Municipal Bonds – Yields and Relative Value Rises
Entering 2027: Municipals Are About Value
As we enter the fourth quarter of 2026, we believe the municipal market is entering 2027 with a very different backdrop than many investors expected just a few months ago.
Treasury yields have climbed to levels we haven’t seen in nearly two decades. Inflation remains a subject of debate, and the path of monetary policy has become increasingly difficult to predict—even for the smartest people in the market.
But here’s what we think investors should be focusing on:
Do Municipal bonds need rates to fall to deliver attractive returns?
At today’s yield levels, the tax-free income is doing much of the heavy lifting.
For investors in higher-tax states, a 5% tax-exempt yield can translate into an almost 10% taxable-equivalent yield. That means investors don’t necessarily need to make the right call on inflation, the Federal Reserve, or the direction of interest rates to potentially earn an attractive return from a high-quality municipal portfolio.
That’s what makes today’s market so interesting. There may be an opportunity to spend time in the market-not try to time the market.
Municipal credit fundamentals remain strong, and relative valuations make municipals particularly compelling compared with Treasuries. In our view, this is less about waiting for the next move in interest rates and more about recognizing the value that’s available right now.
Investors who focus on high-quality bonds, appropriate maturities, and yields that make sense for their individual circumstances can potentially build portfolios designed to produce meaningful tax-free income whether rates remain elevated or eventually move lower.
Our view: Municipals are entering 2027 as a value opportunity. And opportunities to buy high-quality tax-free income at these yield levels exist right now.
Summary
Municipal bonds sold off sharply in late September, and the reason had little to do with the bonds themselves. The Fed raised rates mid-month, investors pulled money out of muni funds, and those sellers hit a market already working through heavy new issuance. As a result, muni yields rose considerably faster than Treasury yields did, with the pressure concentrated in shorter maturities where redemptions land first.
The outcome is that munis are now priced more attractively against Treasuries than they have been through most of the past three years, and long-dated high-grade yields have moved back above 5%, worth substantially more than that to investors in the top tax bracket. Consensus forecasts call for Treasury yields to decline from here, but an investor doesn’t need that to be right for today’s yields to disappear: if Treasury yields simply hold where they are and the relationship between munis and Treasuries returns to its historical average, long muni yields may fall on their own.
Where the market stands
The long end of the tax-exempt curve now clears 5% in the highest-grade paper, not only in AA and single-A credit. That is a change from three weeks ago.
AAA municipal and Treasury yields, October 1, 2026
| 2 year | 5 year | 10 year | 30 year | |
| AAA municipal (%) | 3.53 | 3.69 | 4.09 | 5.24 |
| U.S. Treasury (%) | 4.87 | 5.10 | 5.32 | 5.68 |
| Muni/Treasury ratio | 72.6% | 72.5% | 76.9% | 92.2% |
| Taxable equivalent (%) | 5.97 | 6.24 | 6.91 | 8.84 |
Source: Bloomberg BVAL AAA municipal curve and Bloomberg generic U.S. Treasury yields, 10/1/2026. Taxable-equivalent yields assume a 40.8% marginal federal rate (37% ordinary income plus 3.8% net investment income tax) and exclude state and local taxes.
A taxable-equivalent 8.84% at thirty years and 6.91% at ten is the headline number. The more useful observation is the one underneath it: the tax-exempt market did not simply follow Treasuries higher. It went further.
Two weeks either side of the hike
Splitting the period at the FOMC date separates two different moves. Before the meeting, Treasuries led, and municipals lagged. After the meeting, the relationship inverted, and the inversion was concentrated at the front of the curve.
Yield changes, basis points
| Period | Leg | 2 year | 5 year | 10 year | 30 year |
| Sept 2 – Sept 16 | Municipal | +25 | +25 | +27 | +22 |
| (pre-hike) | Treasury | +40 | +37 | +25 | +11 |
| Sept 16 – Oct 1 | Municipal | +68 | +48 | +36 | +29 |
| (post-hike) | Treasury | +13 | +22 | +30 | +32 |
| Full period | Municipal | +93 | +72 | +63 | +51 |
| Treasury | +53 | +58 | +56 | +43 |
Source: Bloomberg, month-end and daily closes.
Two-year municipals gave up 68 basis points in two weeks against 13 for two-year Treasuries. At thirty years, the two legs moved together — 29 against 32. With A dislocation that sits at the front of the curve that fades toward the long end, we can infer it is a flow event, not a repricing of credit or of the rate path.
That reading is consistent with what happened to demand. In the week of the decision, investors pulled roughly $1.8 billion from municipal bond funds, ending a 21-week run of inflows.
The September monthly numbers tell the same story at lower resolution: AAA municipal yields rose 101, 83, 75 and 61 basis points at two, five, ten and thirty years, against Treasury moves of 55, 59, 53 and 39.
Ratios against their own history
A municipal-to-Treasury ratio is the cleanest measure of whether tax-exempt paper is cheap or rich relative to the taxable alternative. Measured against the distribution of the last 36 months, municipals are cheap at every point on the curve.
Muni/Treasury ratio distribution, 36 months through September 2026
| 2 year | 5 year | 10 year | 30 year | |
| 25th percentile | 61.0% | 62.1% | 65.1% | 85.6% |
| Median | 64.6% | 65.3% | 68.5% | 87.1% |
| 75th percentile | 69.0% | 67.5% | 71.3% | 91.3% |
| 36-month maximum | 81.1% | 82.0% | 80.7% | 95.7% |
| Current (10/1/26) | 72.6% | 72.5% | 76.9% | 92.2% |
Source: Bloomberg, month-end observations September 2023 through September 2026; current reading from daily close.
The two-year ratio was 60.0% on September 2 and 72.6% on October 1. The ten-year reached 80.9% on September 29, within two points of its three-year high, before Treasuries cheapened further and pulled it back. Every tenor now trades above its 75th percentile.
The following may seem complex, but it’s necessary to understand how we get to the end result.
To gain an estimate of what we may expect for muni rates relative to Treasuries, we first have to understand that translating a Treasury forecast into a municipal yield requires knowing how tightly the two markets are linked. Regressing monthly changes in municipal yields on monthly changes in Treasury yields over the same 36 months gives a direct answer, and the answer differs sharply by maturity.
| 2 year | 5 year | 10 year | 30 year | |
| Beta (muni per 1.00 Treasury) | 0.75 | 0.76 | 0.88 | 0.95 |
| R-squared | 0.43 | 0.54 | 0.62 | 0.73 |
Source: Bloomberg; monthly changes, September 2023 through September 2026.
Thirty-year municipals have historically absorbed 95% of a Treasury move, and the Treasury move explains roughly three-quarters of the variation in them. At two years, the beta falls to 0.75 and the explanatory power to 43%, meaning more than half of what drives short municipal yields has nothing to do with Treasuries at all. It is supply, fund flows, and reinvestment.
This has a practical consequence for the section that follows. A Treasury forecast is a reasonable foundation for a view on long municipals and a weak one for a view on short municipals, which is the opposite of where forecast confidence usually sits. (Typically, we would have more confident explanatory evidence in the near term compared to the long term).
What the forward curve implies
Contributor consensus forecasts collected from Bloomberg’s Bond Yield Forecast function call for Treasury yields to decline across the curve over the next two years. The policy-rate path embeds one further hike by year-end, consistent with the September dot plot median of 4.1%, followed by easing through 2028.
Consensus Treasury yield forecasts (%)
| Spot | Q4 2026 | Q4 2027 | Q4 2028 | |
| 2 year | 4.87 | 4.50 | 4.11 | 3.80 |
| 10 year | 5.32 | 4.86 | 4.60 | 4.36 |
| 30 year | 5.68 | 5.26 | 5.04 | 4.88 |
| Fed funds, upper bound | 4.00 | 4.21 | 4.05 | 3.61 |
Source: Bloomberg contributor consensus, 10/1/2026.
Applying that path to the ratio band gives a range of implied municipal yields rather than a point estimate.
Implied AAA municipal yields (%)
| Today | Q4 2026 | Q4 2027 | Q4 2028 | |
| 10 year, ratio at current | 4.09 | 3.74 | 3.54 | 3.35 |
| 10 year, ratio at 75th pct | — | 3.47 | 3.28 | 3.11 |
| 10 year, ratio at median | — | 3.33 | 3.15 | 2.98 |
| 30 year, ratio at current | 5.24 | 4.85 | 4.65 | 4.50 |
| 30 year, ratio at 75th pct | — | 4.80 | 4.60 | 4.45 |
| 30 year, ratio at median | — | 4.58 | 4.39 | 4.25 |
Implied yield = consensus Treasury forecast multiplied by the stated ratio. Ratio scenarios are the current reading and the 75th and 50th percentiles of the trailing 36 months.
A buyer at today’s 5.24% thirty-year yield is being paid 59 to 85 basis points more than the consensus path implies for the end of 2027, depending on whether ratios hold or revert. At ten years, the gap runs 55 to 94 basis points.
The rate call and the relative-value call are separable, and worth separating. If Treasuries do not rally at all and ratios alone revert to their three-year median, the ten-year municipal falls from 4.09% to roughly 3.64% and the thirty-year from 5.24% to roughly 4.95%. The investor does not need the Treasury forecast to be right to be worse off waiting, only the ratio.
The municipal market cheapened against Treasuries in late September for reasons that had little to do with credit and little to do with the rate path. A record issuance calendar met a fund-flow reversal in the week the Fed raised rates, and the front of the curve absorbed most of it. The result is a AAA thirty-year yield above 5% and ratios above their 75th percentile at every maturity.
The Bottom Line
The bottom line is simple. We know based on prior research how rare a 5% municipal bond yield can be. Based on their historic relationship with treasuries, especially longer out on the curve, and the forward expectations in Treasuries, we should expect the current 5% muni environment to also be short lived. Further, we can also conclude that it may not even require treasuries to fall drastically for us to see muni yields fall back below 5%, but instead just a reversion to normal muni/treasury ratios that have expanded recently beyond their historical levels.
Sources and Methodology
- Municipal yields: Bloomberg BVAL AAA municipal curve, month-end September 2023 through September 2026 and daily September 2 through October 1, 2026.
- Treasury yields: Bloomberg generic U.S. Treasury yields, same periods.
- Data alignment: the Treasury daily series returned one more observation than the municipal series, positioned at the start, which offset the two legs by one trading session. The Treasury leg was realigned before any ratio or change statistic was computed. Verified against the independently aligned month-end series and against the spot column of the consensus forecast screen.
- Forecasts: Bloomberg contributor consensus, retrieved 10/1/2026, transcribed manually.
- Statistics: betas and R-squared from ordinary least squares on monthly changes, not levels. Ratio percentiles from month-end observations over the same 36 months.
- Policy and flow data: FOMC statement and Summary of Economic Projections, September 16, 2026; municipal fund flow and issuance data from published market commentary, week of September 21, 2026.
- Taxable-equivalent yields assume a 40.8% marginal federal rate and exclude state and local taxes.
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