Lind Capital Partners Municipal Market Commentary

Municipal Market Performance and Benchmark Rates:   Escalating geopolitical risks, AI disruption jitters, and ongoing tariff turmoil fueled this month’s US Treasury market rally that saw rates, across all tenors, drop nearly 30 bps. While the AAA municipal benchmarks couldn’t quite keep pace with their UST counterparts, municipals still secured it’s position as the best performing fixed income asset year-to-date. The AAA municipal benchmark curve continued to bull steepen in February, as 5YR rates were lower by 15bps and 30YR rates lower by 11bps. The Bloomberg Municipal Bond Index (LMBITR) returned 1.24% in February, extending YTD returns to 2.20%, and high-yield (LMHYTR) continued to outperform, posting +1.77% this month, increasing year-to-date returns which now stand at +2.67%. Despite persistent elevated supply, insatiable investor demand and overall technical strength has defined the municipal market to kick-off 2026.

Mutual Fund Flows:   Municipal fund inflows are close to setting records in 2026 as total inflows, which approach $20B, are the 3^rd highest on record heading into March. Funds experienced inflows all four weeks in February, extending the weekly inflow streak to 14 consecutive weeks and 21 out of the last 22. The demand has also been largely indiscriminate with inflows broad based across investment grade and high yield, as well investment vehicle (open-ended mutual funds and ETFs).

Primary Market Supply:  Prolific issuance in the municipal market, a major theme in 2025 and to start 2026, continued in February as growing capital requirements for municipal infrastructure drove an influx of borrowers to the new issue market. Primary market supply eclipsed $47B in February, roughly flat year-over-year, but approximately 25% higher than the trailing 5-year average for the month. While the high-yield primary has maintained a health cadence year-to-date, the latter half of February saw primary issuance thin slightly, renewing investor focus in the secondary market. Looking ahead, municipal supply historically picks up in March and April and this year is expected to be no different.

Lind Capital Partners Municipal Non-Rated Market Commentary

Private credit was back in the financial headlines; and again, the news was not positive. Blue Owl Capital, one of the largest players in private credit, announced the sale of $1.4 billion in assets to return capital to investors and, more notably, permanently halted redemptions from the Blue Owl Capital Corporation II (OBDC II) fund, a non-traded business development company (“BDC”). This announcement stoked additional concerns surrounding the asset class and was quickly labeled another “canary in the coal mine” for private credit. Rather than providing an exhaustive analysis of the news, we would like to offer a few or our key takeaways for investors to consider. Full details can be found on the company’s press release, their 8-K filing, and the numerous articles released over the past week. However, here are a few summary points:

• The original structure of OBDC II offered investors quarterly liquidity up to 5% of fund assets, often referred to as a “semi-liquid” fund. The fund was also structured to have a terminal life, with the intent of return capital to investors through a "liquidity event" or orderly wind-down after a defined period.
• OBDC II faced mounting investor redemptions (exceeding the 5% cap) for several quarters, which lead to a failed merger attempt with Blue Owl’s publicly traded “OBDC” in November 2025.
• Blue Owl announced the sale of $1.4 billion in assets, across three different funds, to return capital to investors. The disclosed sale price for these assets was 99.7 cents on the dollar, at fair market value.
• OBDC II will use sale proceeds to return 30% of fund assets to investors and proceed with an orderly wind-down of the fund.
• OBDC II permanently halted the 5% quarterly redemption and will instead begin to distribute capital to investors as fund assets are sold. They expect to have 50% of the fund redeemed by end of 2026.

All of this opened a “can of worms” with questions and concerns across the marketplace; perhaps the most incendiary news was the “gating” of investor capital. Liquidity can be a difficult concept for investors (retail or sophisticated). We have never quite understood how investors can talk about liquidity without also considering execution price. In our view, there are always two components to liquidity: timing and price. With illiquid assets (private markets, real estate, etc.) and less-liquid assets (non-rated municipals), there is a reason behind earning an “illiquidity premium.” Investors should expect to earn incremental yield as a trade-off for the timing of liquidity. If they find themselves unwilling to trade liquidity timing, they should expect the premium to erode. It’s hard to have your cake and eat it too…but try telling that to a herd of investors who want what’s theirs, now, at the price they want.

Semi-liquid funds attempt to match the liquidity of the investment vehicle with the liquidity of the underlying assets. Most importantly, they are designed to protect the illiquidity premium for long-term investors, who may otherwise be adversely affected by the behavior of less patient investors. There is nothing like a market dislocation to highlight the behavioral biases of individual investors. We see this all the time in the non-rated municipal market, which has long been plagued with a mismatch in asset liquidity and the predominant fund structure: open-end mutual funds and ETFs (something we seek to exploit). That is why we feel so confident that the interval fund structure (semi-liquid) is the ideal pooled vehicle for our asset class (less-liquid, not illiquid). The lesson for investors from the Blue Owl event is to always consider if the investment vehicle is well-suited for the asset class and underlying assets, and to understand what you are trading in exchange for potential incremental return.

OBDC II halting redemptions also stoked growing investor concern regarding the quality of the underlying loan portfolio and more systemic risk in the private credit markets. On the surface, the recent asset sale should provide investors with a degree of confidence, with execution at 99.7 cents on the dollar. There are also prominent hedge funds making tender offers to OBDC II investors at 20-30% discounts, perhaps suggesting that the sharks smell blood in the water but there is true value in the portfolio. However, we often see credit fund managers liquidate their best loans first to maximize price and satisfy redeeming investors. While Blue Owl executives assured the market that this was not the case, we believe the true harbinger for the private credit market will come over the next several quarters as the remaining OBDC II portfolio is liquidated.

We do not have an opinion on the quality of OBDC II’s loan portfolio. However, the market’s drastic reaction should cause investors to reflect on basic capital structure and portfolio management implications. If there is this much concern about debt…what about the equity? One of the primary benefits of credit exposure should be diversification to equities. We fear that this benefit may be lacking for most private credit investors, who may be waking up to the fact they have significantly more cross-over sector risk exposure (mainly, technology) across their portfolio than intended, just in different places in the capital structure. If private credit fears prove to be well-founded, there may be dire implications for equity markets, and investor portfolios may fail to deliver diversification benefits exactly when they most need them.

While we believe private credit plays a key role in the capital markets and deserves consideration in many portfolios, investors should have clear understanding of the risks and trade-offs. Importantly, investors should also be aware of alternative investment options in the credits markets, such as non-rated municipal bonds, that may avoid many of the potential pitfalls in private credit, offer true diversification and provide extremely competitive yields on a taxable equivalent basis.

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.

Lind Capital Partners Municipal Market Charts