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. Glad to have back with us senior fixed income strategist for the Americas, Sadeep Mukherjee. So with that, Sadeep, 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 to 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 munis 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, which followed the last third of last year. The 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 and 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 in a backdrop of where, you know, we have, you know, the third largest positive of inflows in the product on record for the time period so far this year. So I think that's going to continue. We haven't changed our outlook that we're looking for high single-digit returns in 2026. It's rocky because of geopolitical events that are affecting every market, but we think that will come through. When we think about what could you invest in that's going to be the least correlated to supply chains breaking, energy infrastructure, things along those lines, essential services. So, you know, the flow, the positive flows that I referenced before, 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 and $650 billion. So we think it'll be between $575 and $600 billion will be total supply. Let talk about the curve I mean the AAA curve is really steep some flattening recently but overall relative to its own historical levels and the tragedy curve the Munich curve is really steep. But there is interest rate risk out there. The Munich index duration has 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 to curve. Having said that, 10-year yields in Muniland 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 rallying 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 pick up 91% of the curve by extending out to 20 years. And we're doing that where appropriate. 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 of 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 to take a maturation risk. I think in dollar-denominated fixed income, that's the cheapest long-gration product that you should have. And I always think about it not only as a standalone in municipals, but if we think about how much money has gone into private credit, the 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 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? So maybe I'll take directly on your private credit spilling over to the muni market. No. AI is spilling over to the muni market. Not really. Not yet. If we look at even the most aggressive assumptions around public power, water-related borrowing, the ion-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 back to you know we 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, we're, it's, we're, Uni 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, the K-12 schools, which has been a robust sector for a long time, you look in the state of California, and long-term projections are that 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 family out-migration. So that's going to, 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. It does create 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 can make the argument if you can buy municipal high yield at a tax equivalent yield of 9-10% 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're compensated at 100 or 125 basis points incremental spread on XYZ projects 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 with 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 investment side of things, the products. So in recent years, we've seen, obviously, 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. 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 muni market, they thinking about a very simple buy or high grade kind of set it and forget it And you now seeing much more creative strategies in that wrapper And I think a large degree, that has to do with technology because oftentimes SMAs are 250,000 minimum, some of them smaller, 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 has 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, I think a lot of people think of ETFs versus the open-end mutual fund wrapper. I mean, the ETF wrapper, you have daily transparency into the portfolio. You have daily liquidity. You know, it fits so many financial advisors 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, and, you know, we close that mutual funds are one of the great efficient ways to have a lever bet on long duration munis and rates. So I think each one of these wrappers has their place, but I think the jury's in on what's going to grow and 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 tackling 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 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. Our insurance clients at BlackRock, if they're on any material widening would weave in long duration taxable munis in size. So the demand is very strong. It's a very technical market because 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 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 its insights. Thanks for taking the time and hope to see you again on this fall sometime. Thank you very much for having me. Good luck, everybody. its subsidiaries or affiliates. 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