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Muni Bond Yields Hit 15-Year Highs as Credit Holds Steady

BY | ETF Database
9:04 am ET 10/27/26 | 57 VIEWS
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Muni bond yields hit 15-year highs in the third quarter, driven by rising rates and record supply rather than weaker credit, according to Thornburg Investment Management.Key Takeaways: Rising rates and heavy issuance, rather than credit problems, sent municipal yields to their highest level since 2008. Yields on two Thornburg taxable bond ETFs also topped their benchmarks as rates climbed across fixed income. Revenue bonds tied to water, sewer, and public power rank among the sectors Thornburg favors in this market. The yield-to-worst on the Bloomberg Municipal Index rose about 120 basis points in the quarter to 4.86%. That marked its highest level since December 2008, according to a report by Thornburg’s David Ashley and Kevin Endo. For top-bracket investors, tax-equivalent yields now top 8%, the highest in nearly 20 years, the authors wrote. The figure shows what a taxable bond must pay to match a muni after taxes. Getting there was painful. The municipal market lost 6.35% in the third quarter, its worst quarter since 1981, according to the report. Still, the authors argue that investors “are being paid more today for credit quality that we believe is broadly unchanged.” In September, a hawkish Federal Reserve raised its policy rate for the first time since 2023, the report noted. An energy-driven inflation scare also lifted yields across fixed income, pushing the 10-year Treasury yield above 5.3% for the first time since 2002. See more: Fed Hike Puts Bond Investors at a Crossroads Those higher yields carry over to taxable bond funds. The actively managed Thornburg Multi Sector Bond ETF (TMB ) had a 6.1% yield-to-worst as of Sept. 30, according to Thornburg. Its benchmark, the Bloomberg U.S. Universal Index, came in at 5.7%. The Thornburg Core Plus Bond ETF (TPLS ) sticks mostly to investment-grade bonds, with room for up to 25% in lower-rated debt. Its yield-to-worst was 6% on the same date, versus 5.6% for the Bloomberg U.S. Aggregate Index, the firm reported. Municipal investors also faced a supply glut, with issuance reaching roughly $504 billion through the third quarter, the report said. Several large issuers, including Los Angeles, Nashville, and New Jersey, postponed deals in late September rather than sell into volatility.Municipal Credit Holds Up as Valuations CheapenState and local governments entered the sell-off with rainy day funds and reserves near historic highs, according to Thornburg. Most revenue bonds tied to essential services also continue to generate healthy coverage on their debt payments. Even so, munis are now cheaper relative to Treasurys than at any point this year, according to the report. Ten-year muni yields rose to about 77% of comparable Treasury yields, while 30-year ratios reached about 91%. Thornburg favors revenue bonds backed by essential services over general obligation bonds, which rely on a government’s taxing power. It sees value in water and sewer, public power, and select charter schools. However, the firm remains selective in lower-rated credit, where it said spreads, or the extra yield over safer debt, haven’t widened enough to cover sector-specific risks. The calendar could offer some support, since issuance has typically slowed late in the year, the authors noted. Exchange-traded funds also drew more than $2 billion of inflows in late September, which they said suggests that "some investors are already moving to lock in these levels.” For more news, information, and analysis, visit our Portfolio Strategies Content Hub.

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