US municipal bonds

4 August 2026, 14:53 UTC Chief Investment Office GWM Investment Research

US municipal bonds CIO View: US municipal bonds Sudip Mukherjee, Fixed Income Strategist, CIO Americas, UBS Financial Services Inc. (UBS FS)

• Munis sold off over the last month in the wake of elevated Global Asset Class Preference Neutral geopolitical uncertainties and more recently, the Fed’s decision to hold interest rates unchanged, as Treasury yields surged higher across the curve. The ICE BofA muni index's total return in July of -1.7% was the lowest monthly return since 2003. While IG munis underperformed over the last month, on a year-to-date basis they are still outperforming Treasuries, IG corporate, and MBS.

• The IG muni index's tax-equivalent yield to worst (YTW) is now at 6.7%, providing substantial pickups over most other high-quality US fixed income assets for investors in the highest tax brackets. The index YTW is currently at the 83rd and 80th percentiles, over the last three years and 20 years, respectively, presenting good long- term opportunities for investors to earn safe tax-exempt income. Tax- Source: Getty equivalent yields of the California and New York muni bond indices are currently around 8% for resident investors in the highest tax brackets.

• Muni yields have risen across the AAA tax-exempt curve over the past one month (the 2-year, 5-year, 10-year, and 30-year have risen by 24, 35, 41, and 36bps, respectively, significantly more than the corresponding Treasury yield increases of 8, 14, 18, and 23bps, respectively). Relative value (as measured by AAA muni-Treasury ratios), has improved the most in the 10-year area of the curve.

• The AAA tax-exempt curve has steepened slightly with respect to the 2s-30s, as a net result of a sharp steepening of 2s-10s and moderate flattening of 10s-30s. Overall, a steep curve, higher yields, strong August redemption demand absorbing elevated supply, and our view that Treasury yields should decline by year-end makes muni duration more appealing.

• While recent progress on the US-Iran conflict is encouraging, uncertainties remain elevated. The possibility of additional Treasury curve steepening is also a key risk factor. Buy-and-hold investors with longer investment horizons could lock in attractive yields of long- maturity munis in the 20-year area. However, from a tactical risk- adjusted perspective, we choose to increase duration moderately. We now close our 1-year to 10-year preference (effective duration 4.2 years) and recommend the 5-year to 15-year part of the curve (effective duration 6.5 years).

• Our coupon, credit, and sector preferences remain unchanged. We continue to favor 5% coupons, allocations of 65%, 30% and 5% to AA and above, single A, and BBB bonds, respectively, and allocations of 65%, 30%, and 5% to airports, states, and prepaid gas sectors, respectively (see CIO View: US Municipal Bonds published 13 July 2026).

This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 3.

• Note: The next edition of the Municipal Market Guide will be published in September.

Central scenario • We expect the 10-year Treasury to be lower by year-end, but rate volatility risks remain given geopolitical uncertainties.

• Credit conditions remain fairly benign. We expect at or near trend economic growth.

• The principal reasons for investors in higher tax brackets to own munis within a diversified portfolio remain intact. Munis can provide a steady stream of tax-exempt income, unlikely payment default, and lower correlation with equity securities.

Upside scenario Much lower US Treasury yields: Muni yields take their cue from the direction and magnitude of moves in US Treasury yields. Declining Treasury yields are supportive of municipal bond performance.

Sustained fund inflows: Mutual fund and ETF inflows represent an important tailwind for performance.

Credit quality remains sound: Upgrades continue to outpace downgrades, supported by strong and sustained economic growth.

Downside scenario Sharp increase in yields: A further sharp increase in US Treasury and/or muni yields, or a reacceleration of inflation, could lead to…