Strong Muni Demand Drives Positive Momentum
Munis outperformed Treasuries amid inflation repricing concerns. With elevated supply and tight spreads, rigorous credit selection and duration positioning are key to capturing income amid shifting technicals, exemplifying active management’s role in 2026.
Market Overview
The municipal bond (muni) market outperformed the Treasury market in May as strong investment demand anchored muni yields while Treasury yields rose. Inflation repricing and shifting Fed policy expectations drove the selloff, with inflation pass-through from the Middle East conflict pushing headline CPI to +3.81% YoY and core CPI to +2.75% YoY. The labor market held steady with unemployment unchanged at 4.3%. Inflation pressures led to a rate hike narrative in the market, fueling the rise in Treasury yields, while sustained muni inflows kept yields contained, driving outperformance versus Treasuries.
Yields and Valuations
Muni yields twisted with the front end rising and back end falling in May. The difference between 1-year and 30-year muni yields remained flat at 187 bps. Muni/US Treasury ratios richened by 1/1/0%, ending May at 62/67/87% respectively for 5/10/30 years.