While valuations have tightened at the front end, longer dated municipals continue to offer attractive relative value versus Treasuries, highlighting the benefits of active management for income focused client portfolios. Find out more in this month’s Municipal Bond Market Brief.
Monthly Summary
- The municipal bond market has maintained its strong momentum to start the year. Although Treasuries and corporate bonds outperformed municipals during the month, municipal bonds remain ahead in year-to-date performance.
- Municipal yields declined across the curve, but to a much lesser extent than comparable US Treasuries (USTs).
- Robust demand continued in February, and healthy reinvestment is expected to continue for March. We believe investor demand is a key component in shaping performance for 2026.
- Municipal bond fundamentals remain stable. Although valuations are less attractive in the short and intermediate portions of the municipal curve, we believe that municipal bonds still offer more compelling value compared to many other fixed income sectors and asset classes.
- Ben Barber joined the Talking Markets podcast with Rick Polsinello to discuss the outlook for 2026 in “The opportunity in municipal bonds in 2026 (Podcast).”
Performance Review
- Longer-maturity municipal bonds in the 15–20 year segment delivered the highest returns for the month, outperforming intermediate and shorter maturity bonds.
- BBB and A rated credits outpaced higher quality credits.
- High-quality short-maturity strategies underperformed.
- High yield municipal bonds outperformed investment grade bonds for the second consecutive month to start the year.
Rates & Duration
- The municipal yield curve experienced declines across all maturities during the period, with the most significant contraction observed in the two-year tenor, which fell by 19 basis points. Notably, this decrease surpassed the movement seen in the two-year US Treasury, highlighting robust demand at the front end of the municipal curve.
- In contrast, the Treasury yield curve experienced a more substantial downward shift—approximately twice as large as that seen in municipal bonds—across the five-year to 30-year maturities.
- In her most recent On My Mind, Franklin Templeton Fixed Income CIO Sonal Desai shares her views on inflation, the labor market and the Federal Reserve’s easing cycle.
Trending Topics
What is the California Billionaire’s Tax Proposal?
- There is a proposed ballot initiative for a one-time 5% wealth tax specifically targeting billionaires. This measure is intended to assess a single levy on individuals whose net worth exceeds the billion-dollar threshold, reflecting a focused approach to revenue generation without recurring annual assessments.
- The initiative is expected to impact roughly 200 taxpayers who were residents of California as of December 31, 2025.
- In order for the proposition to appear on the ballot, organizers will need to gather approximately 900,000 valid signatures by April 17.
- Should the measure pass, we anticipate considerable legal challenges which could either delay or ultimately prevent its implementation. The complexity of wealth tax enforcement, particularly for mobile and high-net-worth individuals, means lengthy litigation is likely.
- If the proposition qualifies for the ballot, it’s reasonable to expect competing measures to emerge. These may offer alternative approaches or modifications, reflecting the ongoing debate over fiscal policy and tax fairness in California.
- From a fixed income perspective, we do not regard this proposal as a material fiscal positive or negative for the state. The targeted nature and potential legal obstacles limit its immediate impact on California’s credit profile.
- Our primary concern centers on the broader economic implications, including the risk of taxpayer migration and possible reputational harm to California’s entrepreneurial tech ecosystem. Such dynamics could influence long-term revenue trends and the state’s attractiveness as a hub for innovation and investment.
WHAT ARE THE RISKS?
All investments are subject to certain risks, including possible loss of principal. Generally, investments offering the potential for higher returns are accompanied by a higher degree of risk. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in a portfolio adjust to a rise in interest rates, the portfolio’s value may decline. 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. High-yield, lower-rated (junk) bonds generally have greater price swings and higher default risks. Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.