Municipal Market Performance and Benchmark Rates: Bond prices took a beating in July as yields moved sharply higher across the curve, with the steepest climb coming in the final trading sessions of the month. The latter half of July featured the Federal Reserve’s rare 9-3 internal split on monetary policy, an approximately 1,100-point Dow decline and a rise in long-dated US Treasury yields to multi-decade highs. Further fueling policy anxiety are escalating geopolitical tensions in the Middle East as a near-term resolution to the conflict with Iran appears increasingly out of reach.
When all was said and done, 5-, 10-, and 30-year US Treasury yields rose anywhere from 30 to 40 basis points, with the 30-year closing the month at 5.27%, the highest level since 2007. AAA Municipal Benchmark yields followed in sympathy, with yields rising anywhere from 37 to 43 basis points, depending on tenor. As a result, the three-month run of positive performance for investment-grade and high-yield municipal indices came to an end in July, with Bloomberg Municipal Bond Index (LMBITR) posting its worst July performance (-1.85%) since 2003. Year-to-date returns for IG remain positive, however, at 0.43%. While the Bloomberg High Yield Index outperformed its IG counterpart, the asset class still could not escape the broader fixed-income rout, ultimately printing a -1.35% return in July. Year-to-date returns remain firmly positive for high yield at 2.52%.
Mutual Fund Flows: While year-to-date inflows ($59B+) into municipal pooled vehicles continue to track as the second-highest YTD pace on record, inflows began to taper slightly in July. Combined mutual fund and ETF flows were positive all four weeks in July, totaling over $3.5B, but high-yield funds experienced outflows in the latter half of the month for the first time since the end of March.
Primary Market Supply: Broad municipal new-issue supply has maintained a relentless pace all year, with July proving to be no exception. Primary supply in July exceeded $50B for the fifth consecutive month. Although July’s $53B total was down 15% YoY, it exceeded the trailing five- and 10-year averages by ~25%. While investment-grade issuance has surged to record levels in 2026, the non-rated new-issue calendar has remained stubbornly sporadic, as investor demand continues to outpace subdued supply, making it increasingly difficult to deploy capital in the slow summer months. Looking ahead, LCP expects the current macro-driven volatility will clear a path for long-term investors to capitalize on these highly attractive entry points.
Periods of extreme volatility and sharply rising rates often result in increased questions and queries from clients and prospects regarding the condition of the market and individual portfolios. As long-term investors, we have always welcomed volatility due to the opportunities it typically presents in the aftermath of a dislocation.
During these periods, we are reminded of what Howard Marks wrote to Oaktree Clients in his memo “What Really Matters” (November 22, 2022). In it, he wrote: “Volatility is particularly irrelevant in our field of fixed income or ‘credit.’ Bonds, notes, and loans represent contractual promises of periodic interest and repayment at maturity.” He went on to note that investors should largely expect the return of their portfolio to reflect the yield of the portfolio at purchase. Yes, bonds will go up and down in value over the life of the bond, but generally bondholders receive their principal at maturity (provided, of course, the Borrower meets its obligations). We have always shared this view and have found that investors who are overly concerned about it tend to act irrationally and create opportunities for long-term investors.
Periods of rising rates often prompt investors to reduce risk, which is beginning to appear in high-yield municipal fund flows. Because these funds offer daily liquidity while holding securities that may trade infrequently, redemptions can force portfolio managers to sell into an already volatile market. That liquidity mismatch can create attractive opportunities for patient investors with the ability to underwrite credits selectively.
Although we expect new-issue and secondary-market activity to slow in August, activity should increase meaningfully in September and through the fourth quarter. Historically, more than 40% of our annual purchases occur during the final three months of the year, when borrowers seek to complete financings and investor participation often declines. If volatility persists, forced selling and heavier issuance could produce an unusually favorable opportunity set.
Unrealized losses are uncomfortable, but for individual bonds held to maturity, interim price movements do not alter the return of principal absent credit problems. Higher rates also allow principal, interest proceeds, and new capital to be invested at more attractive yields. With available capital and a disciplined underwriting process, LCP is positioned to provide liquidity when other investors are compelled to sell and capitalize selectively on the resulting price dislocation.
The chart above shows the increase in value of $1,000,000 invested in the LCP composite at inception (net of management fees and expenses) vs. the benchmark, the Bloomberg High Yield Muni (LMHYTR) as well as the Bloomberg Muni (LMBITR) indices (it is not possible to invest in either Bloomberg Index). Please contact us with questions regarding credit profile, returns, taxable equivalent yields or further portfolio information. Past performance is not indicative of future results.