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The Shape of the Municipal Bond Market

February 1, 2026 | Commentary

  • At over $4 trillion in size, the municipal bond market is less than 10% of the total U.S. bond market dominated by government and corporate bonds. It is, however, a vital tool in public finance and in the portfolios of millions of taxpaying citizens.
  • The U.S. Treasury yield curve has evolved since COVID from virtually flat at near zero rates, to a strongly inverted curve as the Fed increased its efforts to control inflation, to today being as close to a traditional upward sloping curve as we have seen in years. During this transition, the municipal bond market curve has moved similarly, but with important differences in the ultimate shape.
  • Today's municipal bond curve is mildly inverted out to five years. It appears that investor demand for safety and minimal mark to market risk has outstripped available supply at short maturities pricing many of those bonds at uneconomic levels.
  • Separately managed accounts with flexible mandates can take advantage of current market pricing by mixing taxable and tax-free paper, avoiding the most expensive maturities and managing risk and return positioning with an appropriate amount of longer-dated municipal bonds that offer both tax advantages and higher absolute yields.

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