Clinton Investment municipal bond performance

Market Dislocation Breeds Generational Opportunity

• We firmly believe this swift reset in fixed income valuations has created an extraordinary, and generational buying opportunity for long-term investors.
• The sudden shift in price has pushed tax-exempt nominal yields to levels that are among the highest observed in close to twenty years.
• Depending on an investor’s specific state of residence, individuals can now capture equity-like taxable equivalent yields (TEYs) approaching or exceeding 10% in municipal bonds.
• For the discerning wealth manager and high-net-worth investor, market dislocations should be viewed not as a risk to be feared, but as an attractive entry point to be exploited.
• In high-tax states such as New York and California, where local tax brackets exceed 10% to 13%, the combined marginal tax rate approaches or exceeds 50%. In these specific jurisdictions, the TEY on a high-grade municipal portfolio yielding 5% can safely approach or exceed 10%.
• To put this in perspective, an investor can potentially capture a highly predictable, double-digit tax-adjusted yield, backed by sectors such as essential public infrastructure, devoid of corporate execution risks, earnings vagaries, and equity market volatility that have historically characterized the corporate landscape.
• An opportunity to lock in historically elevated yields now exists.

The third quarter proved to be a critical turning point for fixed-income markets, characterized by a dramatic macro-driven repricing that completely erased the steady gains achieved during the first half of the year. While tax-exempt yields drifted modestly higher throughout July and August, in tandem with a broader global selloff in fixed income, the narrative shifted aggressively in September. The primary catalyst for this upward pressure on municipal interest rates was a sharp, unrelenting surge in U.S. Treasury bond yields. This dynamic shift was driven almost entirely by a significant spike in global oil prices, which renewed inflation anxieties and upended the Federal Reserve’s projected path of monetary policy. The linkage between energy markets and fixed-income assets was undeniable, as evidenced by an extraordinary, near perfect correlation between crude oil prices and benchmark interest rates over the 90-day period ending September 30.

As Treasury yields broke through key technical resistance levels, the municipal market faced severe crosscurrents. The sudden drop in bond prices triggered extensive industry-wide selling, mutual fund outflows, and a mismatch between secondary market supply and institutional demand. This technical pressure, exacerbated by seasonal crosscurrents and proactive tax-loss harvesting, culminated in September recording its worst monthly total return for the municipal bond market since the global financial crisis of 2008.

Understandably, short-term price volatility is unsettling for investors and asset allocators. However, Clinton Investment Management views this dislocation through a highly optimistic lens. We firmly believe this swift reset in fixed income valuations has created an extraordinary, and generational buying opportunity for long-term investors. The sudden shift in price has pushed tax-exempt nominal yields to levels that are among the highest observed in close to twenty years¹. For individuals positioned in the highest marginal tax brackets, the structural advantages of tax-exempt cash flow have rarely been more compelling. Depending on an investor’s specific state of residence, wealthy individuals in the highest tax brackets, can now capture equity-like taxable equivalent yields (TEYs) approaching or exceeding 10% in municipal bonds.²

As we look toward the remainder of the year, our outlook on the asset class is supported by strong structural fundamentals. We are of the view that underlying municipal credit quality remains remarkably solid and stable. State and local governments continue to maintain near-record rainy-day funds and robust cash balances, shielding them effectively from a cooling domestic economy. This underlying fundamental strength gives us deep confidence that investors can seek to lock in what are some of the highest tax-free yields in a generation, toward the goal of securing predictable income streams, while awaiting the resolution of the current geopolitical and macroeconomic uncertainties.

The September Energy Shock and Technical Reset

To fully comprehend the magnitude of the third-quarter market adjustment, one must analyze the unique relationship between commodity price inflation and fixed-income mechanics that defined the late summer. The quarter began with a relatively stable backdrop; July and August experienced typical summer technical patterns, characterized by a predictable reinvestment wave driven by seasonal coupon payments and principal maturities. However, underlying vulnerabilities were quietly building as core economic data remained stickier than market participants anticipated.

The true inflection point arrived in September, a month that will be remembered for its severe asset correlation and technical breakdown. The primary transmission mechanism was the energy sector. A rapid reduction in global crude supply, combined with resilient industrial demand, sent oil prices climbing. This energy shock immediately altered inflation expectations, forcing fixed-income investors to price in a “higher-for-longer” monetary regime.

The mathematical precision of this relationship was remarkable. Over the 90 days ending September 30, the correlation between crude oil and long-term Treasury yields rose to over 90%. This tight linkage meant that every incremental dollar increase in oil prices exerted upward pressure on interest rates. Municipal bonds, despite their tax-exempt status and distinct investor base, could not decouple from the broader Treasury selloff.

As benchmark yields surged, the municipal marketplace experienced a severe technical liquidation. Fixed-income mutual funds, including ETF’s, which had enjoyed steady inflows earlier in the year, faced sudden redemption pressures as retail investors reacted to declining net asset values (NAVs). To meet these redemptions, fund managers were forced to sell high-quality, liquid municipal positions into a market of disinclined buyers, putting ever increasing downward pressure on prices. This structural mismatch between eager sellers and hesitant buyers caused municipal yields to spike. When the dust settled, September registered a historic decline, marking the most painful monthly total return for tax-exempt investors since the depths of the 2008 financial crisis.

Taxable Equivalent Yields at Historical Extremes

For the discerning wealth manager and high-net-worth investor, market dislocations should be viewed not as a risk to be feared, but as an attractive entry point to be exploited. Fixed-income dynamics dictate that when nominal yields rise, the compounding value of tax-exemption expands for those in the highest tax brackets. We are currently witnessing an environment where the math heavily favors the tax-exempt allocator over almost every other credit asset class. See Figure 1 below³.

Figure 1.

Consider the landscape of fixed income over the past two decades. For much of the post-2008 era, investors were forced to accept sub-2% nominal yields, compressing after-tax returns, and pushing individuals into riskier asset classes to meet their income requirements. Today, the landscape is entirely inverted. Nominal high-grade municipal bond yields across the intermediate and long portions of the yield curve have reached heights not seen since the early 2000s.

When these nominal yields are converted to a TEY, reflecting the true gross return that tax-free munis offer, when compared to taxable alternatives, the results are compelling. For an investor subject to the top federal bracket of 37% plus the 3.8% Net Investment Income Tax (NIIT), a 5.0% nominal tax-exempt yield transforms into an effective taxable return of roughly 8.44%⁴. When state and local taxes are layered into the equation, the value proposition becomes enhanced. In high-tax states such as New York and California, where local tax brackets exceed 10% to 13%, the combined marginal tax rate approaches or exceeds 50%. In these specific jurisdictions, the TEY on a high-grade municipal portfolio yielding 5% can safely approach or exceed 10%.²

To put this in perspective, investors have the opportunity to capture a highly predictable, double-digit tax-adjusted yield, backed by sectors such as essential public infrastructure, devoid of corporate execution risks, earnings vagaries, and equity market volatility that have historically characterized the corporate landscape.

Municipal Bond Credit Fundamentals Remain Solid

A vital component of our investment thesis is the stark divergence between market price volatility and underlying credit strength. While bond prices fluctuated wildly during the third quarter, the creditworthiness of municipal issuers remained stable. This fundamental divergence creates a stable foundation on which investors can allocate capital and build upon generational high cash flow, without taking on existential credit risk.

Following years of robust tax collections, federal pandemic stimulus distributions, and often conservative budgetary management, state and local governments entered this period of volatility with balance sheets that are among the strongest in modern history. Rainy-day funds across the nation remain near all-time highs and issuers have used the inflationary environment to their advantage, as rising nominal economic activity naturally bolsters sales tax collections and property tax assessments, providing an organic hedge against their own rising operational costs.

Moreover, the structural nature of municipal debt possesses inherent safeguards.  Unlike corporate issuers that frequently rely on short-term commercial paper or face constant debt rollover risk in volatile credit markets, the vast majority of municipal debt is structured as long-term, fixed-rate amortization, according to the Tax Policy Center.

Consequently, local governments are not as exposed to sudden spikes in their interest expense profiles; their debt service costs remain locked in at historical levels, preserving cash flow for essential operations and debt repayment. Historical default data from rating agencies consistently reinforce this reality, showing that investment-grade municipal defaults remain an exceedingly rare anomaly, keeping the asset class structurally sound⁵.

Locking in Yield Amid Macro Headwinds

As we look toward the final months of the year, Clinton Investment Management maintains a highly constructive and offensive posture. The overarching macroeconomic backdrop remains clouded by significant crosscurrents, including lingering inflation doubts, evolving monetary policies, and intensifying global geopolitical tensions. However, it is precisely this uncertain backdrop that validates our strategic focus on high-quality, tax-exempt fixed income. Additionally, we expect supply to abate as we approach year-end as evidenced by the recent new issue projections shown in Figure 2 below.

Figure 2.

Our investment strategy, under current market conditions, is straightforward: lock in historically elevated yields now. Waiting for the absolute peak of an interest rate cycle is a notoriously difficult timing exercise that often results in missed opportunities. In our view, present yield levels offer a highly attractive entry point that provides an asymmetric payoff profile. If interest rates remain elevated, investors will continue to compound tax-free income at a rate that handily outpaces inflation. Conversely, if economic growth slows, and inflation cools, leading to a decline in interest rates, investors could enjoy meaningful capital appreciation across the municipal curve.

We expect the technical selling pressures observed in September will naturally subside as tax-loss harvesting programs conclude and institutional buyers step back in to capture market opportunities similar to what we are seeing. Given reduced supply expectations for the fourth quarter, any normalization in retail investor demand could trigger a rapid compression in yield/spreads, causing bond prices to recover just as quickly as they fell.

In conclusion, the third quarter delivered a stark reminder of how macro forces can disrupt short-term asset pricing. Yet, for the forward-thinking, long-term investor, it has reopened a window of opportunity that many believed was permanently closed. By focusing on the solid fundamental credit quality of the municipal market and capitalizing on the historically elevated TEYs available today, investors can confidently position themselves to navigate broader market volatility, secure their financial foundations, and capture the generational high in tax-free income streams municipal bonds now offer, which could serve them well into the future.

What’s Driving Interest Rates Higher? Oil

Where is the Opportunity? Munis

The fixed-income market is experiencing a rare, time-sensitive window of opportunity for investors. As global capital markets transition through a cooling economic cycle and a changing monetary policy environment, history shows that opportunities to capture historically high yields in traditionally lower risk municipal bonds can vanish rapidly. For high-net-worth investors, acting quickly to lock in tax-free cash flow, at levels seen only on select occasions over the past twenty years could increase after-tax cash flow levels for decades to come.

• Oil is the primary driver: If anyone wants to know what has been driving interest rates higher in the US and around the globe, the answer is very straightforward: higher oil prices. The correlation between the price of oil and US Treasury yields is over 90% over the past three months, according to Bloomberg. The breaking news here is that it is not budget deficits or the US government’s growing level of outstanding debt driving interest rates higher. Instead, the higher price of energy has been the primary catalyst pushing rates up around the world.
• Historic 8% to 10% Taxable-Equivalent Yields¹: High-grade and high-yield municipal bonds are currently generating some of the most compelling taxable-equivalent yields (TEY) observed in the post-pandemic era. For investors in the highest tax brackets, especially when factoring in combined federal, state, and local taxes, nominal, taxable-equivalent Muni yields equate to historical equity-like returns of 8% to 10%, without exposure to equity, corporate, or private credit risks.
• A Shrinking Window for Peak Income: This highly unusual pricing anomaly represents a rare dislocation in the yield curve and broad fixed-income complex. As the broader macroeconomic cycle continues its shift, these high-income opportunities could vanish as quickly as they came, should oil prices decline, exerting downward pressure on inflation. What we know is that higher oil prices and corresponding higher interest rates are demand destroyers, not catalysts for faster economic growth.
• Locking In Fixed-Rate Protections Now: Investors have the opportunity to increase after-tax, fixed cash flow, preserving a predictable income stream for potentially decades to come, while positioning their portfolio for potentially significant capital appreciation, should rates drift lower over time, as is our expectation.
• Maximum Insulation from Tax Erosion: For investors residing in the highest tax brackets, the structural tax exemption of municipal securities offers immediate relief. It prevents the heavy tax drag that typically erodes fully taxable alternative investments, ensuring more cash flow stays in the portfolio.
• Unmatched Generational Stability: Backed by essential public infrastructure, utilities, and state or local government tax autonomy, high-grade municipal bonds boast historical default rates well below 1% over multiple decades, according to Moody’s,² offering a safe harbor in a late-cycle economy.
• Unencumbered Asset Liquidity: Municipal securities provide clean, reliable liquidity and predictable revenues, entirely free from predatory fee structures, opaque valuations, or capital-access restrictions.

If you would like to learn more about the best way to capture the most compelling opportunities we are seeing, please let us know.

Municipal Bond Taxable Equivalent Yields Now Rival Those of Private Credit

• Clinton Investment Management’s Municipal Credit Opportunities yield-to-worst of 4.31% equates to roughly 9% when compared to corporate bonds or over 7.25% when compared to Treasuries, for those in the highest tax bracket living in a high tax state like New York.
• Contrasting with the private credit market, an asset class that has attracted sizeable capital inflows over the past several years, the relative value proposition shifts heavily toward municipals.
• We are of the firm belief that the structural fundamentals of municipal bonds provide a superior layer of investor protection compared to the opaque world of private corporate lending.
• The domestic economic engine experienced a pronounced slowdown, with advanced gross domestic product estimates revealing the U.S. economy decelerated sharply to a 1.5% annualized growth rate, a steep drop from the 2% expansion recorded in the first quarter of the year.
• The outlook for the municipal bond market remains exceedingly advantageous, in our view, as the convergence of slowing economic growth, a softening labor market, and a constrained central bank creates a constructive fundamental and technical backdrop for the asset class.

The second quarter of 2026 marked a pivotal transition period for global capital markets, characterized by a pronounced deceleration in domestic economic activity and an increasingly complex monetary policy landscape. For high-net-worth investors navigating this shifting macroeconomic terrain, the fixed-income markets offered divergent paths. On one hand, the broader corporate and private lending landscape began to exhibit symptoms of late-cycle fatigue, compressed spreads, and rising credit vulnerabilities. On the other hand, the municipal bond market emerged as an exceptionally resilient and fundamentally mispriced asset class. As tax burdens continue to erode nominal investment returns for individual investors in the highest tax brackets, the structural benefits of municipal securities have become glaringly apparent. Underneath the short-term market noise, macroeconomic data points to an economic cooling cycle that favors high-quality, fixed income assets. For capital allocators analyzing the relative value landscape, the tax-exempt arena currently presents an asymmetric risk-reward profile that outclasses highly leveraged corporate alternatives.

A rigorous evaluation of asset class fundamentals reveals that high-grade municipal bonds offer some of the most compelling taxable-equivalent yields observed in the post-pandemic era. For example, Clinton Investment Management’s Municipal Credit Opportunities yield-to-worst of 4.31%¹ equates to roughly 9% when compared to corporate bonds or over 7.25% when compared to Treasuries, for those in the highest tax bracket living in a high tax state like New York². Contrasting with the private credit market, an asset class that has attracted sizeable capital inflows over the past several years, the relative value proposition shifts heavily toward municipals. Private credit has traditionally positioned itself as a high-yielding alternative to traditional fixed income, yet its returns are fully taxable, severely diluting the net yield delivered to wealthy individuals. Furthermore, the private credit landscape is experiencing a rapid degradation in credit quality, with middle-market corporate borrowers facing intense margin compression from sustained elevated borrowing costs. The municipal market, however, offers investors exposure to sectors such as public infrastructure, utility systems, and state and local governments that possess tax autonomy, pricing power given essentiality of services they provide, together with historically stable, predictable revenue streams. In addition, municipal tax revenues are projected to increase, given widescale AI adoption at the enterprise level and resultant data center construction.

We are of the firm belief that the structural fundamentals of municipal bonds provide a superior layer of investor protection compared to the opaque world of private corporate lending. Historically, high-grade municipal securities have exhibited exceptionally low default rates, remaining well below one percent over multiple decades, according to Moodys’ Credit Default Study, 2024 data³. This sharply contrasts with the private credit market, where industry analysts are observing escalating corporate fragility and default rates climbing toward six percent among over-leveraged middle-market companies, according to Fitch⁴. This vast gulf in credit risk is exacerbated by the exorbitant fee structures embedded in private credit funds, which frequently charge two percent management fees alongside twenty percent performance hurdles for funds exposed to a meaningful degree of leverage. Heavy fee drag can result in a significant reduction of private credit investor returns over time, whereas active municipal asset management utilizes transparent, lower cost Separately Managed Account structures that maximize the pass-through of interest income to the underlying client. The liquidity dynamics of the two asset classes also illustrate the operational advantages inherent in the municipal bond market. Private credit vehicles routinely protect their illiquid underlying portfolios by implementing restrictive redemption terms, including the frequent deployment of multi-year capital lock-up periods and liquidity gates. During periods of economic stress, investors in these private funds often find themselves trapped, unable to reallocate capital as credit conditions deteriorate. Municipal bonds, conversely, typically trade within a deep, highly transparent institutional secondary market, allowing for continuous portfolio optimization, tax-loss harvesting, and a high level of liquidity without arbitrary holding penalties or withdrawal restrictions. This operational freedom ensures that wealth managers can dynamically adjust portfolio positioning as macroeconomic variables evolve. The structural contrast extends to the type of interest rate exposure embedded in these respective asset classes. Private credit is fundamentally built upon floating-rate debt instruments, a feature that benefited investors during the Federal Reserve’s aggressive tightening cycle but has now transformed into a distinct vulnerability. As the broader economy slows, corporate borrowers under floating-rate arrangements face immense debt-service pressure, and looming maturity walls, while investors are exposed to the risk of rapidly declining yields once monetary policy begins to ease. Municipal bonds are predominantly structured with fixed coupon rates, allowing informed investors to lock in high terminal yields for an extended period, should interest rates remain stable or decline over time, as is our expectation. By capturing these fixed rates at the cyclical peak of the interest rate cycle, municipal bond investors can further reduce their portfolio exposures to reinvestment risk which will inevitably plague floating-rate private credit strategies as benchmark yields move lower. It is important to remember that municipal bonds provide liquidity within one business day, in most circumstances, providing investors with the flexibility to adjust exposures as market conditions shift rather than when the investment manager deems the timing appropriate, as is currently the case for many investors currently gated in private credit vehicles.

The necessity of locking in these fixed yields is underscored by the macroeconomic data that defined the second quarter of 2026. The domestic economic engine experienced a pronounced slowdown, with advanced gross domestic product estimates revealing the U.S. economy decelerated sharply to a 1.5% annualized growth rate, a steep drop from the 2% expansion recorded in the first quarter of the year. This cooling economic trajectory was reinforced by a sudden and severe softening in the domestic labor market. The June 2026 non-farm payrolls report delivered a downward surprise to market participants, expanding by a mere 57,000 jobs and missing consensus expectations by more than half. This data illustrates that the labor sector, which had long served as the primary pillar of economic resilience, is no longer running hot and may be succumbing to the restrictive monetary environment.

While a volatile geopolitical energy landscape has kept headline inflation figures sticky and prevented an immediate, aggressive pivot toward monetary easing, this combination of anemic gross domestic product growth and a weakening employment backdrop is likely to pressure the Federal Reserve, Chairman Kevin Warsh and the Federal Open Market Committee. Recognizing the fragility of the economic expansion, the central bank opted to hold benchmark interest rates steady within the 3.50% – 3.75% range at its most recent meeting. The Federal Reserve is effectively handcuffed, constrained from pursuing further policy tightening by explicit signs of economic fatigue, yet hesitant to cut rates prematurely due to lingering, and potentially transient, localized price pressures. This prolonged pause by the monetary authorities establishes a highly favorable environment for fixed-income assets, as it removes the threat of further upward rate shocks while signaling that the next structural move in interest rates may be a cut as opposed to a hike.

Looking ahead, the outlook for the municipal bond market remains exceedingly advantageous, in our view, as the convergence of slowing economic growth, a softening labor market, and a constrained central bank creates a constructive fundamental and technical backdrop for the asset class. As cash yields on short-term instruments begin to lose their luster, we expect a meaningful rotation of capital out of money market funds and preferred savings vehicles back into long-term fixed-income securities, creating a powerful technical tailwind that will support valuations. Investors who proactively extend duration within municipal portfolios offering higher yields, stand to achieve not only elevated tax-free cash flow but may also enjoy significant capital appreciation alongside highly durable, tax-sheltered income streams. In an environment where corporate balance sheets may be pressured by rising input costs and the inability to pass on those higher costs to consumers already under financial strain, at the same time that private market vehicles are limiting redemptions, the clarity, safety, and attractive taxable-equivalent yields of the municipal bond market represent a haven for capital preservation and compelling tax-free cash flow. Active portfolio management and disciplined credit selection will remain paramount in separating premier underlying credits from localized areas of fiscal stress, enabling investors to fully capitalize on these unique macroeconomic conditions, against an uncertain economic and geopolitical backdrop.

What’s Happening?

• Municipal bond investors in the highest tax brackets have an opportunity today to lock in taxable equivalent yields approaching 9%*, compared to taxable corporate bonds. However, this opportunity may be fleeting. Once the Strait of Hormuz is reopened, energy prices are expected to drop, likely easing current inflationary pressures and causing interest rates to fall in the future.

• The municipal yield curve is roughly 100 basis points steeper than the current Treasury curve, indicating municipal investors are very well compensated to extend duration.

Where Should Municipal Investors Be Optimally Positioned?

• Short duration, passive strategies are likely to continue to underperform, as they have year-to-date and over the past three years, in our view.
• Given low absolute yields offered by short-to-intermediate municipal strategies, we believe investors should be underweight 2 to 8 year maturities.

Is Now a Good Time to Add to Municipal Bond Allocations?

• Year-to-date municipal new issue supply has been elevated, allowing CIM to expeditiously invest capital and construct new client portfolios effectively.
• The timing is ideal to add to municipal bond allocations, in our view, given stable underlying credit fundamentals, high taxable equivalent yields, and ample supply.
• We expect new issue municipal bond supply to moderate heading into the summer months, however, creating an attractive entry point today. Materially increased reinvestment dollars and continued strong fund flows are expected to result in fewer compelling relative value opportunities.
• Elevated interest rates present investors an opportunity to harvest losses across their municipal bond holdings, positioning portfolios to maximize tax-free cash flow and long-term total return. The tax alpha we may generate for clients complements the total return we have delivered over time.

Why CIM?

• CIM’s differentiated municipal bond strategies continue to deliver total returns that are among the highest in the municipal SMA industry for the 12-month period ending April 30, 2026, according to PSN Informa.

Unlocking Value: Trading Private Credit’s High Fees, Impaired Liquidity, and Declining Floating Rates for the Tax-Free Certainty and Security of Municipal Bonds

The municipal bond market navigated a turbulent first quarter in 2026, characterized by a “tale of two halves.” While the year began with robust demand and falling yields, a sharp reversal in March, driven by reignited inflation fears and the outbreak of the conflict in the Middle East, erased early gains. Despite this volatility, the fundamental case for municipal bonds has strengthened, particularly as a transparent and liquid alternative to the increasingly opaque private credit market.

Q1 2026 Market Performance and Yield Dynamics

The first two months of 2026 saw municipal bonds off to one of their strongest starts since 2020, with the Bloomberg Municipal Bond Index gaining over 2% through February. However, March brought a significant repricing due to geopolitical strife, with the 10-year tax-exempt benchmark yields, which had bottomed at 2.52% in late February, rising to end the quarter at 3.12% — a 59-basis point jump in a single month, according to the Municipal Market Data AAA muni curve.

Key drivers of the Q1 performance included¹:

• Technical Conditions: Record issuance in 2025 continued into Q1 2026, with total volume reaching $129.6 billion, up 7% year-over-year.
• Resilient Inflows: Despite March’s volatility, tax-exempt mutual funds and ETFs saw nearly $26 billion in net inflows for the quarter, comfortably absorbing supply, illustrating strong retail appetite.
• Yield Curve Shifts: The long end of the curve (30-year) became particularly attractive as the Muni/Treasury ratio rose to 91%, the highest level in nearly two years.

The Rising Tide of Local Taxes

In our recent Clinton Investment Jan Commentary, we highlighted a critical and growing risk: the increasing frequency of state and local tax increases across the country. We note that, while state-level credit fundamentals remain generally stable, local municipalities are increasingly choosing to raise income taxes on the wealthy to balance budgets as pandemic-era federal aid is fully exhausted and to address growing unfunded mandates.

We see this trend accelerating, evidenced by tax increase proposals in CA, VA, RI, and ME, together with passage of a 9.9% income tax increase in the state of Washington on those making more than $1 million, effective in 2028. Recently, the state of Illinois began considering a 3% “millionaire’s tax” on high earners.

Munis vs. Private Credit: The Safety and Yield Advantage

As the Federal Reserve continues to cut short-term rates, the landscape for income-seeking investors appears to be shifting away from floating rates, preferred savings, money market funds, and private credit, toward municipal bonds.

The Decline of Private Credit

Private credit, once the darling of the “yield at any cost” era, is facing significant headwinds in 2026.

• Fee and Liquidity Burdens: Private credit funds often charge high management and performance fees (e.g., 2% and 20%) and frequently utilize “lock-ups” and “gates” that prevent investors from freely accessing their capital during market stress, as is occurring with increasing frequency in the current environment, evidenced by the plethora of news articles referencing funds implementing these tactics.
• Floating Rate Risk: Most private credit loans are floating rate. As the Fed cuts rates, the yields on these loans will naturally decline, potentially eroding the income profile that attracted investors initially.
• Default Concerns: A recent quote from Fitch Ratings highlights the rising fragility in this sector, estimating a private credit default rate of roughly 6%.² By contrast, municipal bond default rates remain historically below 1%, according to Moody’s.³

The Taxable Equivalent Yield (TEY) Calculation

Municipal bonds currently offer a compelling alternative to private credit and other taxable fixed income instruments. with TEY’s of 8% to 9% for those in the highest tax bracket, seeking protection from federal, state, and local taxes.  For example, if a long-term muni bond offers a 5.00% tax-free yield (as seen recently in the 20-30 year area of the curve for NY), the TEY is approximately 8.45%.⁴

The visualization above illustrates how a base tax-free yield of 5.00% scales as the investor’s tax burden increases. In high-tax states like New York or California, the TEY can easily surpass 9.5% when accounting for both federal and state exemptions.

Conclusion

The first quarter of 2026 reaffirmed that while municipal bonds are not immune to interest rate volatility, they have historically been, and we believe will remain, among the most resilient and sound investments for high-income investors. When one considers the rising pressure to raise state and local taxes, especially on high-income earners, together with the rising default concerns, high fees, and declining floating rate yields in private credit, municipal bonds remain a compelling alternative given their return profile, credit stability and higher level of liquidity they offer investors.  

What is “Tax Alpha”?

Clinton Investment Management (CIM) calculates tax alpha as the capital losses harvested, divided by the market value of the assets under management, multiplied by the maximum capital gains tax rate of 23.8% (20% plus 3.8% net investment income tax), for a given period. In essence, the tax alpha we generate is the amount our clients save, annually in taxes, that they would have been forced to pay otherwise, assuming they have gains to offset each year*.

In a dynamic environment increasingly focused on tax efficiency, the definition of “Tax Alpha” is essential to understanding the actual value a given muni manager delivers. To this point, what many managers say and what they do may not necessarily be the same thing. For example, quantifying the amount of losses harvested, as many managers do, is not Tax Alpha. Rather, Tax Alpha is the amount of capital gain avoided. A manager who states only the amount of losses harvested may be significantly overstating the actual Tax Alpha they achieved.

Is Your Current Muni SMA Manager Willing to Document Their Tax Alpha Generation?

Marketing literature from several prominent municipal bond industry peers claim to actively harvest tax losses within their Separately Managed Account (SMA) municipal bond portfolios but you are unlikely to find this data documented anywhere. Beyond this fact, many of these managers outline minimum thresholds for net benefits to be realized for their client portfolios, (benefits net of transaction costs), before engaging in tax harvesting, limiting the degree to which they ultimately deliver on this promise.

We would strongly encourage investors and advisors to challenge municipal bond managers who make ambitious claims regarding tax-loss harvesting, if they are unwilling to document the actual Tax Alpha they claim to deliver. If managers will not document, in their marketing literature, the tax alpha they generated, what they say and ultimately do may not be the same thing.

Where Can I See CIM’s Composite Level Tax Alpha Generation?

You can find our Tax Alpha on the front page of our strategy fact sheets. CIM prominently and transparently displays the Tax Alpha we generate on our SMA strategy fact sheets, whereas competitors may simply claim, in casual conversation, losses they generate on a theoretical, rather than documented basis. For example, the 2025 year-end tax alpha for our Municipal Credit Opportunities strategy composite, with over $2.6 billion in assets under management, was 36 basis points. This net tax benefit proportionately offset the annual management fee we charge.

What is CIM’s Tax Loss Harvesting Philosophy?

At CIM, tax harvesting is deeply embedded in our investment protocols and actions. We proactively engage in tax swaps throughout the year. This contrasts with the approach that may be taken by peers who may delay such actions until they are forced, by the advisor or the client, to do so, or they wait until the final few weeks of the calendar year, when secondary market liquidity and depth are typically more limited. CIM’s active Tax Optimization Protocol (TOP) has generated meaningful tax alpha for clients over the past five years, while also preserving core portfolio characteristics and objectives.

CIM also seeks to avoid common pitfalls associated with tax loss harvesting, such as selecting problematic or ineligible replacement securities, holding bond sale proceeds in cash for extended periods, or ignoring transaction and opportunity costs associated with these swaps.

In January 2025 several wildfires burned in the Los Angeles area resulting in catastrophic destruction and loss of life for which the causes are still under investigation and aftermath yet to be determined. The frequency and scale of wildfires and weather-related incidents have materially increased over the last decade, and continues to do so, thus increasing the risks and potential liabilities for utilities requiring an augmented approach to assessing credit risk. This is especially the case in California where utilities operate under a strict liability standard known as “inverse condemnation” that can potentially lead to a material increase in liability exposure if the utilities’ equipment is implicated in the cause of a fire. This standard was unfortunately illustrated in 2019 with the Pacific Gas & Electric (for-profit utility) bankruptcy as a result of the Camp Fires in 2018¹.

Our investment process is predicated on identifying risks and receiving adequate compensation for that risk. While we do share the view that the Los Angeles Department of Water & Power (and related entities) is a systemically important issuer as the largest municipal utility in the country, with access to liquidity and potential support from the state. We do not, however, have any clarity, nor does anyone else, on the magnitude of their potential liability from the 2025 fires and the resulting impact to their credit rating. Due to insatiable demand for California municipal bonds given the state’s high taxes, many California issuers are issuing bonds that, despite having credit ratings inferior to AAA national rates, are yielding below those of AAA quality, effectively receiving a subsidy from investors. Or stated another way, investors may not be adequately compensated for the increased credit risks they are bearing. Illustrative of this is Los Angeles Department of Water & Power (AA-, Aa2, A) which in December 2024 offered yields on par with national AAA bonds² though their credit rating was 5 notches lower. Spreads widened by +50-60 basis points following the wildfires in January 2025 and began on a path lower to +35 by October, and most recently to +20 basis points as a new issue of power revenue bonds were brought to market last month³.

As investors appear to be willing to accept such nominal compensation for an unknown risk, we ask why? Especially when there are alternatives, in-state and out of state (on an after-state tax basis), that provide comparable or greater yields. Even the rating agencies affirming ratings acknowledge the outcome of litigation pertaining to Los Angeles Department of Water & Power’s culpability in contributing to the progression of the fires and subsequent damage, are an unknown. If found liable, these losses could be quite material for the entity and perhaps damaging to ratings. This could cause potential spread widening given these aforementioned risks do not appear to be adequately factored into current prices.

• Munis have now delivered solid returns, for the past three consecutive years, resulting in over +13% returns cumulatively, or +4.00% annually, as of 1/19/26, according to the Bloomberg Muni Index.
• Municipal bonds delivered performance that was higher, on a taxable equivalent basis, than every other fixed income market in 2025, including Treasury bonds, corporate bonds, high yield bonds, and global bonds, according to Bloomberg Municipal Bond Index, as of 1/19/26.
• There are now almost a dozen states considering raising income or surtaxes on taxpayers, including individuals making more than $1 million.
• We say to those in the highest tax brackets, just because you are paranoid doesn’t mean they aren’t after you.
• Holders of cash and short duration instruments are giving up the opportunity to increase their tax-free cash flow by 100%, as the yield differential between short and long-term municipal bonds is now over 2.00% or 200 basis points, more than double the yield of short-term bonds and after-tax taxable cash yields.
• Municipal bond investors willing to extend out to modestly longer maturities can achieve taxable equivalent yields approaching 7%.

The casual market observer is forgiven if, in early 2025, they concluded it would be an underwhelming year for municipal bond returns. If you close one eye and look at the first half of 2025 in isolation, that summation would have appeared reasonable. However, for those with an investment horizon longer than six months, you would have also seen the second half of 2025 deliver one of the most powerful recoveries in municipal bond prices in some time. As our clients and loyal followers know, we have been imploring investors to prepare for a turnaround in market sentiment, for a number of quarters. We remained firm in our conviction that a recovery in municipal bond performance would likely be swift and powerful. In the early days of 2026, we reflect not only on market conditions that have brought us to this point but also contemplate the various risks and opportunities investors are likely to experience in 2026.

Market conditions in the first half of 2025 were indeed challenging. The municipal bond market stumbled out of the gate, plagued by uncertainty surrounding the potential loss of municipal bonds’ coveted tax-exempt status. Fear of losing the municipal bond tax-exemption has become the proverbial Sword of Damocles, hanging over the muni market, for over three decades. While the risk of losing tax-exempt status is perceived to be quite low, for constitutional reasons, as we discussed extensively in our Q1 2025 Market Commentary Shaken, it has not stopped retail investors from overreacting each time the topic begins to leak into media headlines. The mere whisper of the potential loss of muni tax-exemption gets the financial news printing presses humming. The media and the broader financial services industry understand all too well that there is no better way to alarm wealthy, tax sensitive, retail investors, in an effort to capture their breathless attention, than to suggest that one of the last and purest tax shelters available may be taken away. Nonetheless, once the news broke that the One Big Beautiful Bill Act (OBBBA) had passed and the muni tax-exemption had been preserved, retail nerves settled as quickly as they had previously risen. Investors took stock of the relative cheapness of the municipal asset class more broadly and wisely concluded that munis were simply too attractive to ignore, igniting the recovery and rally that ensued in the latter part of 2025, which has continued into 2026.

What started off as a spiritless year for munis, ended on a particularly strong note.  Munis have now delivered solid returns, for the past three consecutive years, resulting in over +13% returns cumulatively, or +4.00% annually, as of 1/19/26, according to the Bloomberg Muni Index. Some may also be surprised to learn that municipal bonds delivered performance that was higher, on a taxable equivalent basis, than every other fixed income market in 2025, including Treasury bonds, corporate bonds, high yield bonds, and global bonds, according to Bloomberg Municipal Bond Index, as of 1/19/26.

While this may come as a shock to some, it is a reminder of how frequently investors fail to properly measure and appreciate the full value of the tax-free income that municipal bonds deliver. The challenge for investors is that municipal bond returns are almost always quoted on an after-tax basis, that is returns are not “grossed up” to reflect the tax-free income they generate, while taxable markets, bonds and equities, almost always quote returns on a before-tax basis. We frequently remind investors, to achieve a true apples-to-apples comparison of their investments, they must carefully calculate the “taxable equivalent” yield and return of their municipal bond holdings when comparing with taxable alternatives. We understand that not everyone enjoys pouring over statements, performing mathematical equations. However, not doing so can result in lost performance and/or unnecessarily increased risk exposures.

Just Because You’re Paranoid Doesn’t Mean They Aren’t After You

Despite the passage of the OBBBA, we know that taxes more broadly will likely remain roughly the same for most taxpayers across the country. Yet, taxes may actually be rising for many wealthy investors, depending on where they live. There are now almost a dozen states considering raising income or surtaxes on taxpayers, including indviduals making more than $1 million. A number of states are also considering additional wealth taxes, i.e. California. We believe these initiatives are the clearest indication that state and local governments are planning to increase revenue rather than reduce spending, as they face the reality of billions of dollars in budgets deficits. While this may be bad news for taxpayers, it is welcome news for municipal bond holders, as we expect municipal credit quality to remain stable going forward. Our confidence is tied to the knowledge that municipalities have the authority and, in several instances, a willingness to raise revenues though higher taxes and user fees to fund debt service and future expenditures. This new reality speaks directly to the power of tax-free cash flow and will likely mean that the tax-exempt income municipal bonds deliver will increase in value as we look to a future of higher local taxes, even if Federal income tax rates remain roughly the same. Therefore, we say to those in the highest tax brackets, just because you are paranoid doesn’t mean they aren’t after you.

Risks Seen and Unseen

We continue to believe that the greatest risk facing fixed income investors going forward remains reinvestment rate risk. The very high opportunity cost of investor exposures to cash, preferred savings, and short duration instruments is evident in the current slope of the yield curve, see Figure 1 below.

The ‘AAA’, tax-free municipal bond and taxable Treasury curves illustrate clearly the meaningfully positive slope of the curve. As you can see, the additional yield investors receive for investing in longer, rather than short, duration bonds is significant. Investors with heavy exposures to preferred savings, cash, and short duration bonds, may be unaware that the lower yield and income they now receive translates into a significant loss of cash flow going forward. This is a relatively new experience for investors as short-term rates were quite high just two years ago. For example, holders of cash and short duration instruments are giving up the opportunity to increase their tax-free cash flow by 100%, as the yield differential between short and long-term municipal bonds is now over 2.00% or 200 basis points, more than double the yield of short-term bonds and after-tax taxable cash yields.

Why Inflation Isn’t Rising

As we consider the factors that have put downward pressure on interest rates over the past two years, we expect many of those conditions to persist in 2026 as well. Inflation was a popular talking point throughout 2025. We continue to believe any pressure from increased tariffs is likely to be temporary, as we do not expect the current administration to materially increase tariffs yet again in 2026. Therefore, the modest price increases that may have flowed through to prices of goods and services, due to tariffs, are likely to diminish as base effect comparisons improve going forward. Owners’ Equivalent Rent (OER), which represents roughly a third of the US Consumer Price Index (CPI), fell consistently throughout 2025. We expect declines in residential and commercial real estate values to continue in 2026, exerting further  downward pressure on OER. Therefore, we expect CPI to continue to moderate going forward. As inflation falls, real returns (that is return after inflation) of fixed cash flow rises. For example, municipal bond investors willing to extend out to modestly longer maturities can achieve taxable equivalent yields approaching 7%. Assuming CPI averages approximately 2.70% during 2026, as it did in 2025, the real, inflation-adjusted yield that muni investors could achieve would be over +4.2%, on a net basis. For this reason, we continue to believe that municipal bonds, given their superior taxable equivalent yields and risk adjusted return potential, are among the most compelling investments investors, in the highest tax brackets, can make in 2026.

CIM Investment Management News

We are very pleased to share that 2025 was another powerful year of growth for CIM.  We added new team members and continued to meaningfully grow our assets under management, as evidenced by the roughly $900 million inflows into our strategies in 2025. We are grateful for the ongoing trust and loyalty of the clients and advisors we serve. We are also fully aware that our success would not be possible without the dedication, commitment, and strength that each CIM team member delivers to our clients each day. We would like to express our deepest thanks to all of our partners and look forward to another year of growth in 2026.

Should you have any questions about this commentary or where we are seeing the best opportunities in the municipal bond market today, please do not hesitate to reach out.

Sincerely,

Andrew Clinton

CEO

December 2025

We are very proud to share that a highly valued member of the Clinton Investment Management team, Alexander Clinton, has been bestowed with Smith’s Research & Gradings 2025 Rising All-Star Municipal Analysts Award. This honor recognizes individuals for outstanding contributions to and achievements within the municipal bond investment community.

Alex, working alongside Shivani Singh, Head of Credit Research, is a core member of our research team and his professional integrity, diligence, attention to detail, and ability to correlate and connect dots in a broader credit perspective is impressive. This award recognizes his hard work, talent, and perseverance, creating significant value for our clients.

Congratulations to Alex for earning this prestigious award!

• The municipal bond market is enjoying its third consecutive year of meaningfully positive total return, 12% on a cumulative basis, since 2023. CIM’s strategies have delivered meaningfully higher returns both net-of-fees and after taxes.
• Municipal bond total returns for the combined period of September through October 2025 were the highest in over 30 years.
• Long duration municipal bonds have outperformed short duration munis by roughly +6.00%, or +600 basis points, since September 1^st.
• Municipal bond TEY’s now exceed nearly every other fixed-income asset class, according to Morgan Stanley Research.
• Consistent with our expectations, moderate inflation and weakening labor market conditions have driven the Fed to restart its easing cycle, cutting interest rates twice with more cuts expected in the near-term.
• Our strategies offer yields between 6% and 7%, on a TEY basis for those in the highest tax bracket, thereby meaningfully compensating investors to swap out of low yield, low return short duration cash and passive bond strategies.
• High-net-worth investors with exposure to Treasury bond ladders would also benefit from transitioning to municipal bonds, given the meaningful yield decline we have seen in short-term Treasury bonds and the higher taxable equivalent yields municipal bonds offer.
• We remain constructive on the outlook for the municipal bond market through the end of 2025 and into 2026.

As we approach the close of the fourth quarter and the Thanksgiving holiday, this time of year presents an opportunity to reflect on events of the past several months and the impact of our decisions on achieving our individual and collective long-term goals and objectives. CIM would also like to express our sincerest gratitude to the clients and advisors we serve for their ongoing trust, confidence, and loyalty. We take our role as responsible stewards of our client’s wealth extremely seriously. For this reason, we are deeply grateful for the value we have delivered throughout 2025, despite yet another tumultuous period in the financial markets. As we evaluate events of this past year, we also carefully consider the risks that lie before us.

While the year is not yet over, it may come as surprise to some that the municipal bond market is enjoying its third consecutive year of meaningfully positive total return, 12% on a cumulative basis, since 2023, according to the Bloomberg Municipal Bond Index. CIM’s strategies have delivered meaningfully higher returns both net-of-fees and after taxes.  For example, our Municipal Credit Opportunities and Municipal Market Duration strategies have delivered over +17% and +15% respectively, net-of-fees on a cumulative basis, over the aforementioned period. This was not the case just a few months ago, as the first seven months of the year were decidedly weak for the municipal bond market. This caused some short-term investors in the muni market to become disenchanted with returns they had achieved. Some were even motivated to liquidate the entirety of their municipal holdings, selling longer-term bonds to invest in short duration paper or cash. Unfortunately, for those investors, this rash decision was ill-timed as they missed out on one of the strongest rallies in the history of the municipal bond market at end of the third quarter. For example, long duration municipal bonds have outperformed short duration munis by roughly +6.00%, or +600 basis points, since September 1st, 2025, according to Barclays Municipal Research.  Municipal bond total returns for the combined period of September through October 2025 were the highest in over 30 years.  The surge in municipal bond prices over the past several weeks has transformed an otherwise lackluster year of returns into a decidedly solid year for the muni market and our strategies in particular.

There is significantly more room for longer duration munis to run, in our view. This is partly due to the relatively high yields one can still achieve in municipal bonds that are exempt from Federal and, in many instances, state income taxes. This tax-exemption is powerful, as a tax-free return of 4.00% translates to a taxable equivalent yield (TEY)* of +6.80% annually, for those in the highest federal tax-bracket. When we consider the substantially lower risk that municipal bonds carry, the diversifying force municipal bonds provide in one’s asset allocation becomes apparent.  Municipal bond TEY’s now exceed nearly every other fixed-income asset class, according to Morgan Stanley Research, see Figure 1 below.

We deeply appreciate our clients’ patience and conviction in the fundamental macroeconomic view we shared many months ago. We know the first half of the year was a challenging period for many investors. This experience is yet another reminder that a patient, measured, and calm approach to investing and assessing one’s return experience is essential, given the degree of short-term volatility the exists in markets today. Our disciplined approach to portfolio construction and positioning is reflected in our long-held views on the direction of the US economy and expressed in our portfolios, enabling our clients to participate fully in the municipal bond market rally of the past two months.

Consistent with our expectations, moderate inflation and weakening labor market conditions have driven the Fed to restart its easing cycle, cutting interest rates twice with more cuts expected in the near-term. For this reason, we believe investors who remain largely underweight fixed income, and municipal bonds in particular, should consider increasing their municipal bond holdings to lock in higher yields before rates fall further. Most savings rates and money market funds have now fallen well below the important 4.00% taxable yield threshold. Our strategies offer yields between 6% and 7%, on a TEY basis for those in the highest tax bracket, thereby meaningfully compensating investors to swap out of low yield, low return short duration cash and passive bond strategies. High-net-worth investors with exposure to Treasury bond ladders would also benefit from transitioning to municipal bonds, given the meaningful yield decline we have seen in short-term Treasury bonds and the higher taxable equivalent yields municipal bonds offer.

As investors consider the most appropriate asset allocations to help navigate rising uncertainty, driven by extreme valuations on risk assets, we understand some investors may compare the returns of the high-flying S&P 500 to the returns municipal bonds have delivered over the past few years. We would caution against this comparison. The highly volatile S&P 500 is demonstrably different than high quality, stable, and durable municipal bonds. As such, munis should not be expected to deliver a similar return experience. The S&P 500 carries dramatically higher risk, roughly 400% more risk, as measured by the S&P 500’s ten-year standard deviation of return of approximately 16%. On the contrary, municipal bonds play a vastly different role in an investor’s asset allocation. Municipal bonds, by definition, offer investors stable cash flow and safety of principal, providing consistent competitive tax-free cash flow while also preserving the wealth investors have accumulated through hard work and discipline, often across generations.

What lies ahead?

We have good news to share. We expect municipal bond fundamental credit quality to remain stable going forward. Moreover, CIM’s demonstrated ability to identify and select stable-to-improving issuers, as illustrated by our long-term track record of success, provides confidence to investors seeking to successfully leverage the opportunity to moderately move down in credit quality to meaningfully increase yield, without materially amplifying credit risk. We know with certainty that we don’t know what lies ahead. Market conditions and public policy shifts serve as stark reminders that risk persists regardless of how much some in the investing community would like us to ignore it. For this reason, we believe investors will continue to seek out lower risk, higher yielding instruments. Therefore, we remain constructive on the outlook for the municipal bond market through the end of 2025 and into 2026. Technical market conditions that existed during the first half of the year have begun to dissipate, as evidenced by the outperformance of the municipal bond market in recent months.  As we approach year-end, the expected decline in new issuance and elevated yields investors can still achieve on longer duration municipal bonds will likely continue to attract investor inflows supporting municipal bond performance in the months ahead.

Should you have any questions regarding the municipal bond market or this commentary, please do not hesitate to reach out.

Sincerely,

Andrew Clinton

CEO