US muni bonds face worst July since 2003 as yields rise and supply floods the market

July is supposed to be a good month for municipal bonds. Historically, it is one of the strongest periods for state and local government debt, as coupon payments and maturing bonds put cash back into investors’ hands and demand naturally outpaces supply. Not this year. US state and local government debt is tracking toward its weakest July performance since 2003, a stretch of more than two decades. The culprits are familiar: rising benchmark Treasury yields making existing bonds less attractive, and a heavy wave of new issuance competing for the same pool of investor dollars. Why this July is different The $4 trillion municipal bond market ran a reasonably decent first half of 2026. The Bloomberg Municipal Bond Index posted a return of +0.96% in June and closed out the second quarter at +2.50%. Then July arrived. When Treasury yields rise, muni yields have to follow to stay competitive. That means the price of existing muni bonds falls. Layer on top of that a surge in new bond issuance from states and cities trying to lock in financing, and you get a supply-demand imbalance that pushes prices down further. The backdrop matters here. Total US government debt now exceeds $39 trillion ...