Municipal Summary
Municipals held steady yesterday despite a better Treasury bid, allowing ratios to drift a bit higher. The steadiness and lower volumes this week are not for a lack of fundamental headlines, but rather a commitment to remain in a narrow range ahead of today's CPI release. Also affecting sentiment: 1) fading upward price momentum, 2) absent cross-over demand, 3) higher volatility across a more correlated equity and bond market, and 4) a steady slog of new issues that, while well-received via strong reinvestment demand, still pressures distribution more than prices. So the municipal market is strong and orderly, but it lacks the conviction to move prices higher; at least until: 1) Treasury 10yr and 30yr yields trade through 4.5% and 5.0%, respectively, 2) CPI is released without meaningful disruption, and/or 3) stats for the upcoming 10yr and 30yr refunding auctions provide some encouragement (Auction table below).
Also, June's MTD price return of 0.58% is already 6x the month's average return over the last 15 years (i.e., June is often perceived as a strong month due to reinvestment estimates, but it's actually the fourth-worst-performing month of the calendar year). Meaning, to the extent near-term fundamentals are not supportive, and means begin to revert, the strong MTD performance could be easily erased.
The good news: 1) nominal yields are still attractive, 2) primary deals are still oversubscribed via strong fund/ETF/SMA/retail and related reinvestment demand (i.e., so the large supply alone is not pulling prices lower), 3) dealers have been able to hedge and keep balances modest (i.e., which has helped liquidity), and perhaps most importantly, 4) municipal IG YTD returns at 10yr maturity are still well below long-term average annual returns (i.e., currently ~1.0% vs. ~5.0% on average), implying there is still ample return potential for 2H26, especially with the market now at its seasonal price bottom.
Municipal Returns
IG Maturities (%): The long end is rallying with 20yr at +3.46% YTD, but the belly remains under more pressure as 5yr (-0.43%) and 10yr (-0.59%) posted negative 3mo returns — a steepening trade that has favored duration.
HY Maturities (%): Longer-dated HY is outperforming shorter maturities by roughly 100-150bps YTD, with 20yr leading at +3.73%.
IG Credit (%): IG munis are broadly positive across all sectors and horizons, with Housing (+2.20%) and Hospital (+2.16%) leading YTD as the market continues to reward essential-service revenue credits.
HY Credit (%): HY dispersion remains wide — PR (+4.25% YTD) and W&S (+3.83%) are outperforming while Tobacco (-0.21% MTD, -0.66% 3mo) and Housing (+0.77% YTD) continue to lag, and Transport carries a deeply negative -3.89% 1yr return.
Credit Returns (%): Rates sold off over the past week with most fixed income sectors negative MTD — MBS (-0.60%) and 20+ UST (-0.59%) hit hardest — while munis bucked the trend with IG Muni (+0.14%) and HY Muni (+0.22%) posting positive MTD returns.
MuniStreet Model Returns
The MuniStreet Model is an alpha strategy with strong tail-risk properties. It is a long/short strategy using municipal technical signals to toggle positioning between long and short MUB. The model has generated ~7.0% annualized vs. ~2.0% for MUB since 2016, 1.16x Sharpe ratio, no negative calendar years, and average annual max drawdowns under 2% (ex-2020). Trades are roughly evenly split between long and short days with alpha in both rising and falling rate environments. Performance details are below.
Macro/Rate Summary
May NFP +172K (vs +88K expected) — 4-sigma beat; April revised up to +179K from +115K, March to +214K from +185K; two-month net revisions +93K, largest upward revision since January 2025.
3-month moving average jumped to +188K (highest since February 2024); diffusion index 53.8 (highest since March 2024).
Unemployment rate 4.296%, essentially unchanged for three months; U-6 fell 0.1 to 8.1%; average hourly earnings +0.3% MoM, +3.4% YoY.
Job creation concentrated in leisure/hospitality (+70K), local government (+55K), private education/healthcare (+40K); other sectors combined added only ~10K — narrow breadth (ING).
Q1 nonfarm productivity revised down 0.5pp to 0.3%; unit labor costs revised down to 1.8% — lowest YoY pace in five years.
Initial jobless claims rose to 225K (above consensus); announced job cuts rose in May, tech firms posted biggest cuts in nearly two years.
DB QCEW data suggest the streak of large negative benchmark revisions over the past two years may be broken.
25bp Fed hike now fully priced by year-end.
Treasury supply this week: $58bn 3Y Tuesday, $39bn 10Y Wednesday, $22bn 30Y Thursday — first test of duration demand after May's auctions all tailed modestly.
BNP changed Fed call to hikes — three sequential 25bp hikes starting December reversing 2025's insurance cuts; raised yield forecasts to 4.35% 2Y, 4.75% 10Y, 5.35% 30Y by year-end; favors 5s30s steepeners.
BAML stays short US rates outright and cross-market; pay 2Y, own 1y2y inflation flattener; June seasonals favor lower 30Y (down 65% of the time, avg -6bps) and flatter 2s10s — front-loaded to first 10 days.
DB: 10Y target stays at 4.70%; real fed funds rate below plausible r-star estimates; biased toward moderately wider intermediate/long swap spreads but front-end spreads look overextended.
Barclays CPI precap: headline +0.5% MoM (4.3% YoY) on gasoline; core +0.3% MoM (2.9% YoY) led by airfares and accommodation.
Wells Fargo CPI precap: headline +0.5% MoM, 4.2% YoY on 8% energy goods surge; core +0.2% as goods stabilize.
Boston Fed study: 33% real oil price shock would lift PCE inflation ~1.5pp over the following year, but US economy far less vulnerable to employment losses than in the 1970s.
Bank of America card data: spending per household +5.2% YoY for week ending May 30.
Spectra: Warsh appears to favor Dallas Fed trimmed mean inflation, but that series is a lagging indicator with a 4-month lag to Core PCE (92.1% r-squared).
Tripp Kaiser, CFA, is the founder of MUNISTREET, Executive Director of the Center on Municipal Capital Markets, and a professor of practice at the LBJ School of Public Affairs at the University of Texas at Austin.