Muni Market Update – Blooming Spring Supply

March is an unpredictable time of the year in Chicagoland. A 70 degree day followed by hail and 30 degree temperatures. The fickle nature of weather this month has its literal green shoots, however, as daffodils and tulips start rearing their heads. The municipal market often moves in similar fashion at this time of the year, trading in fits and starts as it braces for the seasonal wave of supply that typically builds through late spring and into summer. In this environment, patience and selective investing are warranted. Investors should not fear accumulating cash at the moment, but be prepared to deploy it as more attractive opportunities emerge in the weeks and months ahead.

After a record year for issuance in 2025, supply in 2026 is trending along a similar trajectory and could exceed $600 billion. Many municipalities are still catching up on capital projects deferred during the COVID period, funding long-needed infrastructure investments across the country. The monthly trend when this supply is issued to market is predictably seasonal with nadirs in the January-February period, before increasing through March-May and peaking in June. We expect this pattern to repeat in 2026.  

Year-to-date issuance (orange line) is hugging – if not slightly surpassing – last year’s record supply (top end of grayed range). Source: Bloomberg

Below graphs the seasonality of supply. Notice the 3 and 5-year average (red and orange) starts increasing in late March through June. Source: Bloomberg

Barring any significant rally (lower yields) in treasuries, the coming increase in municipal supply should present investors with attractive opportunities to deploy cash. Even today, the long end of the municipal curve offers compelling nominal and relative value compared with other high-grade fixed income. Yields near 4% remain readily available in the ~15-year maturity range, which equates to a taxable-equivalent yield above 6.3% for investors in the 37% federal tax bracket. In contrast, short-to-intermediate maturities appear less compelling from both an absolute yield and relative value perspective.

The yield curve remains a tale of two cities: unattractive yields at the front end and more compelling valuations further out the curve. The latter may give investors pause given the duration risk inherent in longer maturities. Those concerns are understandable, particularly amid a recently weakening Treasury market, somewhat stubborn underlying inflation, and the recent spike higher in oil prices.

At the front end – with benchmark yields in the low to mid-2%s – we believe investors are best served by focusing on bonds with “funkier” structures, such as short calls and/or lower coupons. These structures can help capture yields of 3% or more (roughly 4.76% taxable-equivalent at the 37% bracket), providing a more attractive alternative to traditional short-maturity structures.

 

Our Approach Given Market Conditions

We continue to believe in the ladder portfolio structure as a diversified and disciplined way to invest in the municipal bond market. We are currently targeting yields of 3% at the front end of the yield curve and 3.75%-4.25% in the 15-20-year maturities. This said, we currently are adhering to more of a barbell approach by capturing attractive value on the long end but dragging our feet and gradually investing cash balances (front end of the barbell).

Given yields remain in the 3-4% range, returns over the medium term should follow suit, barring any major market moves. These yields correspond to 4.76%-6.34% taxable equivalent yields at the top tax bracket. These types of yields remain both outright and relatively attractive to other high grade fixed income. The upper end of the range (6.34% TEY) surpasses even BBB rated corporate bonds[1].  For high duration strategies, this is free lunch given municipals historically display significantly lower default rates (see addendum) and less sensitivity to weakening economic conditions. Furthermore, your average municipal bond offers solid call protection (8 to 10-years on average for new issues) and daily liquidity via public markets. Some of the alternative, private market fixed income products offer neither.

Given the attractive characteristics of today’s market—elevated long-term yields and the potential for even higher yields as seasonal supply builds—municipal bonds appear well positioned to offer compelling buying opportunities in the weeks and months ahead.

Thank you for the continued confidence you place in our team. As always, please do not hesitate to reach out to your Investment Specialist or Portfolio Manager with any questions.

 

Sincerely,

Matt Bernardi
Senior Vice President

 

Addendum: Highlight’s of Moody’s Default Rate History Report
Source: https://www.moodys.com/research/doc–PBM_1445155

This report, published in the summer of 2025, provides an in depth summary of the historical and current sturdiness[2] of the municipal bond market.

Moody’s notes:

  • There was one default – a small hospital system – in 2024 and most of the municipal sector remains highly rated and stable
  • Municipal defaults remain rare and concentrated in competitive enterprises.
  • Municipal ratings continued to drift up and at a higher rate than corporates
  • Median rating for municipal bonds is Aa3, compared with Baa3 for corporates.
  • As of the end of 2024, 98.5% of the municipal sector was rated investment grade

Historical default rates for Moody’s Aaa rated municipalities remains 0.00% while, and 0.02% for AA rated. For the latter, all the historical defaults ultimately had 100% recoveries, and most in short order.

We hope this serves as a reminder to the sturdiness of the asset class from a principal preservation perspective and appreciate Moody’s broad surveillance.

 

[1] Source: Bloomberg, USD US Corporate BBB+, BBB, BBB- BVAL Yield Curve; BVSC0075, March 12th, 2026

[2] As of 2024