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By
Tom Kozlik
Head of Public Policy and Municipal Strategy
Hilltop Securities Inc.
Rising yields have strengthened the case for municipal bonds, but improving relative value indicators may be the more important signal. Municipal-to-Treasury Ratios (M/T Ratios) rose above their 2026 averages recently and are now near or above their highs for the year. If that improvement continues, crossover buyers could become more active. Strong demand has defined the municipal market so far in 2026. The combination of higher tax-exempt yields and improving relative value could become the more important story from here. At a time of considerable economic and market uncertainty, municipal investors are being offered more income at more attractive valuations. That is a municipal market signal and an opportunity worth watching closely.
Investors have no shortage of candidates for the defining market story of 2026. Federal debt recently crossed $40 trillion. President Donald Trump has proposed a $5,000 payment to every adult American if Republicans retain Congress, an idea that could cost more than $1.2 trillion. The artificial intelligence (AI) buildout continues to drive meaningful capital spending, and AI safety made headlines over the weekend. Meanwhile, the war with Iran continues to disrupt energy markets and send oil prices higher, potentially putting additional pressure on inflation and interest rates.
More uncertainty potentially lies ahead. Treasury Secretary Scott Bessent testifies Tuesday, followed by the Federal Open Market Committee’s rate decision Wednesday. To begin this week, markets placed the probability of an increase in the Fed’s target rate near 90%, according to Fed Funds futures.
In May, we put substantial and potentially record-breaking demand at the top of our candidates for the municipal market story of the year. That case has strengthened. Municipal funds recorded a 21st consecutive week of inflows through Sept. 10, bringing year-to-date inflows to approximately $40 billion, according to Lipper. Potentially record-breaking issuance has accompanied those flows, with more than $400 billion issued through August, including nearly $60 billion in August alone.
Demand, however, is no longer the entire investment case. Higher rates, heavy issuance, inflation concerns, and geopolitical pressure have pushed municipal yields higher and, perhaps more importantly, improved relative value indicators. Ten and 30-year Municipal Market Data (MMD) AAA yields have risen almost 50 basis points since mid-August. Long-term tax-exempt yields now roughly hover around 5.00% across portions of the investment-grade municipal market.
The recent bond market selloff may have further to run. But it is also raising tax-exempt income, improving relative value, and giving investors more choices amid growing market uncertainty. In May, demand looked like the municipal story of 2026. Now, the signals are shifting. Investors do not need to call the bottom to recognize that the municipal bond market opportunity has improved.
As Head of Public Policy and Municipal Strategy, Tom Kozlik advises HilltopSecurities’ businesses and clients on strategies related to U.S. public policy, public finance, and infrastructure. He publishes regular commentary that provides insight into current trends affecting these themes across a variety of sectors and geographic regions. Kozlik is frequently featured in print, digital, and broadcast news segments and regularly offers his expertise as a keynote speaker and panelist at industry conferences and events across the country. He can be reached at 214.859.9439 or tom.kozlik@hilltopsecurities.com.
The paper/commentary was prepared by HilltopSecurities (HTS). It is intended for informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this paper was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute the views of HTS Public Finance as of the date of the document and may differ from the views of other divisions/departments of Hilltop Securities Inc. In addition, the views are subject to change without notice. This paper represents historical information only and is not an indication of future performance. This material has not been prepared in accordance with the guidelines or requirements to promote investment research, it is not a research report and is not intended as such. Sources available upon request.
Hilltop Securities Inc. is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. HTS is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, Texas 75201, (214) 859-1800, 833-4HILLTOP.