Munis Showed up Throughout a Volatile First Quarter

Why It Matters

The resilience of munis amid geopolitical shock underscores their role as a stable, tax‑advantaged asset, while rising yields and tighter ratios create new entry points for investors seeking income and diversification.

Key Takeaways

• Municipal issuance rose 8% YoY in Q1 despite Middle East tensions.
• AAA and Aa muni yields climbed 60 and 35 basis points respectively.
• March muni returns fell 2.32%, wiping out earlier gains.
• Fund flows stayed positive, with ETFs and SMAs attracting capital.
• 10‑yr and 30‑yr ratio levels reached 72% and over 90%.

Pulse Analysis

The first quarter of 2026 demonstrated the municipal market’s capacity to absorb external shocks while maintaining issuance momentum. After a record‑setting supply year, issuers delivered an 8% YoY increase in total volume, with March alone up 20% despite the Iran‑Israel flare‑up. Strong demand kept front‑end ratios on the richer side, pushing the 10‑year ratio to 72% and the 30‑year to above 90%, signaling tight credit spreads and a favorable risk‑adjusted return environment for tax‑exempt investors.

Geopolitical tension and oil prices breaching $100 per barrel sent Treasury yields climbing, and municipal yields followed, albeit with a lag. AAA and Aa ten‑year yields rose roughly 60 basis points, while 30‑year yields added 35 basis points, causing a 2.32% monthly loss in March—the worst return in over two years. Nevertheless, the sector’s “carry trade” appeal persisted; investors extended duration to capture higher taxable‑equivalent yields, especially on the long end, where relative value remained compelling despite the short‑term underperformance.

Looking ahead, the Federal Reserve’s stance appears cautiously dovish, with officials hinting at a possible rate cut later in the year while monitoring inflation pressures from higher energy costs. Tightening ratios and elevated yields create attractive entry points, but credit quality vigilance is essential as revenue‑bond sectors like healthcare and higher education face fiscal headwinds. Active security selection and duration management will be key for investors aiming to balance income generation with risk mitigation in a market that continues to prove resilient amid uncertainty.