Macros, Markets and Munis
Municipals posted positive returns last week and generally outperformed taxable fixed-income as the prospect for de-escalation in the US-Iran conflict along with a weak nonfarm payrolls report contributed to a positive tone across fixed-income markets. Oil prices declined more than 10% as President Trump called off a planned strike. Meanwhile, nonfarm payrolls surprised to the downside with July data showing a decline of 23,000 jobs, which was well below consensus expectations and the prior month’s job growth that was also revised downward. US Treasuries rallied across the curve during the week, moving 10 basis points (bps) lower in short and intermediate maturities while moving 7 bps lower in the longest maturities, lowering the probability of a September rate hike to 44%, down from 72% the prior week. High-grade municipals generally trailed Treasuries lower, outperforming in intermediate maturities. At the same time, strong demand absorbed an elevated new issue calendar. This week we highlight the persisting relative steepness of the municipal curve.
Improved Demand Absorbed an Elevated New-Issue Calendar
Fund Flows ($1.3 billion of net inflows): During the week ending August 5, weekly reporting municipal mutual funds recorded $1.3 billion of net inflows, marking a 16th consecutive week of inflows, according to Lipper. The long-term category led demand with $1 billion of inflows, the intermediate category recorded $182 million of inflows and the short-term category recorded $94 million. Last week’s inflows led year-to-date (YTD) inflows to $63 billion.
Supply (YTD supply of $369 billion; up 10% YoY): The muni market recorded $20 billion of new-issue supply last week, double the prior week’s level. YTD new-issue supply of $369 billion is 10% higher than the prior record-issuance year, with tax-exempt issuance up 11% year-over-year (YoY) and taxable issuance up 3%. This week’s calendar is expected to jump to $15 billion. Largest deals include $1.6 billion Sutter Health and $1.1 billion City of Atlanta transactions.
This Week in Munis: Yield Curve Steepness
While both Treasury and municipal yield curves have steepened amid inflation and policy uncertainty, the municipal curve has historically remained steeper than its taxable counterparts. This relative steepness reflects structural differences in municipal technicals and other market considerations. Municipal supply tends to be concentrated in longer maturities as issuers finance long-lived infrastructure projects, while investor demand tends to be concentrated in short and intermediate maturities. Lower liquidity, embedded call options and greater uncertainty over longer investment horizons can also contribute to a term premium. As of Friday, the 30-year/1-year slope of the AAA municipal curve was 202 bps, nearly 80 bps steeper than the comparable Treasury curve.
More recent supply and demand trends have reinforced, if not exacerbated, this historical steepness. Since the start of 2024, record high municipal issuance has been largely concentrated toward maturities beyond 10 years, while only approximately 40% of the estimated $173 billion in municipal fund flows has been directed to longer-duration strategies, with the majority of flows moving to short and intermediate solutions. Front-end demand has also been bolstered by growth in short- and intermediate-duration SMAs, whose AUM increased by approximately $274 billion from December 2023 through March 2026, according to Cerulli. Greater long-maturity supply and relatively limited long-duration demand have therefore contributed to the curve’s additional steepness.
AA Yield Curve vs. Supply and Demand (January 2024 to August 2026)
The resulting muni curve steepness may create attractive opportunities for long-term investors through both higher tax-exempt income and greater potential rolldown returns. Based on current valuations, and assuming an unchanged curve over a one-year horizon, a 20-year AAA municipal security could provide an estimated 1.44% return contribution from rolldown, compared with approximately 0.73% at the most attractive point on the Treasury curve. These dynamics illustrate how active managers can use maturity positioning and curve exposure to drive attractive incremental value within municipal portfolios and across broader fixed-income allocations.
Income vs. Rolldown Characteristics of the AAA Municipal and Treasury Curves
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. taxable alternatives.
Theme 3: The muni curve remains steep and offers relative value in longer maturities.
