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Franklin Templeton Fixed Income Fixed Income

Municipal Bond Market Monthly Brief: August 2026

Municipal bonds lost ground for a second straight month in August as yields rose across the curve, while strong investor demand continued to absorb record issuance and underlying credit fundamentals remained resilient. The Franklin Templeton Fixed Income team examines performance, supportive technicals and attractive relative valuations as lower-rated credit continues to outperform.

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Franklin Templeton Fixed Income

Published date

September 8, 2026

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Monthly Summary

  • Municipals (munis) lost ground in August as yields rose across the curve. The Bloomberg Municipal Bond Index returned -0.23% month-to-date (MTD), reducing its year-to-date (YTD) gain to +0.20%. Lower-rated credit continued to outperform, with the Muni High Yield Index leading at +2.74% YTD with a +0.22% MTD return. Munis trailed Treasuries and corporates for the month; those sectors returned +0.31% and +0.43%, respectively, but munis are still outperforming both YTD.
  • Supply continued at a record pace in August, with YTD issuance roughly 8% ahead of last year. While strong mutual fund and ETF demand remained supportive, September’s expected net positive supply should provide an important test of market technicals and investor appetite.
  • Fundamentals remained supportive, underpinned by steady employment, solid capital market returns, and well-funded state and local reserves. Downgrades continued to weigh on the education sector, where enrollment declines have pressured school district revenues.
  • Be sure to read Jennifer Johnston’s latest installment, Balanced Budgets, Uneven Pressures, in which she reflects on the US fiscal year 2027 budget season and explores the fiscal trends driving increasingly divergent credit outcomes across municipal issuers.

WHAT ARE THE RISKS?

All investments involve risks, including 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. 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. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance. An investor may be subject to the federal alternative minimum tax, and state and local taxes may apply. Diversification does not guarantee a profit or protect against a loss.

WF: 12591019

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In August, the US dollar weakened modestly, sovereign bond yields generally rose, and emerging market hard-currency bonds gained. Inflation remained elevated but mixed across countries, while central bank commentary leaned hawkish despite few policy meetings. The Templeton Global Macro team believes global growth remains resilient, though geopolitical and trade uncertainty reinforce the need for country-specific analysis.

Important Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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