Talking Markets Podcast Series (Munis) with Pat Haskell (BlackRock) & Sudip Mukherjee (UBS CIO)

Welcome back to the UBS Market Moves podcast channel. Today we will spend some time examining the current landscape for the municipal bond market. With that, joining us from our partners at BlackRock, we have Patrick Haskell, head of the Municipal Bond Group, and then moderating today's conversation from the UBS Chief Investment Office.

We also have back with us Senior Fixed Income Strategist for the Americas, Sudeep Markerjee. So with that, Sudeep, let me turn it over to you. Welcome back.

Thank you, Dan. And a very warm welcome. And thank you to Pat for doing this, taking time off to give his comments on the muni market.

Pat, thank you. And very welcome to the call. Thank you very much for having me.

I appreciate it. All right. So let's get right into it.

So we've seen a lot of action in the muni market. Can you just kind of just step back and tell us, how did munis do so far year to date? We know that we had a reset in March and then a subsequent rally.

And then comments on your outlook for the remainder of 2026, especially as muni supply continues to hit record levels and geopolitical risks continue to be elevated, investors question whether demand and flows can keep pace. And finally, you know, amongst all of that, where along the curve do you see the best opportunities? Look, I think the first thing you touched on is performance, what's happened so far this year.

You know, look, it's been a little bit rocky, you know, overall, you know, we've got a little less than 100 basis points of total return, but that started out with a lot of strength in the beginning of the year, and it would follow the last third of last year. Munis underperformed in 2025, but had a very strong August to December period. Then as the market sold off in February, we, excuse me, as we had the geopolitical events in March, the market sold off, we took a pretty big hit.

Now, a lot of that, over half of that has retraced in April. And that's at a backdrop of where, you know, we have, you know, the third largest positive inflows in the product on record for the time period so far this year. So I think that's going to continue.

We still, we haven't changed our outlook that, you know, we're looking for high single-digit returns in 2026. It's rocky because the geopolitical events that are affecting every market, but we think that will come through. You know, when we think about, you know, what could you invest in that's going to be, it's not, it's going to be the least correlated to supply chains breaking, energy infrastructure, those things along those lines, essential services.

So, you know, the flow, the positive flows that I referenced before are predominantly in investment-grade munis, and it makes a lot of sense. So I think that unlike other volatile times when volatility gets elevated and we have outflows, I think people are smart to realize that it's not affecting the underlying credit fundamentals in the muni market. You know, you mentioned supply.

I think supply will be robust this year as it was the last two years, but I think it's not going to be what people were thinking in the fourth quarter of 2025 when estimates were between $600 billion and $650 billion. So we think it'll be between $575 billion and $600 billion when we total supply. Let's talk about, let's talk about the curve.

I mean, the curve, the triple-A curve is really steep, some flattening recently, but overall relative to its own historical levels and the treasury curve, the muni curve is really steep. But there is interest rate risk out there, the muni index duration is extended. So how do you see duration risk and how do you see the opportunities along the curve?

So we continue to favor a barbell approach because of that rich belly of the curve. Having said that, 10-year yields in muni land are 50 basis points higher now than they were six or seven weeks ago. So that has, you know, we have seen some cheapening there.

We've seen ratios go from, you know, basically 60-61 to as high as 71, a little bit of rally in from there in the 10-year point. So absolute yield buyers, I think, are going to feel better about that sector. I think from a relative value perspective, the long end still continues to have a tremendous amount of value.

I mean, we can, you know, we can pick up 91% of the curve by extending out to 20 years. And we're doing that where appropriate. You know, you mentioned duration risk, there's no question there is risk.

The reality is the level of tax equivalent yields that are available in the municipal market right now haven't been available since pre-financial crisis, with the exception of a couple times of chaos. So, you know, we're back in a more normalized market. And when I say normalized, I mean, we're going to think about monetary policy paradigm more similar to pre-financial crisis than that period of 2010 to 2022 of financial repression.

And that's going to leave curves steeper, it's going to leave real rates higher. And that's an opportunity to pick up income in fixed income. So, you know, I think that you're getting paid taking that duration risk, I think in dollar denominated fixed income, that's the cheapest long duration product that you should have.

And I always think about it not only as, you know, as a standalone in municipals, but if we think about how much money has gone into private credit, and private credit has a place in the world just like everything else, but all the people when rates were lower that went into private credit, so they could have some yield, right? That's all floating rate exposure. So I think of, you know, munis in the back end of the curve as a complement to what people are doing in private credit.

So if something does happen, and you get a 200 basis point rally in the back end of the curve, and you want to participate in that, you will have some enjoyment there. If everything is in floating rate product, you're not going to obviously enjoy that move at all. That's a great point.

And talking about private credit and concerns there about, how do you see muni credit? Any impact of AI or private credit concerns? What are your views on credit quality in munis?

So let me, maybe I'll take directly on your private credit spilling over to the muni market. AI spilling over to the muni market, not really, not yet. If we look at, you know, the, even the most aggressive assumptions around public power, water-related borrowing, the AI-linked issuance remains, you know, relatively small.

I think that obviously could change over time, but today, affecting muni credit, that's no. Broadly speaking, though, if we look at muni credit, you know, we came out of the pandemic, you know, a tremendous amount of programs were set up to help state and local governments, higher ed, not-for-profit hospitals, most of that now has been spent down. So we're back to, you know, we're back to, you know, blocking and tackling, you know, reserves on the state level are slowing, state revenues really are no longer keeping pace with longer-term trends.

So, you know, doing your credit work now is important. Having said that, we came from a really good spot. So I think we're, to a large degree, muni credit is in a very good position, but it's time to do your homework again.

I mean, there's different sectors that are going to show up that are going to be challenged. I mean, you know, the K-12 schools, which has been a robust sector for a long time, you know, you look in the state of California, and long-term projections are there's going to be a drop of 500 to a million students. And that's because birth rates have dropped since 2007, and a bit of, you know, family out migration.

So that's going to, you know, depending upon where that settles in, you're going to really need to know what exposure you have in different districts. And we're working very hard to follow that. That's well said.

In terms of credit quality and spreads, where do you think investors, how do you think investors should position this market? So look, the credit quality, again, like I said, to a large degree, we're in a good spot. There's obviously, that's going to vary depending upon what sector you're investing in.

Spreads I think are, broadly speaking, a little bit tight. I think that's partially because the issuance has been so focused in the investment grade sector, and the absolute yield buyers that have been reaching for high yield are keeping those spreads a little bit tighter than we'd like to see them. But you know, you can make the argument, if you can buy, you know, municipal high yield at a tax equivalent yield of 9, 10%, you know, that's pretty attractive.

And I think that's the way a lot of investors are looking at it. They're not looking at whether, you know, you're compensated at 100 or 125 basis points of incremental spread on XYZ projects. So the, and you know, we, you know, we, sectors we like, we like the prepaid gas sector.

We like housing bonds, the kind of national, large regional health systems we like. You know, we stay away from senior living, long-term care facilities. We're just not as comfortable with some of those smaller exposures.

You know, speculative projects, weak sponsorship, we try to stay away from. You know, I think you have to be really selective with some of the small private universities, especially in the Northeast, where you have this demographic waste, and people are fighting for students, and can't get enough full pairs. There's definitely, you know, that's something that we've been all over, but that's kind of where we see it.

Okay. That's great. Let's pivot to the investments side of things, the products.

So in recent years, we've seen, obviously, a tremendous growth in SMAs, and now more recently, active ETFs and ETFs in general in the mini-market. A lot of the flows are now being driven by the ETFs. So how do you see the evolution of the investment landscape in munis?

What are the key trends investors should be aware of, so as to invest effectively in this market? I'm going to answer that in two parts, because you talked about SMAs and ETFs. In SMAs, I think you're going to see more dynamism in the product.

I think a lot of people, when they hear SMA, and when you're using that wrapper in the mini-market, they're thinking about a very simple box or high-grade, you know, kind of set it and forget it. And you're now seeing, you know, much more creative strategies in those, you know, in that wrapper. And I think a large degree of that has to do with technology, because, you know, oftentimes, you know, SMAs are, you know, $250,000 minimum, some of them smaller, you know, to a couple million.

And it's very hard for a scaled manager, whether it's BlackRock or anybody else, to change those portfolios in a super-dynamic way. And technology's changed that. And you can do that.

And you know where the attribution is, and you see that in performance. So I think you'll continue to see more dynamism and interesting strategies go into that SMA wrapper. And I think you'll continue to see that grow.

ETFs, you know, I think a lot of people think of ETFs versus the open-end mutual fund wrapper. I mean, the ETF wrapper, you know, you have daily transparency into the portfolio. You have daily liquidity.

You know, it fits so many financial advisors. And to scale their practice or using models, it fits very nicely into that. They tend to have slightly lower fees.

That also accrues to the advisor and to the end-user. So I think the trends are intact. And I think, you know, I expect them to continue.

There's certainly a place for funds. You know, closed-end mutual funds are one of the great efficient ways to have, you know, a lever bet on long-duration credit, excuse me, long-duration munis and rates. So, you know, I think each one of these wrappers has their place.

But I think, you know, the jury's in on what's going to grow and what will continue to be that actively managed ETF sector in SMAs. Okay. That's great to know.

And then finally, just a quick word on taxable munis. Where do you guys stand on that and what's the outlook? The demand, both domestically and foreign, for long-duration taxable munis is significant.

There's just not enough supply. You know, you can't get that kind of quality long-duration exposure in other markets. So I continue to expect it to be a reasonably small part of the supply universe.

I'd love that to change. You know, our insurance clients at BlackRock, you know, if they're on any material widening, would waive in long-duration, you know, taxable munis in size. So the demand is very strong.

It's a very technical market because of the lack of supply. I don't see that changing anytime soon. So to the extent that issuers would want that unconstrained taxable money as opposed to having, you know, tax-exempt money which has to have a specified use, and they're willing to pay for that flexibility, I think it would be well-received in the marketplace.

Excellent. Pat, thank you so much for your insights. These are great points on the muni market, and I'm sure our advisors and clients will really benefit from your insights.

Thanks for taking the time, and hope to see you again on this call sometime. Thank you very much for having me. Good luck, everybody.

Thank you. Thank you.