Thoughts from the Municipal Bond Desk

Key takeaways

• Muni bonds faced multiple headwinds during March, including heightened geopolitical uncertainty, increased market volatility, and typical seasonal factors.
• Issuers responded to market conditions by adjusting, delaying, or reconsidering planned bond offerings, leading some analysts to revise downward their 2026 supply forecasts.

Tim:

March was a tough month for municipal bonds, with the Bloomberg Municipal Bond Index returning –2.32%.² 

What do you think accounted for the weakness?

Mark: 

I think it was due to several challenges that hit all at once. Rising geopolitical tensions drove oil prices higher, spurring renewed inflation worries. As inflation expectations increased, investors demanded higher yields across fixed income assets, which put downward pressure on bond prices, including munis. Rapid shifts in investor sentiment, driven by those same geopolitical headlines, added to the volatility. Yields on a 10-year AAA general obligation bond, for example, climbed more than 60 basis points (bps) in March, hitting 3.11% on March 27 — their highest level since September 2025.³ At the same time, seasonal pressures worked against the muni market. Investment flows declined as investors prepared to fulfill their April tax obligations. Meanwhile, new issuance remained high, and reinvestment capital dried up. Combined, these factors led to negative total returns for munis, resulting in their weakest month in more than two years.⁴

Tim:

This dramatic rise in yields has had some repercussions for muni issuance, hasn’t it?

Mark: 

It has. March can be one of the trickier months for issuers due to weaker market technicals. Since supply outweighs demand, issuers need to offer higher yields in order to attract buyers. Now, we’ve had to add rate volatility from inflationary fears and geopolitical uncertainty into the equation, which has affected several new deals. Illinois and New York City were two examples of issuers having to reduce their deal sizes in late March.⁵ In response, a major bank revised its 2026 muni supply forecast down by roughly 6%, lowering it to $600 billion from a previous estimate of $640 billion.⁵ It’s worth noting that $600 billion would still be a year of record issuance, following last year’s record total issuance of more than $585 billion.⁶

Read the complete article, including munis by the numbers.

Footnotes

• 1 Source: London Stock Exchange Group plc (LSEG) Lipper, March 2026. The LSEG Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60, and 120 months. The fund with the highest Lipper Leader for Consistent Return (effective return) value in each eligible classification wins the LSEG Lipper Fund Award. For more information, see lipperfundawards.com. Although LSEG makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, its accuracy is not guaranteed by LSEG Lipper. For the 10-year period ending Nov. 30, 2025, Invesco California Municipal Fund Y shares were named best in class among 28 California Municipal Debt Funds, Invesco Rochester® Municipal Opportunities Fund Y shares were named best in class among 38 High Yield Municipal Debt Funds, Invesco Rochester® New York Municipals Fund Y shares were named best in-class among 22 New York Municipal Debt Funds, and Invesco Pennsylvania Municipal Fund Y shares were named best in-class among 13 Pennsylvania Municipal Debt Funds. For the five-year period ending Nov. 30, 2025, New Jersey Municipal Fund R6 shares were named best in class among 12 New Jersey Municipal Debt Funds. 
• 2 Source: Bloomberg L.P., as of March 31, 2026. Investment grade municipal bonds are represented by the Bloomberg Municipal Bond Index, an unmanaged index considered representative of the tax-exempt bond market. An investment cannot be made into an index.
• 3 Source: Bloomberg L.P., as of March 27, 2026 
• 4 Source: Bloomberg L.P., as of March 31, 2026. The municipal market is represented by the Bloomberg Municipal Bond Index. Past performance does not guarantee future results.
• 5 Source: Bank of America, as of March 27, 2026
• 6 Source: Bloomberg L.P., as of Dec. 31, 2025

Original article posted 04/10/26: Thoughts from the Municipal Bond Desk