skip navigation
Western Asset Management Company
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

ECONOMY
17 February 2026

Muni Monthly—January 2026

By Sam Weitzman
Download the Article

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Performance Overview

Municipals Outperformed in January, Partially Reversing 2025 Underperformance

Fixed-income markets were volatile in January amid elevated geopolitical tensions and trade threats. Yields moved higher mid-month following tariff threats related to President Trump’s effort to formally acquire Greenland, but ultimately eased as a framework with Europe was reached. Economic data was relatively steady and the labor market modestly softened as the unemployment rate increased slightly, offset by steady manufacturing data. The Federal Reserve kept rates steady, maintain the fed funds target rate range at 3.50%-3.75%.

The Treasury curve moved 3-5 basis points (bps) higher across the curve during the month. The high-grade municipal curve outperformed, with yields moving 13-20 bps lower in maturities inside of 20 years, and up to 5 bps higher in longer maturities. All told, the Bloomberg Municipal Bond Index returned 0.94%, outperforming the US Treasury and Corporate Indices which returned -0.09% and 0.18%, respectively, reversing some of the muni underperformance observed in 2025.

Exhibit 1: Municipal vs. Taxable Index Returns
Municipal vs. Taxable Index Returns
Source: Bloomberg, Western Asset. As of 06 Feb 26. Select the image to expand the view.

Technicals

Muni Demand Accelerated as Supply Declined

Muni outperformance was supported by traditional “January Effect” conditions, a period of technical strength where heavy coupon and principal reinvestment coincides with limited new issuance. ICI estimates municipal funds and ETFs recorded $13 billion of net inflows in January, the highest level since the market’s $120 billion major outflow cycle ended in early 2024. Meanwhile, monthly new-issue supply of $35 billion was down 6% from January 2025 levels and down 44% from the recent highs observed in October 2025, further strengthening market technicals.

Exhibit 2: Muni Demand Has Risen to New Heights as Supply Declined
Muni Demand Has Risen to New Heights as Supply Declined
Source: Bloomberg, ICI, Western Asset. As of 31 Jan 26. Select the image to expand the view.

Fundamentals

Record Revenue Collections Support Muni Fundamentals

In January, the Census released 3Q25 state and local tax collection estimates, which were delayed due to the government shutdown, but underscored continued resilience for traditional state and local credit conditions. Twelve-month trailing collections increased 4.2% year-over-year (YoY) to $2.2 trillion, marking a record high, according to Census data. On a 12-month trailing basis, individual income tax collections increased 8.6% YoY and sales tax collections increased 2.6%, while corporate income tax collections declined 3.6%. Twelve-month rolling property tax collections increased 4.2% YoY.

Exhibit 3: 12-Month Trailing State and Local Revenue Collections
12-Month Trailing State and Local Revenue Collections
Source: Census, Western Aset. Major state and local tax revenue are not seasonally adjusted. As of 15 Jan 26. Select the image to expand the view.

Valuations

Muni Credit Spreads Remain Tight, Warranting Diligent Credit Selection

Despite municipal yields moving lower with the yields of other fixed-income asset classes over the past year, tax-exempt income opportunities remain attractive compared with historical averages. Municipals offer a compelling after-tax yield pickup versus taxable counterparts, a trend that could continue as we transition out of “January effect” conditions into a weaker technical environment ahead of tax season. Given that tax-exempt credit spreads remain at historically tight levels, Western Asset emphasizes that diligent credit selection is paramount. Western Asset believes that long-term investors may be well-served by potential income opportunities offered by any upcoming seasonal weakness.

Exhibit 4: Tax-Exempt Investment-Grade Quality Spreads
Tax-Exempt Investment-Grade Quality Spreads
Source: Western Asset, Bloomberg. As of 06 Feb 26. Spreads represent the reference Bloomberg Quality Index YTW (Bloomberg AA Municipal Index, Bloomberg A Municipal Index, Bloomberg BBB Municipal Index) less the Bloomberg AAA Municipal Index YTW. Yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Select the image to expand the view.

© Western Asset Management Company, LLC 2026. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
For the Franklin Templeton global-non product disclosures, please click here.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Ltda. is regulated by Comissão de Valores Mobiliários; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.