- As we shared on 2/24, BlackRock recently noted that municipal bonds appear poised for a solid year after trailing U.S. Treasuries in 2025. Their outlook calls for investment-grade municipals to potentially deliver mid- to upper-single-digit returns in 2026 as market conditions stabilize. We continue to believe the asset class has a favorable tailwind: rates appear steady to modestly lower, supply remains manageable, and capital is rotating away from more volatile sectors such as private equity. Our base case remains approximately 75 basis points of rate cuts over the course of this year.
- On the policy front, Lisa D. Cook cautioned that the Federal Reserve may face limitations in addressing rising unemployment if labor displacement from AI adoption accelerates. While AI is clearly enhancing productivity and supporting economic growth, it may also place pressure on the labor market over time. Some Fed members view this as a longer-term catalyst for easier monetary policy should job growth weaken into 2026–2027.
- Recent data showed U.S. consumer confidence ticking higher in February, reflecting improved expectations for the economy, jobs, and income growth. The Federal Reserve will be closely monitoring both labor market data and inflation trends heading into its next meeting. At present, we continue to believe the Fed’s bias is toward easing, though not imminently.
- Austan Goolsbee recently commented that the Supreme Court’s decision striking down many of President Trump’s tariffs could create short-term business uncertainty but may ultimately help moderate inflation. Trade policy remains a moving variable, particularly with discussions of increasing the global tariff rate to 15% “where appropriate.” For now, the 10% framework remains in place, but tariff headlines are once again influencing all markets.
- From a flow perspective, municipal bonds continue to attract capital. According to the Investment Company Institute, the asset class saw $1.94 billion in inflows last week, following $2.78 billion the prior week. This steady demand suggests investors are seeking stability amid equity volatility and ongoing geopolitical risk.
- Visible supply began the week at $12.9 billion, modestly above the 12.5 billion average. However, demand has been strong enough to absorb issuance efficiently. While supply is expected to remain elevated, current fund flows and SMA growth suggest it is unlikely to meaningfully pressure yields higher in the near term.
- On the economic side, the Bureau of Economic Analysis reported that U.S. GDP expanded 2.2% last year, slightly below expectations, with consumer spending and trade weighing on growth. Inflation continues to moderate, helping yields grind incrementally lower. We do not think this will lead to a rate reduction in March; however, we expect the FED to comment on this.
- Credit remains important. Fitch Ratings recently downgraded Chicago one notch due to persistent deficits and structural budget concerns. For investors considering Chicago exposure, we strongly recommend reviewing credit fundamentals with us and the underlying security structures before allocating capital.
- Despite record issuance in February, yields have remained resilient amid strong demand. We anticipate seasonal dynamics may shift modestly, particularly on the short end, as buyers look to lock in longer-term yields at current levels. If you are seeking to lock in yields here, we continue to reiterate keeping your call dates > 3 years if possible, and the trade works for your overall allocation.
Bottom Line
Municipal yields are down roughly 4 basis points across the curve in February and down again today across the curve with the economic news this morning. We expect rates to remain range-bound over the next 20–30 days. The wildcard remains the March 18 Fed meeting, where the probability of a rate cut appears low. Market expectations for easing are increasing ahead of the June 17 meeting, and we continue to anticipate approximately 75 basis points of total cuts this year.
Securities offered through NewEdge Securities, LLC, member FINRA and SIPC. The DRL Group is not a subsidiary or control affiliate of NewEdge Securities, LLC. NewEdge Securities, LLC. has no affiliation to BondDesk Trading LLC or BondTrader Pro, or Tradeweb Direct, Bondpoint, TMC, Market Axess or any ECN.
Yield to call (YTC) is not indicative of total return; this yield is valid only if the security is called. Bonds may or may not be called, or be callable on multiple dates or, in other cases, called any date following the first call date, so yield to call is based on the earliest stated call date. Discounted bonds may be subject to capital gains tax. Bonds may be subject to OID (Original Issue Discount). Prices and availability may change at anytime without notice.
Do not buy bonds based on the Yield to Call (YTC). Insured bonds are issued for timely payment of principal and interest only. Insured bonds do not cover potential market loss and are subject to the claims paying ability of the insurance company.
Non-rated (NR), With-Drawn (WR), or below investment grade bonds, lower rated bonds, carry a greater potential risk of default & should be considered by sophisticated investors only.
This document is for informational purposes only and does not replace or serve as a substitute for your official monthly statement generated by NFS. Please refer to your official statement for accurate and comprehensive account details.
Bonds may be subject to capital gains tax. This summary is for informational purposes only and is not an offer or solicitation for the purchase or sale of any security or a recommendation or endorsement of any security or issuer. NewEdge Securities, LLC. and DRL Group make no representation about the accuracy, completeness, or timeliness of this information. Bonds could also be subject to the DeMinimis Rule, please consult with your tax advisor for further clarification.
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