Municipal Fixed Income Update July 2026

Key Takeaways

1

Slowing demand and geopolitical tensions led to a backup in municipal yields and underperformance relative to Treasuries as the Federal Reserve held interest rates steady amid persistent supply-side inflation pressures.

2

Municipal yields rose and the yield curve steepened, while municipal-to-Treasury ratios cheapened across various maturities by the end of the month.

3

Negative performance was broad-based across both investment grade and high yield municipal indices, with all credit rating tiers posting negative returns for the month.

4

Looking ahead, we expect resilient municipal credit and seasonal summer reinvestment demand to provide investors with compelling entry points to lock in attractive absolute yields amid persistent rate volatility.

Sell-off in Muni Yields May Provide Entry Point

Market Overview: Why did the muni market underperform Treasuries in July?

The municipal bond (muni) market underperformed the Treasury market in July, as reignited Middle East tensions brought inflation pressures back to the forefront. A persistent new issue calendar, modest pullback in demand and stretched starting valuations placed additional pressure on the muni market, contributing to the relative underperformance. While a moderating June CPI print supported the Federal Reserve’s decision to hold rates steady at 3.50-3.75% at its July FOMC meeting, renewed supply shock inflation concerns drove risk premiums higher, particularly at the longer end of the curve. This shift in market sentiment coincided with a slowdown in muni demand, contributing to the underperformance for the month.

Yields and Valuations: Did muni yields and valuations shift in July?

Muni yields rose an average of 36 basis points (bp) in July. The difference between 1-year and 30-year muni yields steepened 15 bp to 194 bp. Muni/US Treasury ratios cheapened by 5/6/2%, ending July at 65/70/84% for 5/10/30 years.

Municipal Yield Curve Line chart showing municipal bond yields to worst across maturities from 1 to 30 years, comparing July 2026 versus June 2026.

Line chart showing municipal bond yields to worst across maturities from 1 to 30 years, comparing July 2026 versus June 2026.

Source: Goldman Sachs Asset Management. Bloomberg. As of July 31, 2026.

Valuations Table showing AAA municipal yields, US Treasury yields, quarterly yield changes, and muni-to-Treasury ratios across 2-, 5-, 10-, and 30-year maturities as of July 31, 2026.

Table showing AAA municipal yields, US Treasury yields, quarterly yield changes, and muni-to-Treasury ratios across 2-, 5-, 10-, and 30-year maturities as of July 31, 2026.

Source: Goldman Sachs Asset Management. Bloomberg. As of July 31, 2026.

Muni Index Performance: How did muni indices fare in July?

The Bloomberg Muni Index declined 1.85% in July, while the Bloomberg Muni High Yield Index decreased by 1.51%. All credit ratings (AAA–BBB) saw negative performance within investment grade munis.

: Bar chart showing monthly and year-to-date total returns for key municipal bond indices as of July 31, 2026.

Source: Goldman Sachs Asset Management. Bloomberg. As of July 31, 2026.

Credit Research Spotlight: Moody’s sector outlook and pension funding

Moody's moved its US cities and counties sector outlook to negative from stable in July, citing expectations that inflation will slightly outpace revenue growth. The outlook shift comes as the broader municipal upgrade-to-downgrade cycle has slowed in 2026.
US public pension funding levels are estimated to hit their highest point this year, climbing to 85%¹. The improved funding is due to strong investment returns as well as increased contributions by many state governments.

Muni Musings: What is the outlook for the muni market?

Supply/Demand

Supply for the rest of the year should remain elevated given continued infrastructure needs. We expect demand to persist due to the August seasonal summer reinvestment, with attractive yields providing compelling entry points for investors.

Valuations and Spreads

Muni/US Treasury ratios remain near fair value across the curve and credit spreads are close to their 5-year historical averages. We see opportunity to lock in attractive absolute yields amid the recent interest rate volatility.

Credit

We anticipate headline-driven volatility to remain present, but a resilient underlying economy and healthy reserve balances continue to put municipalities in a strong position to navigate the path forward.

Supply: Remains on pace for record year

July new issue supply amounted to $44 billion ($43 billion tax-exempt and $1 billion taxable). This was 20% lower than July 2025 volumes and 28% lower than June. Year-to-date, new issue volumes are on par with this time last year.

Weekly new issuance volumes in July ranged from $8.7 billion to $13.4 billion. Notable deals included $2.4 billion Connecticut Aquarion Water Authority, $1.8 billion California State University, and $1.5 billion NYC Transitional Finance Authority.

Bar chart showing annual total municipal bond issuance and net supply from 2010 through July 31, 2026.

Source: Goldman Sachs Asset Management. The Bond Buyer, Barclays. As of July 31, 2026.

Demand: Positive but decelerating

July saw positive inflows for all four weeks, with the strongest demand during the first two weeks with $1.3 billion each week. There was a sharp drop-off in week three to $174 million due to outflows from long duration and high yield munis, but demand accelerated in the last week of July with inflows of $761 million.

Overall, July experienced robust demand across both investment grade and intermediate duration munis. Year-to-date fund inflows have totaled $62 billion, with the majority of flows into investment grade and long duration munis.

Bar chart showing weekly municipal fund flows spanning all muni, high yield, intermediate, and long-term categories, from July 2025 through July 31, 2026.

Source: Goldman Sachs Asset Management. Refinitiv. As of July 31, 2026.

Spreads: Continued tightening in July

Investment grade and high yield spreads tightened 7 bp and 11 bp, respectively, finishing July at 87 bp and 172 bp.

Within high yield, despite overall spread tightening, the increase in yields on the month led to negative returns across most sectors, with only the Electric sector posting positive returns, at 0.31% for the month. Education and Puerto Rico showed the largest negative returns, down 2.58% and 2.05%, respectively.

Line chart showing BBB versus AAA municipal index credit spreads and high yield versus investment grade municipal index spreads from July 2021 to July 31, 2026.

Source: Goldman Sachs Asset Management, Bloomberg. As of July 31, 2026.

¹Source: Equable Institute as of June 30, 2026

Author(s)

Scott Diamond

Co-Head of Municipal Fixed Income

Sylvia Yeh

Global Head of Client Portfolio Management and Co-Head of Municipal Fixed Income

David Alter

Head of Credit Research, Municipal Fixed Income

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Risk considerations and disclosures

Risk Considerations

Municipal securities are subject to credit/default risk and interest rate risk and may be more sensitive to adverse economic, business, political, environmental, or other developments if it invests a substantial portion of its assets in the bonds of similar projects or in particular types of municipal securities. While interest earned on municipal securities is generally not subject to federal tax, any interest earned on taxable municipal securities is fully taxable at the federal level and may be subject to tax at the state level.

When interest rates increase, fixed income securities will generally decline in value. Fluctuations in interest rates may also affect the yield and liquidity of fixed income securities.

High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

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Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

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Bloomberg Municipal 3yr: Bloomberg Municipal 3 Year Index The Bloomberg Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable Municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark. This index is the 3 Year (2-4) component of the Municipal Bond index.

Bloomberg Municipal 1-10yr Blend: Bloomberg Municipal 1-10 Yr Blend Index A market value-weighted index which covers the short and intermediate components of the Bloomberg Municipal Bond Index, an unmanaged, market value-weighted index which covers the U.S. investment-grade tax-exempt bond market. The Bloomberg Municipal Bond 1-10 Year Blend Index tracks tax-exempt Municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years. The index includes reinvestment of income.

Bloomberg Municipal Aggregate Index: Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD An index that covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

Bloomberg High Yield Muni: Bloomberg Municipal High Yield Total Return Index Value Unhedged USD An unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody's Investors Service with a remaining maturity of at least one year. The Index figures do not include any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

Bloomberg AAA Index: Bloomberg Municipal AAA Index Total Return Index Value Unhedged USD is an index that tracks the performance of high-quality, investment-grade municipal securities, designed to reflect the market for AAA-rated bonds.

Bloomberg BBB Index: Bloomberg Municipal BAA Index Total Return Index Value Unhedged USD is an index that tracks the performance of high-quality, investment-grade municipal securities, designed to reflect the market for BBB-rated bonds.

Bloomberg US Treasury Index: Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. Separate Trading of Registered Interest and Principal of Securities (STRIPS) are excluded from the index because their inclusion would result in double-counting.

Compliance code: N13373-OTU-393874

Date of first use: August 12, 2026