Treasury Prices Weaken, Municipals Yawn

The above headline is typical for municipal bonds. Today the two-year US Treasury note traded at 4.28% while the NR/AAA/NR rated Alamo Heights, TX bonds detailed below were priced today at 2.60% or 61% of treasuries. Depending on your tax situation, you may need to be in a relatively high tax bracket for new issue municipals to be worthwhile compared to taxable alternatives.

Expanding to the global universe of treasuries and municipals you would think they lived on different planets. US Treasury Bond performance as tracked by the Bloomberg Treasury Index has a 2.69% one-year performance while Bloomberg’s Municipal Bond Index sports a 6.52% performance for the same period. Over the past five years the outperformance has also appeared otherworldly with the Treasury Index losing 3.7% for the period and the Municipal Bond Index up 5.38%, though on an annualized basis that is a slightly negative annual Treasury performance versus up 1.05% annually for the Municipal performance.

If investors, or more likely investment managers, continue to buy municipals at or near 61% of treasuries, municipal bond outperformance could continue. But that is not how we approach municipal bonds over time. Taking a longer perspective, bond performance across both assets tends to look alike because interest rates are interest rates, reflecting the costs of borrowing with treasury yields primarily serving as the base case.

The fact that municipal bonds have outperformed lately is because they are priced higher (yield less) relative to treasury securities. That is all in the past. Buying new issue municipals now appears, in our opinion, to be a case of paying a relatively higher price for a bond you may own for several or more years.

With two-year US Treasury notes trading today at a sixteen-month high of 4.28%, and a level seen for only a few weeks over the past two years, as well as dramatically higher than the 3.36% low of early March, one would need quite an argument to refute interest rates that are trending higher. Which is not to say the two-year treasury note is not a good deal; a two-year treasury note may help protect your investment’s value in ways that other longer-duration fixed income investments cannot. Now could be the time to think about protecting your wealth, especially if you have investments in managed or unmanaged packages or portfolios of bonds.

Investments are for the future, not about overpaying for the past. Higher interest rates should be positive for you and your portfolio. Do not let higher interest rates wreck the portfolio values you have worked so hard to build.

Alamo Heights, TX

Combination Tax & Revenue Certificates of Obligation Series 2026

AAA S&P (Underlying)

Due 8/15 Dated 7/1/26 Maturity 8/15/46

$7,745,000 Sold

Years Maturity Coupon Yield*

1 2027 5.00% 2.60%

2 2028 5.00% 2.60%

3 2029 5.00% 2.70%

4 2030 5.00% 2.75%

5 2031 5.00% 2.85%

6 2032 5.00% 2.95%

7 2033 5.00% 3.00%

8 2034 5.00% 3.05%

9 2035 5.00% 3.15%

10 2036 5.00% 3.25%

11 2037** 4.00% 3.35%

12 2038** 4.00% 3.45%

13 2039** 4.00% 3.50%

14 2040** 4.00% 3.55%

15 2041** 4.00% 3.65%

16 2042** 4.00% 3.70%

17 2043** 4.00% 3.75%

18 2044** 4.00% 3.85%

19 2045** 4.00% 3.90%

20 2046** 4.00% 3.95%

*Yield to Worst (Call or Maturity) **Callable 8/15/36

Source: Bloomberg

This is an example of a new issue priced the week of 7/13/26. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

This commentary is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Prices, yields and availability subject to change. Investment return and principal value of fixed income securities may fluctuate, and bond prices are subject to interest rate risk, credit risk, and liquidity risk. Index data is provided for illustrative purposes only. The Bloomberg Treasury Index and Bloomberg Municipal Bond Index represent different segments of the fixed income market and are not directly comparable. Investors cannot invest directly in an index. Municipal bond interest is generally exempt from federal income tax but may be subject to state, local, or alternative minimum taxes. Tax treatment depends on an investor’s individual circumstances. Investors should consult their tax advisor regarding their specific situation.