By Gayl Mileszko
Market Commentary
Red and Green
Municipal bonds are rarely able to shake off the strong pull from Treasuries. But they sometimes cross their arms, stomp their feet, stand firm, or run away on a little hot streak. For much of 2026, they did so, outperforming taxable counterparts, buoyed by retail demand for tax-exempts, steady fund inflows, and heavy semi-monthly payments of principal and interest for reinvestment. This was not the case in September. Munis underperformed all their taxable counterparts, with all rating categories and tenors suffering losses. Historians label it the worst month for municipal bond returns since September of 2008. With both investment grade and non-rated index returns in the red at negative 4.05%, CreditSights ranked last month as the fourth worst for performance since January 1989. Nevertheless, new issue volume at $56.9 billion was up 19% year over year, municipal ETFs took in a net haul of $12.7 billion, investors received $40 billion of principal and interest payments, and customers, presented with tax-equivalent yields as high as 10%, were net buyers. You just can’t knock this market down.
Green Light for Edenwald
It is with this attitude that HJ Sims is in the market this week with a $162.9 million BB+ rated financing for Edenwald, the first university-based life plan community in Maryland. Edenwald has partnered with Goucher College on an expansion project that will add 125 new independent living entrance fee units, already 100% pre-sold. Founded in 1881 as the General German Aged People’s Home of Baltimore, Edenwald currently features 250 independent living, 32 assisted living, 35 memory care and 47 skilled nursing units. Goucher, founded in 1885, is a liberal arts college with more than 1,500 undergraduate and graduate students situated on a 287-acre campus. Bonds are being offered through the Maryland Health and Higher Education Facilities Authority structured with a final maturity in 2061. Last week, we brought $19.2 million of taxable municipal bonds for Prodigy Early Learning Centers in Riverview and Venice, Florida to refinance loans used to fund construction. Non-rated bonds due in 2031 were priced at par to yield 8.56%. Please reach out to your HJ Sims representative for more information.
Yields Up, Market Resilient
Municipal yields surged in September by 60 to 100 basis points. The day-to-day volatility in the market caused some borrowers to set planned refundings aside or delay market entry. But 5% rates in 30 years, in the range of historical averages, did not keep most borrowers from coming to market given the pressing needs for capital and projects ready to launch. Trading volume in September reached 117,000, the highest total since 1995. There were more trades in one week (667,000) than in an average month. Block trades rose to 2,800. Offerings at 82,000 a day were unusually high, and bids wanted exceeded $3.7 billion on September 30 alone – a level not seen since the start of the pandemic in March 2020. Underwriters were challenged to say the least. Some deals were repriced higher and some dealers took down inventory, but the $4.4 trillion market, not exactly structured for this kind of rapid change or volume level, remained liquid and resilient. Muni buyers, including the backbones of the market (households and funds), the new players, and the crossovers stepped up, diverting funds from other assets to take advantage of rare prices and yields. Many took advantage of rapidly moving conditions and sold positions to reduce some tax bills using a tax loss harvesting strategy not typically employed until November and December. Proceeds from the sales were quickly invested in money market funds, ETFs and higher yielding offerings in the primary and secondary.
ETFs: the New Market Stabilizer
The heavy volume of trading, including some bonds rarely seen, allowed for new price transparency and brought to light the growing role of ETFs as a market stabilizer. Mutual fund flows outflows totaled $11.4 billion during the month, offsetting the previous three months of inflows according to CreditSights. But ETFs took in $13.5 billion of net assets, bringing the year-to-date total to $52.4 billion, a new record high. Even the news of the Brightline bankruptcy, the speculation over the impact on $4.4 billion of bondholders, the sudden sale of $190 million at 45 cents by one of the largest creditors, did not send the market into the skids. There were muni bargains galore and even foreign buyers had to peek over the fence to see what was going on. At this writing, the 2-year AAA rated municipal general obligation benchmark yield stands at 3.42%, the 10-year at 4.10% and the 30-year at 5.24%.
Dominoes
Foreign buyers of U.S. bonds have been of mixed mindsets. Concerns about our heavy debt and apparent lack of interest in doing anything about it caused quite a bit of selling this year. The Fed reported that foreign investors sold $408 billion of Treasury bills in the second quarter alone. There were plenty of other buyers to take their place. But sales at new levels have drawn considerable interest. Prices have also impacted the valuations of many other holdings as so many lending rates here and abroad are pegged to our 10-year benchmark. It was unquestionably the U.S. that led the pack in this global, multi-decade surge in sovereign bond yields. One after another around the world, central banks, grocery shoppers, truckers, homebuilders, homebuyers, those with variable rate debt, and companies looking to extend loans have seen rates rise in a rapid domino-like, chain reaction. Banks and insurers are thrilled by the higher rates, as are many savers, but plenty more are crying uncle.
Gradually Then Suddenly
With or without central bank action, rates have been climbing all year. Reporting has, however, been overwhelmed by all the hullabaloo over AI. Then, all the headlines revolved around moves in the 10-year Treasury to a two-decade high. The sudden realization brings to mind the explanation offered by Ernest Hemingway’s character Mike Cambell in The Sun Also Rises when asked how he went bankrupt. “Two ways,” he said. “Gradually and then suddenly.” When asked what brought it on, he replied “Friends. I had a lot of friends. False friends. Then I had creditors too.” Treasury yields, no matter how fast or high they have risen, are not the only reason for global bond selloffs and higher borrowing costs. Our allies in Europe are highly reliant on energy imports and we all have large deficits and debt levels. Nevertheless, yields across the board have risen in tandem with our spikes, in response to persistent inflation and monetary policy tightening. About 84% of global fixed income is now yielding more than 3%, up from just 12% in January 2022, when most central banks held rates near or below zero. At this writing, the 1-month U.S. Treasury yield stands at 3.94%, the 3-month at 4.15%, the 1-year at 4.44%, the 2-year at 4.81%, the 10-year at 5.34%, the 20-year at 5.77% and the 30-year at 5.72%. The Israeli 10-year sovereign bond yield is in the range of 4.16%, the equivalent British gilt 5.49%, the Mexican Bono 7.055%, and the German Bund 3.51%. The Italian 10-year Treasury has risen from 3.80% in July to 4.70%, and the French OAT has increased from 3.82% to 4.96%. In Russia, more than four years after the full-scale invasion of Ukraine, the 10-year bond yield stands at 16.828%
Oil
Inflation is linked at the hip to oil prices which, in turn, have moved alongside perceived prospects for a Middle East deal and the full reopening of the Strait of Hormuz. At this writing, Brent crude is still over $100 a barrel, and West Texas Intermediate is climbing up again on talk of new military strikes and disruptions caused by Hurricane Isaiah. Diesel prices have taken over much of the spotlight. At the end of August, prices began to spike and that placed a new burden on farmers and truckers transporting food and other goods. Since the start of the year, U.S. weekly average retail diesel prices rose from $3.61 per gallon to $6.529 and have now settled at about $6.199. Hopes for a resolution of the Iran war have ebbed and flowed since March, and headlines reflecting the latest prospects have moved markets. Traders have looked hopefully to the approaching mid-term elections as incentive to bring about an end to hostilities and spur a huge market rally, but with only 26 days to go, these hopes have dwindled. Now, allied governments are tapping emergency oil and diesel reserves to temporarily bring wholesale energy prices down. But other rate-sensitive sectors of the economy here– most notably housing – are straining. And significant new concerns are being raised about whether rising financing costs for tech- and AI companies will trigger a major market correction since it becomes increasingly difficult if not impossible for revenue growth to keep pace.
One More Rate Hike This Year
There are less than 20 days to go until the next Federal Open Market Committee, but markets see less than a 20% probability of voting members raising rates then. They were unanimous in their support for a quarter point hike on September 16 and indicated an expectation for another increase by the end of the year. So odds that fed fund rates will go up again have risen to 71% for the meeting on December 9. The assumption has already been incorporated into short term rates. With respect to longer term rates, investors have come to realize that neither the Fed nor the Treasury is really able to do anything to control yields there. Investors are dictating the terms of the compensation they need. Given ongoing concerns about inflation trends, the economic outlook, the relentless government borrowing and seemingly unmanageable debt, it is no wonder that investors want to be paid more to lend their money for longer periods.
Don’t Worry Be Happy
One of our favorite market commentators describes the muni environment as “volatility on steroids.” The MOVE Index, which tracks expected volatility in Treasury yields climbed over 100 in September, far above 62 where it began the year. Meanwhile, the VIX, which measures the expected 30-day volatility of the S&P 500 Index, hit a low for the year on September 22. Equities seem to be saying “don’t worry be happy”. Big AI and tech names dominate these indices but they are not immune to movements in bonds. The Dow and the S&P 500 both lost ground last month.
What Next for the Cost of Money?
Market strategists, like prediction markets, futures traders, and political pollsters point in every which direction. The latest Bloomberg survey of economists show a median forecast of 4.85% on the 10-year Treasury yield at year-end, a considerable drop from where it stands today. Some, like Barclays sees yields remaining elevated since the economy appears resilient and there is no particular catalyst in sight for why yields should fall below 5%. The head of fixed income global asset management at the Bank of Montreal sees a 30- year 6% yield as inevitable, and likely to happen this month. We at HJ Sims have assisted clients in every market environment since 1935. Reach out to your HJ Sims representative to learn how we can help you through this quarter’s market moves.