This month’s Muni Monthly covers performance, supply and demand technicals, fundamentals and valuations for the month ending January 2026.
Performance Overview: Municipals Outperformed in January, Partially Reversing 2025 Underperformance
Fixed-income markets were volatile in January amid elevated geopolitical tensions and trade threats. Yields moved higher mid-month following tariff threats related to President Trump’s effort to formally acquire Greenland, but ultimately eased as a framework with Europe was reached. Economic data was relatively steady and the labor market modestly softened as the unemployment rate increased slightly, offset by steady manufacturing data. The Federal Reserve kept rates steady, maintain the fed funds target rate range at 3.50%-3.75%.
The Treasury curve moved 3-5 basis points (bps) higher across the curve during the month. The high-grade municipal curve outperformed, with yields moving 13-20 bps lower in maturities inside of 20 years, and up to 5 bps higher in longer maturities. All told, the Bloomberg Municipal Bond Index returned 0.94%, outperforming the US Treasury and Corporate Indices which returned -0.09% and 0.18%, respectively, reversing some of the muni underperformance observed in 2025.
Source: Bloomberg, Western Asset. As of 06 Feb 26.
Technicals: Muni Demand Accelerated as Supply Declined
Muni outperformance was supported by traditional “January Effect” conditions, a period of technical strength where heavy coupon and principal reinvestment coincides with limited new issuance. ICI estimates municipal funds and ETFs recorded $13 billion of net inflows in January, the highest level since the market’s $120 billion major outflow cycle ended in early 2024. Meanwhile, monthly new-issue supply of $35 billion was down 6% from January 2025 levels and down 44% from the recent highs observed in October 2025, further strengthening market technicals.
Source: Bloomberg, ICI, Western Asset. As of 31 Jan 26.
Fundamentals: Record Revenue Collections Support Muni Fundamentals
In January, the Census released 3Q25 state and local tax collection estimates, which were delayed due to the government shutdown, but underscored continued resilience for traditional state and local credit conditions. Twelve-month trailing collections increased 4.2% year-over-year (YoY) to $2.2 trillion, marking a record high, according to Census data. On a 12-month trailing basis, individual income tax collections increased 8.6% YoY and sales tax collections increased 2.6%, while corporate income tax collections declined 3.6%. Twelve-month rolling property tax collections increased 4.2% YoY.
Source: Census, Western Asset. Major state and local tax revenue are not seasonally adjusted. As of 15 Jan 26.
Valuations: Muni Credit Spreads Remain Tight, Warranting Diligent Credit Selection
Despite municipal yields moving lower with the yields of other fixed-income asset classes over the past year, tax-exempt income opportunities remain attractive compared with historical averages. Municipals offer a compelling after-tax yield pickup versus taxable counterparts, a trend that could continue as we transition out of “January effect” conditions into a weaker technical environment ahead of tax season. Given that tax-exempt credit spreads remain at historically tight levels, Western Asset emphasizes that diligent credit selection is paramount. Western Asset believes that long-term investors may be well-served by potential income opportunities offered by any upcoming seasonal weakness.
Source: Western Asset, Bloomberg. As of 06 Feb 26. Spreads represent the reference Bloomberg Quality Index YTW (Bloomberg AA Municipal Index, Bloomberg A Municipal Index, Bloomberg BBB Municipal Index) less the Bloomberg AAA Municipal Index YTW. Yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting.
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.
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