category reported $293 million of inflows. Last week’s inflows bring year-to-date (YTD) inflows to $58 billion.
Supply (YTD supply of $328 billion; up 12% YoY): The muni market recorded $13 billion of new-issue supply last week, 22% above the prior week’s level. YTD new-issue supply of $328 billion is 11% higher than the prior record-issuance year, with tax-exempt issuance up 12% year-over-year (YoY) and taxable issuance up 1%. This week’s calendar is expected to remain steady at $13 billion. Largest deals include $1.5 billion New York City Transitional Finance Authority and $944 million San Antonio Airport System transactions.
This Week in Munis: Summer Technicals
Municipal performance has historically strengthened during the summer months, supported by favorable supply-demand technicals that include seasonal coupon and maturity reinvestment, lighter net issuance and a rebound in demand following spring tax-season reallocations. Over the past decade, May, June and July have generally ranked among the strongest average return months for the Bloomberg Municipal Bond Index. While this year’s technical backdrop differs from historical norms given elevated issuance, municipal performance has remained resilient. From Memorial Day through July 17, the Bloomberg Municipal Bond Index returned 1.19%, outperforming both the Bloomberg U.S. Treasury Index (0.69%) and the Bloomberg U.S. Corporate Index (-0.53%). That outperformance is notable given that municipal supply remains on pace for a third consecutive record year.
Supply trends have historically supported municipal performance during the summer months. While gross issuance is often strong in June, elevated coupon payments, maturities and called bonds can meaningfully reduce net supply through the summer reinvestment period. From 2015 through 2023, the municipal market recorded negative net supply, on average, from June through September. As issuance rebounded in 2024 and 2025, the market shifted back to positive net supply, although summer issuance still represented one of the lighter seasonal periods in those years. In 2026, supply has remained elevated relative to prior record-year levels, resulting in positive net supply and a continued departure from the historical summer pattern.
Strong municipal performance despite elevated supply underscores the strength of demand observed this year. According to ICI and Lipper data, YTD municipal fund inflows of $64 billion represent the second-highest calendar-year total on record and bring cumulative municipal fund inflows since January 2024 to $172 billion, approaching prior record inflow-cycle levels. In addition, separately managed account (SMA) demand remains robust and persistent. According to Cerulli Associates’ 2Q26 SMA Report, managed municipal SMA assets increased $65 billion during the first quarter of 2026, nearly double the increase in municipal mutual fund assets over the same period.
Continued demand from both mutual funds and SMAs should remain supportive of municipal market technicals despite elevated supply levels. While municipals have outperformed other fixed-income sectors so far this year, our view is that elevated issuance should continue to create attractive opportunities for active investors. Periodic increases in supply may create temporary price dislocations, but we believe those episodes are more likely to present attractive entry points than undermine the broader technical backdrop.
Municipal Credit Curves and Relative Value
Theme 1: Municipal taxable-equivalent yields remain elevated relative to historical averages.
Theme 2: Munis offer attractive after-tax yield pickup vs. longer-duration or lower-quality taxable alternatives.
Theme 3: The muni curve remains steep and offers relative value in longer maturities.
