This month’s Muni Monthly covers performance, supply and demand technicals, fundamentals and valuations for the month ending July 2026.
Performance Overview: Munis posted the weakest July returns in over two decades.
Municipals posted their weakest July return in more than two decades. The Bloomberg Municipal Bond Index returned -1.85%, underperforming most investment-grade fixed-income sectors and marking just the fifth negative July return over the past 30 years. July is typically supported by lighter issuance and strong reinvestment demand. Longer-duration bonds lagged amid persistent inflation uncertainty and elevated supply, while higher-quality cohorts also underperformed as continued credit-spread tightening favored lower-rated segments. Despite the July decline, the Bloomberg U.S. Municipal Bond Index return remained positive at 0.43% year to date (YTD), compared with returns of -0.69% for the U.S. Aggregate index, -0.84% for the Treasury index and -0.83% for the Corporate index.
Exhibit 1: Bloomberg Municipal Bond Index—July Performance
Source: Bloomberg, Western Asset. As of 31 Jul 26.
Technicals: Municipal demand is down from June but still above the 10-year July average.
Elevated issuance and a rising forward calendar outweighed otherwise steady fund demand. July municipal issuance totaled approximately $47 billion, down 25% from June but still 28% above the 10-year July average. The Bloomberg 30-day forward supply calendar increased from $12.5 billion at the beginning of the month to $24 billion by month-end, underscoring the persistent pace of record issuance in 2026. Meanwhile, combined Lipper and ICI estimates indicate that municipal funds recorded more than $9 billion of net inflows during July, roughly in line with June.
Exhibit 2: July Tax-Exempt Supply Maintained Record Pace
Source: Western Asset, Lipper, ICI. As of 31 Jul 26.
Fundamentals: Rating agency downgrades outpace upgrades amid moderate growth and cost pressures.
As July represents the start of a new fiscal year for most municipalities, strong tax collections have supported timely budget filings. However, rating actions have begun to reflect moderate growth expectations and persistent cost pressures. Downgrades from Moody’s, S&P and Fitch outpaced upgrades by borrower count, continuing a trend observed since March. Total YTD defaults remain below prior-year levels, however, and remain isolated to select high-yield sectors. Notably, four of the five first-time payment defaults recorded in July occurred within the charter school sector.
Exhibit 3: Rating Agency Upgrades vs. Downgrades
Source: Bloomberg. As of 31 Jul 26.
Valuations: After-tax yield advantages support attractive municipal entry points.
The July selloff lifted municipal tax-exempt income levels and improved relative valuations. The Bloomberg Municipal Bond Index yield-to-worst rose to a year-to-date high of 3.93%, equivalent to 6.64% on a taxable-equivalent basis for investors subject to the highest marginal tax rate. That compares favorably with yields of 4.57% for the Bloomberg U.S. Treasury Index and 5.46% for the Bloomberg Corporate Index. After-tax yield advantages across maturities and credit-quality cohorts remain above their five-year averages, supporting more attractive entry points for the municipal asset class, in our view, amid continued economic uncertainty.
Exhibit 4: After-Tax Yield Pickup by Quality Cohort
Source: Bloomberg, Western Asset. As of 31 Jul 26: 10- and 30-Year comparison reflects Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. AA Muni reflects the Bloomberg AA Muni Bond Index. A Muni reflects the Bloomberg A Muni Bond Index. BBB Muni reflects the Bloomberg BBB Muni Bond Index. HY Muni reflects the Bloomberg High Yield Muni Bond Index. AA Corp reflects the Bloomberg AA Corporate Bond Index. A Corp reflects the Bloomberg A Corporate Bond Index. BBB Corp reflects the Bloomberg BBB Corporate Bond Index. After-tax yield considers top marginal tax rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
Definitions:
“AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (“BB,” “B,” “CCC,” etc.) are considered low credit quality, and are commonly referred to as “junk bonds.”
One basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).
The Bloomberg Municipal “Muni” Bond Index covers the USD denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
The Bloomberg Municipal High Yield Bond Index is an unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody’s Investors Service with a remaining maturity of at least one year.
The Bloomberg Taxable Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody’s, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade.
The Bloomberg US Corporate Bond Index measures the performance of the investment-grade, fixed-rate, taxable corporate bond market. It includes U.S. dollar-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg US Treasury Index measures the performance of US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with at least one year until final maturity. Treasuries, if held to maturity, offer a fixed rate of return and a fixed principal value; their interest payments and principal are guaranteed.
The Bloomberg Valuation Service (BVAL) provides prices on a daily basis for over 2.5 million securities across all asset classes.
The Bloomberg AAA BVAL Callable Municipal Credit Curve is represented by the US General Obligation AAA Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured AAA General Obligation bonds. The curve is populated with high quality US municipal bonds with an average rating of AAA from Moody’s and S&P. The yield curve is built using non-parametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues, and other proprietary contributed prices. The curve represents 5% couponing. The 3-month to 10-year points are bullet yields, and the 11-year to 30-year points are yields to worst for a 10-year call.
The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.
Inverted yield curve refers to a market condition when yields for longer-maturity bonds have yields which are lower than shorter-maturity issues.
Yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
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.
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.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
WF: 12012058
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