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Key Takeaways

  • Munis posted positive returns last week, outperforming taxable fixed income.
  • Lower supply and positive demand contributed to favorable technicals.
  • This week we touch on what control of Congress and the governors’ races could mean for munis.


Municipal Yield Changes and Returns

AAA Muni vs. Treasury Yield Changes and Ratios
As of October 30, 2026

Tenor

AAA

Δ bps

UST

Δ bps

Ratio

10Y avg

2-year

2.77%

−11

4.59%

−9

60%

74%

5-year

2.93%

−11

4.72%

−9

62%

72%

10-year

3.40%

−12

4.93%

−7

69%

79%

30-year

4.80%

−4

5.31%

−1

91%

92%

Source: BVAL AAA callable curve and Treasury generics change vs. October 23, 2026. Ratio = AAA muni yield ÷ Treasury yield; 10-year average of daily ratios.

Index Returns and Yields
As of October 30, 2026

Bloomberg index

1 wk

YTD

YTW

TEY

Municipal

0.66%

−0.48%

4.21%

7.12%

High-yield muni

0.28%

1.80%

5.87%

9.91%

US Corporate

0.48%

−1.02%

5.79%

5.79%

US Treasury

0.53%

−0.47%

4.80%

4.80%

Global Aggregate

0.30%

−1.30%

4.25%

4.25%

Source: one-week return vs. October 23, 2026. TEY = taxable-equivalent yield at a 40.8% top marginal rate.

Source: LSEG Lipper weekly reporting funds, week to October 28, 2026. Issuance: Bloomberg cumulative year-to-date issuance. Visible supply: The Bond Buyer 30-day visible supply,

Markets Last Week

Fixed income rallied last week amid a growing flight-to-quality sentiment. Concerns surrounding elevated artificial intelligence (AI)-related capital expenditures, technology valuations and corporate borrowing contributed to market volatility, particularly toward the end of the week as disappointing earnings from major technology companies accelerated the equity selloff Friday.

Economic data reinforced a resilient growth backdrop, while inflation remained elevated. Third-quarter gross domestic product (GDP) expanded at a 3.4% annualized pace, exceeding expectations and accelerating from 2.2% in the second quarter. September headline Personal Consumption Expenditures (PCE) inflation increased 3.6% year-over-year, while core PCE increased 3.1%. The Federal Reserve held its policy rate steady at 3.75%–4.00% at the Federal Open Market Committee meeting last week. Futures continue to price a relatively high 73% of a December hike.

Treasuries rallied across maturities and the curve flattened, with yields falling 9 basis points (bps) in 2-years and 7 bps in 10-years. Municipals outperformed as high-grade tax-exempt yields moved 11 bps lower in 2-years, 12 bps lower in 10-years and 4 bps lower in 30-years.

Supply and Demand Technicals

Weekly reporting municipal funds took in US$1.7 billion of net inflows in the week ended October 28. Long-term funds led flows at US$621 million, followed by short-term funds at US$567 million. Tax-loss harvesting continued to shape flows, with ETFs gaining US$3.5 billion while open-end funds lost US$1.8 billion. Year-to-date (YTD) net inflows now total US$79 billion, the second-highest level on record for the comparable period and running US$32 billion ahead of last year's pace.

Last week's new issue supply totaled US$10.5 billion, 29% below the prior week's US$14.7 billion. YTD issuance reached US$525 billion, 9% ahead of last year's record pace. Tax-exempt issuance accounted for US$494 billion of the total, 9% above the prior-year pace, while taxable issuance of US$31 billion was running 3% ahead of the prior year. The 30-day visible supply was little changed at US$13.8 billion, 3% above the prior week and 53% above the US$9.0 billion visible at this point last year.

This Week in Munis: 2026 Election Series—What the Races for Congress and Governor Mean for Munis

Last week we touched on tax policy ballot measures that could impact state and local revenue structure and potential relative value for municipal securities in affected states. This week we focus on the legislative outcomes and how they could impact policy. On November 3, voters will determine control of Congress, elect governors, and choose thousands of state and local officials. The outcomes will likely influence federal funding and state fiscal policies, credit fundamentals and municipal market valuations for years to come. Understanding the policy implications can help investors distinguish short-term political headlines from longer-term credit considerations.

Control of Congress: A Potential Turning Point for Federal Policy

The composition of the next Congress will influence the administration's ability to advance its legislative priorities during the final two years of US President Trump's term. Currently, Republicans maintain narrow control of the White House and both chambers of Congress. If Republicans retain both chambers, unified control could facilitate tax, spending and regulatory legislation, though narrow majorities and Senate rules would remain constraints.

Democratic control of either chamber would create divided government and could limit major legislative changes or complicate negotiations over appropriations, federal programs and taxes. Even so, bipartisan legislation would remain possible. For municipal investors, the key question is how the resulting alignment affects fiscal policy and the municipal market.

Federal Policy Issues

1. Federal Funding for State and Local Governments

Congress determines federal assistance for transportation, education, healthcare, housing and infrastructure. Shifting priorities could affect states and local governments, especially issuers heavily dependent on intergovernmental aid.

A Congress aligned with the administration may have greater ability to implement federal spending priorities. If Republicans retain both chambers, further reductions in federal aid to states and localities would be more likely. If Democrats win either chamber, we would expect negotiated compromises, funding delays or stopgap measures. Investors should distinguish between issuers with diversified, locally generated revenues and those with substantial exposure to federal funding decisions.

2. Healthcare and Medicaid

Healthcare is another important intersection between federal policy and municipal credit. Federal Medicaid changes enacted in 2025 are expected to reduce federal spending and pressure states and health care providers. States may respond by increasing funding, reducing provider payments or optional benefits, changing eligibility administration, or otherwise modifying their programs.

These decisions could have downstream implications for local governments, public hospitals and nonprofit healthcare systems, particularly institutions with significant Medicaid exposure. The election outcome could influence future attempts to modify these policies, although already enacted provisions would remain in effect unless changed through subsequent legislation.

3. The Municipal Bond Tax Exemption and Other Federal Tax Policies

Perhaps the most direct connection between congressional policy and the municipal market is the federal income tax exemption on municipal bond interest. The exemption was retained in the 2025 federal reconciliation law, but future debates over deficits and tax expenditures could renew scrutiny. Although the exemption has historically enjoyed bipartisan support, congressional control will influence the legislative agenda and any future attempts to modify the tax code.

While we view changes to the muni tax exemption as unlikely, the exemption frequently gets attention during budget cycles. Other policies that could be revisited include changes to individual income tax rates and the state and local tax deduction. We believe that the importance of the municipal bond market as the source of most infrastructure financing in the country will continue to generate bipartisan support.

Governors’ Races

While congressional elections attract the most national attention, gubernatorial elections may have more immediate consequences for individual municipal credits. Thirty-six states will elect governors, including several competitive or open-seat contests such as Michigan and Wisconsin. These races matter because governors shape budgets, tax policy, resource allocation and infrastructure priorities, including how readily budgets are enacted. A change in administration can alter a state's approach to fiscal management even when its underlying economic conditions remain unchanged.

Three areas warrant particular attention:

  • State Tax Policy and Budget Management. While it varies according to state law, governors can propose income, sales, and property tax changes that influence state and local revenue collections. Tax reductions may provide economic benefits but can also constrain revenue growth if not accompanied by sufficient spending adjustments or offsetting revenues.
  • State Aid to Local Governments. Governors and legislatures determine substantial portions of funding for public schools, municipalities and other local entities. As states confront slower revenue growth and increasing healthcare and education costs, decisions about intergovernmental aid could become especially consequential for local credits.
  • Infrastructure and Borrowing Priorities. New administrations may accelerate or defer transportation, water, housing and other capital investments. These decisions can influence future municipal bond issuance, debt burdens and the financing needs of public-sector borrowers.

Importantly, the fiscal consequences will depend not only on who occupies the governor's office but also on which party controls the state legislature. Unified governments can pass budget and tax measures more easily, supporting credit quality when those actions produce sustainable fiscal policy. However, it can also enable deficit-expanding measures that weaken credit conditions. Divided government can provide useful checks and balances and encourage bipartisan agreements that may prove more durable. But political brinkmanship can delay or obstruct action on necessary fiscal issues.

Looking Beyond Election Night

For municipal investors, election results should be viewed as the beginning of a policy transition rather than an immediate change in credit quality. Political shifts do not automatically translate into rating changes or financial deterioration. Most municipal issuers operate within established legal, institutional and financial frameworks that provide continuity across administrations. Nevertheless, elections can influence the trajectory of revenues, expenditures, capital investment and financial reserves over time.

Ultimately, the most meaningful impact of the 2026 midterms on the municipal bond market may not be the election results themselves, but the tax, spending and budget decisions that follow. For municipal investors, evaluating those decisions through the lens of individual issuers' credit fundamentals will remain essential.

Key Market Themes

1) Municipal taxable-equivalent yields remain near their highest level in over a decade

Muni and Taxable-Equivalent Muni Yield-to-Worst

Percent

Source: Bloomberg, Bloomberg Municipal Bond Index yield to worst, weekly, December 31, 2010 to October 30, 2026. Taxable-equivalent yield uses the top marginal federal rate in effect each year (35% through 2012, 43.4% for 2013–2017, 40.8% from 2018).

2) Tax selling weighs on technicals, drives opportunity

Weekly Fund Flows: ETFs vs. Open-End Funds

US$ Billions

Source: LSEG Lipper weekly reporting funds and Bloomberg. Weekly data from December 2024. Week to October 28, 2026, is the eighth consecutive week in which ETF and open-end fund flows have moved in opposite directions, consistent with tax-loss harvesting out of funds and into ETFs.

3) High-grade munis offer attractive after-tax yield pickup vs. taxable alternatives

After-Tax Yield Pickup vs. Taxable Comparables

As of October 30, 2026
Basis Points

Source: Bloomberg, Treasury rows use the BVAL AAA callable curve and Treasury generics; quality rows use Bloomberg municipal and corporate quality indices. After-tax yields at a 40.8% rate.

Market Monitor

30-Day Visible Supply, and Cumulative Year-to-Date Fund Flows vs. Five-year Average

US$ Billions

Source: Bloomberg; The Bond Buyer (visible supply); Lipper (weekly fund and ETF flows). As of October 30, 2026. Five-year average is the mean cumulative total for 2021–2025 at each week of the year.

Fund Flows: ETFs vs. Open-End Funds, Weekly

US$ Billions

Source: LSEG Lipper weekly reporting funds and Bloomberg. Week to October 28, 2026 is the eighth consecutive week in which ETF and open-end fund flows have moved in opposite directions, consistent with tax-loss harvesting out of funds and into ETFs.

Quality Spreads to AAA, Bps

As of October 30, 2026
Basis Points

Source: Bloomberg; Bloomberg Municipal AA, A, BBB and High Yield Index yields-to-worst less the Bloomberg AAA Municipal Index yield-to-worst; daily data shown monthly, January 2011 to October 30, 2026. Five-year averages in the legend.

Municipal vs. Taxable Yields, National, High-Yield and Key States

As of October 30, 2026
Percent

Source: Bloomberg, National and high-yield use the Bloomberg Municipal and High Yield Municipal Indices; states use the Bloomberg state municipal indices (CA, NY, NJ, OR, MN, MA). Taxable-equivalent yields assume a 40.8% top federal rate plus each state's top marginal rate. Taxable: Bloomberg US Treasury, US Aggregate, US Corporate and US Corporate High Yield Indices.

Market Monitor: Municipal Credit Curves

Municipal Credit Curves, Nominal

As of October 30, 2026
Percent

Source: Bloomberg Valuation Service (BVAL), Franklin Templeton. AAA callable, AA general obligation, A revenue and BBB general obligation curves AAA prior week Markers and values at 5, 10 and 30 years.

Taxable-Equivalent Municipal Credit Curves vs. Treasury

As of October 30, 2026
Percent

Source: Bloomberg Valuation Service (BVAL), Franklin Templeton. Taxable-equivalent yields at a 40.8% top marginal rate; Treasury generics with linear interpolation between published tenors.