Municipals Weekly Hawkish Fed, Patient Bull Positioning for the Fall rally

Municipals Weekly Hawkish Fed, Patient Bull: Positioning for the Fall rally Industry Overview

04 September 2026 Key takeaways • Warsh's hawkish speech lifted Sept hike odds to 52%; curve bear-flattened & munis Municipals United States dipped; Fall rally should still unfold. • Muni credit held firm in Aug-26: U0A0 net upgrade rate up to 1.7%, stability 95.1%; Table of Contents recovery leads corporates, Local GOs lag. Market views and strategies 2 • First-time payment defaults totaled $46.5mn in Aug-26; YTD total of $895.6mn is down 25% y/y. Performance 5 Supply & demand 7 Curve 8 A hawkish Fed is good for curve flattening Relative value 9 Fed Chair Warsh’s hawkish Jackson Hole speech shifted the debate from a possible Trade activity 11 4Q26 hike to whether September's can be avoided; futures now price ~51% odds. The Credit corner 12 Treasury curve bear-flattened, with 10s30s flattening offering some constructive tone. Defaults, distress & HY 17 Muni yields rose 9–16bp, ratios held stable and credit spreads tightened further. We still Acronyms 19 expect a Fall rally to unfold, favoring longer maturities and a prudent, under-hedged Research Analysts 24 stance using 10yr Treasuries. August’s and September MTD issuance indicates negative new money growth and high refunding growth over the first 7mo of 2026 are switching to good new money growth and even higher refunding growth. Yingchen Li Municipal Research Strategist Aug-26 muni index UGRs BofAS Muni credit momentum held firm in Aug-26, with the Muni Master Index (U0A0) net Ian Rogow upgrade rate ticking up to 1.7% and stability steady at 95.1%. Munis' recovery has led Municipal Research Strategist BofAS corporates this cycle – cresting 7mo earlier – reflecting front-loaded federal aid to issuers vs the Fed's investor-side corporate support. Beneath the surface, signals John Lombardi diverge: reading upgrade rates against stability rates separates settled sectors (like Municipal Research Strategist BofAS Transportation, Housing) from those churning two-way (like Industrial Development Revenue). Local GOs screen weakest (‑6.0% UGR), though much of that reflects Sophie Yan concentrated Los Angeles USD downgrades rather than broad deterioration. Municipal Research Strategist BofAS Aug-26 default & distress John Reilly First-time payment defaults totaled $46.5mn in Aug-26, bringing YTD defaults to Municipal Research Strategist BofAS $895.6mn, down 25% y/y. First-time distress totaled $33.1mn in Aug-26, bringing YTD distress to $3.09bn (inc. of outlier Brightline Trains Florida CUSIPs), up 50% y/y. Ex- See Team Page for List of Analysts Brightline’s outlier CUSIP’s, YTD distress is down 49% y/y.

Key market figures Recent Municipals Research Municipals Weekly: Surprising sources of Supply: YTD issuance totals $415.4bn, up 6% y/y. New money is down 3% while refunded bonds 28 August 2026 refundings are up 33% y/y. Rates & ratios: The 10yr AAA MMD climbed 16bp w/w as of 2 September to 3.47% while the 30yr AAA MMD rose 15bp to 4.70%; the 10yr muni/Tsy Municipals Educational Series: Primer on ratio cheapened 1.3ppt w/w to 72.4% and the 30yr ratio cheapened 1.4ppt to 89.2%. premium bonds 25 August 2026 Returns: In Aug-26, U0A0 returned -0.10%, underperforming govies, corporates, taxable and HY munis. Spreads: IG spreads tightened 2bp to 11bp w/w as of 2 September. HY Municipals Weekly: “Range bound Summer” spreads tightened 9bp to 141bp. Trade activity: In Aug-26, $182.5bn of muni par value gives way to “Fall rally” 21 August 2026 traded in the secondary, with a daily avg of $8.7bn, up 5.3% m/m but down 3.5% y/y. Municipals Weekly: Reversing like October 2022? 14 August 2026 BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of Municipals Weekly: Pressure for higher interest that could affect the objectivity of this report. Investors should consider this yields remains 07 August 2026 report as only a single factor in making their investment decision. Refer to important disclosures on page 20 to 22. Municipals Weekly: Hedge now, rally later 31 July 2026

Exhibit 1: Overweight…