Muni Monthly: March 2026

From a demand perspective, municipal fund flows were resilient early in the month despite typical seasonal tax-related weakness. Following two strong months of inflows in January and February, municipal mutual funds recorded $7 billion of net inflows, according to ICI. Demand softened in the final two weeks of March amid broader market volatility and as tax day approached. Overall, demand has remained sound, with first-quarter net inflows of $28 billion, approximately half of the total flows observed in the prior calendar year.

Exhibit 2: Monthly Municipal Supply

Fundamentals: Tax revenue growth remains resilient.

Earlier in the month, the U.S. Census Bureau released its 4Q25 state and local tax collection data, effectively closing out full-year 2025 results. In the fourth quarter, total state and local tax collections reached $671 billion, representing a 6.2% YoY increase. Among major revenue sources, individual income taxes led growth, rising 10.8%, followed by corporate income taxes (+9.0%) and sales taxes (+5.7%). Property taxes, the primary revenue source for local governments, increased 4.2% YoY. The strong tax collections, building on already elevated levels, underscore the resilience of state and local credit and their capacity to manage potential budgetary pressures. As the municipal market navigates budget season, Western Asset expects these revenue trends to support overall credit stability and the historically high quality of the asset class.

Exhibit 3: 12-Month Trailing and Local Revenue Collections

Valuations: Taxable-equivalent yields jumped in March.

While periods of market volatility can contribute to short-term underperformance, they often create attractive long-term opportunities for investors to capture tax-exempt income at improved valuations. The Bloomberg Municipal Bond Index yield-to-worst increased to 3.77% (6.37% taxable-equivalent yield), up from February lows of 3.29% (5.56% taxable-equivalent yield). Notably, the 5- to 14-year segment of the curve experienced the largest increase in yields of over 50 bps, providing improved relative value, particularly for SMA strategies that had faced valuation challenges through much of the past year.

Exhibit 4: Muni and Taxable Equivalent Muni Yield-to-Worst

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Definitions:

“AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (“BB,” “B,” “CCC,” etc.) are considered low credit quality, and are commonly referred to as “junk bonds.”

One basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

The Bloomberg Municipal “Muni” Bond Index 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.

The Bloomberg Municipal High Yield Bond Index is 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 Bloomberg Taxable Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term taxable 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 if all three rate the bond: 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.

The Bloomberg US Corporate Bond Index measures the performance of the investment-grade, fixed-rate, taxable corporate bond market. It includes U.S. dollar-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

The Bloomberg US Treasury Index measures the performance of US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with at least one year until final maturity. Treasuries, if held to maturity, offer a fixed rate of return and a fixed principal value; their interest payments and principal are guaranteed.

The Bloomberg Valuation Service (BVAL) provides prices on a daily basis for over 2.5 million securities across all asset classes.

The Bloomberg AAA BVAL Callable Municipal Credit Curve is represented by the US General Obligation AAA Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured AAA General Obligation bonds. The curve is populated with high quality US municipal bonds with an average rating of AAA from Moody’s and S&P. The yield curve is built using non-parametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues, and other proprietary contributed prices. The curve represents 5% couponing. The 3-month to 10-year points are bullet yields, and the 11-year to 30-year points are yields to worst for a 10-year call.

The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.

Inverted yield curve refers to a market condition when yields for longer-maturity bonds have yields which are lower than shorter-maturity issues.

Yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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