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.
Lind Capital Partners Municipal Non-Rated Market Commentary
Closing the Position, Not the File: A recent Bloomberg headline caught our attention. The story highlighted the turnaround efforts of Riverside Military Academy, a private military academy (grades 6-12), whose bonds we owned many years ago. The borrower defaulted last year on approximately $48 million of debt issued in 2017 and is now relying on an additional subordinate debt injection to stay afloat. The primary reason for the borrower’s default was a precipitous drop in enrollment during the COVID-19 pandemic, which never recovered. Prior to the pandemic, we had owned this credit for almost a decade and the bonds performed well. However, observing the negative credit impacts and very challenging path to recovery, we divested our position in 2021. Part of our credit-intensive strategy is maintaining an ongoing knowledge base of credits in our target sectors, even those we have sold. We spend significant time and energy understanding a borrower before committing capital, an intellectual investment that retains value even after a position leaves our portfolios. We continue to follow many of our former holdings, monitoring financial performance, management decisions, changes to the underlying business, and capital market activity. Over time, the new information we gather may confirm the concerns that led to divestiture or result in our reconsidering our prior assessment.
Coincidentally, around the same time we noted the Riverside Academy article, we found ourselves re-engaging with another former portfolio holding that we sold during roughly the same period. Similarly, we owned this well-performing credit for several years before COVID-19 induced credit stress prompted us to divest the position. However, over the years we maintained close surveillance and observed stabilizing fundamental credit conditions. The market presented an opportunity to reinvest in this credit at prices that we believe significantly undervalued the credit improvements. Our history with the borrower greatly contributed to our ability to understand their current position and gain conviction to reenter the position.
For Lind Capital, the comparison of these two credits illustrates a critical feature of our credit process: divesting a position does not necessarily result in our closing the credit file. Credit analysis is not about permanently labeling a borrower “good or bad.” It is about continually assessing credit fundamentals and the relationship between risk and return at a particular point in time. Fundamentals change. Management teams change. Capital structures and financial resources evolve. Asset values rise and fall. And perhaps most importantly, market prices can change dramatically. There is significant value in institutional memory. When we revisit a credit years later, we are not starting from scratch. We know the issues that concerned us, the assumptions underlying our original analysis and how events ultimately unfolded. That history provides valuable context when evaluating a former credit anew and helps us determine the appropriate risk/return given current conditions.
At this point, we will remain interested bystanders of Riverside Academy. And while these two credits appear to be traveling in opposite directions, they illustrate the same investment discipline: continually reassessing the creditworthiness of a borrower rather than remaining anchored to an earlier conclusion. Our history with our portfolio credits provides invaluable context. It is never a permanent verdict.
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
