BBH Municipal Fixed Income Quarterly Update

BBH Municipal Fixed Income Quarterly Update – Q2 2026

June 30, 2026

Gregory Steier

Portfolio Manager, Gregory Steier, provides an analysis of the investment environment and most recent quarter-end results of the Municipal Fixed Income strategy.

Highlights

Kevin Warsh was sworn in as chair of the Federal Reserve in May 2026, taking the reins in uncertain times. Despite initial concerns that he would steer the Fed toward easing, investor expectations now predict two rate hikes over the next 12 months.

The municipal market bounced back during the quarter, with mutual fund and exchange-traded fund (ETF) assets benefiting from the longest inflow cycle on record and high yields and incoming capital driving strong demand for new issuances.

Our intermediate benchmark returned 1.3%, and our portfolios outperformed the benchmark by 55 bps, due to the yield advantage of our portfolios driven by investments in niche sectors, such as housing, and in securities with non-standard structures. Our portfolios also benefited from the recovery of longer-maturity bonds.

Fast Car

Many view the municipal market as slow and safe compared to other fixed income markets. It is not the fast car flashing through the racetrack, but rather the steady and reliable car you would let your teenager drive. In practice, however, municipals also face twists, turns, and potholes, and navigating them requires the same preparation, precision, and discipline it takes to win on race day.

There have been plenty of hazards to avoid this year, with more undoubtedly to come. On May 22, 2026, Jerome Powell’s arduous eight-plus-year tenure as the Federal Reserve (Fed) chair ended. Powell led the Fed through a global pandemic, fought the subsequent inflation, and staunchly defended the Fed’s independence. Enter Kevin Warsh – the new chair – and his five task forces. A vocal critic of the Fed in recent years, Warsh plans to systematically review its major operating tenets, including:

Task force	Objective
Fed communications	Optimize policy messaging
Balance sheet policy	Reduce holdings
Data gathering	Evaluate additional sources
Productivity and jobs	Impact of AI
Inflation frameworks	Review alternate measures

Warsh took the reins of the Fed during uncertain times, with elevated inflation, an unresolved Middle East conflict, and the unknown impact of artificial intelligence (AI) and its massive infrastructure buildout. He will likely find it difficult to ignore the continued $1 to $2 trillion federal fiscal deficits and the sitting administration’s expectations for lower rates. Despite initial concerns that Warsh would quickly steer the Fed toward easing, investor expectations now center around two rate hikes over the next 12 months.

Yields across the curve began second quarter 2026 in the mid-90th percentile of observations post-Global Financial Crisis, with the five-year at 2.67%, the 10-year at 3.12%, and the 20-year at 4.12%. Investors took notice, and with a ceasefire between the U.S. and Iran beginning in early April, the municipal market bounced back strongly during the quarter. Households, which own roughly 75% of the market either directly or through funds, continued to grow their investments via both avenues. Notably, mutual fund and exchange-traded fund (ETF) assets have benefited from the longest inflow cycle on record (129 weeks as of the latest reading in June 2026). High yields and incoming capital have driven strong demand for new issuances, especially those with wider spreads, which have been met with high subscription levels. Overall, the record-paced level of new issuance has been easily absorbed.

Read image caption

Charts depicting the municipal yield history for five-, 10-, and 20-year maturities. Yields began second quarter 2026 at 2.67%, 3.12%, and 4.12%, respectively.

For the quarter, long-maturity bonds led the rally, with yields declining 35 basis points (bps)¹, followed by intermediate maturities, whose yields fell 20 bps. Short-maturity yields fell moderately. We have been highlighting the return potential of 10- to 20-year maturities for quite some time, and the market has begun to respond. On the credit side, lower-rated bonds outperformed, with triple-B bonds returning 3.5% for the quarter, ahead of triple-A bonds by around 100 bps.

Our intermediate benchmark returned 1.3% in second quarter 2026, bringing its year-to-date return into positive territory at 1.1%. We are happy that our portfolios outperformed the benchmark by 55 bps, bringing our year-to-date performance ahead by 99 bps. Even though our portfolios hold minimal levels of triple-B bonds and no high yield, we still outperformed for the quarter. We attribute this result to the yield advantage of our portfolios, largely driven by investments in niche sectors, such as housing, and in securities with non-standard structures. Our portfolios also benefited from the recovery of longer-maturity bonds.

Municipal credit continues to face strong headwinds which could impact healthcare, higher education, state and local government, airport, and toll road sectors, among others. The 2025 One Big Beautiful Bill Act (OBBBA) significantly altered Medicaid by imposing stricter eligibility requirements for patients and limiting federal Medicaid funds available to healthcare providers, which could strain hospitals’ margins. At the same time, the federal administration has taken a stricter stance on grant funding for universities and on immigration. This could strain university budgets, both directly (if it leads to lower grant revenues) and indirectly (if it causes declines in enrollment and thus student revenues). In fact, international enrollment is down nearly 20% from last year. The administration has also reduced support for the Supplemental Nutrition Assistance Program (SNAP) and sought to scale back Federal Emergency Management Agency (FEMA) funding, shifting more costs to states. The conflict in the Middle East has added another layer of risk, driving up fuel prices and exacerbating already-elevated inflation. There are additional stress points, and we view credit as past its high-water mark. Market valuations spin a different story and imply few risks ahead. Keep your seatbelt on; it pays to be cautious.

Even with these headwinds, the opportunity set remains broad. Market dynamics allow us to purchase high-quality bonds at attractive yields. During second quarter 2026, we added several bonds, including a prepaid energy bond backed by Alphabet Inc., parent company of Google. Funding recipients for prepaid energy bonds are typically banks or insurance companies; the Alphabet-backed transaction was the first where the funding recipient is a technology company. The deal priced at about +90 bps for nine-year paper, significantly wider than where corporate bonds were trading. We also purchased a 10-year prepaid energy bond, backed by Citigroup Inc., at a spread of +150 bps. Beyond prepaid energy bonds, we continued to add to our airport holdings, including Houston for +80 bps, and to our housing exposure, including multiple planned amortization class (PAC) bonds in the +90-bp spread range and a Freddie Mac-backed floating rate note at Secured Overnight Financing Rate (SOFR) +40 bps. The Freddie Mac yield equates to roughly 4% today and a spread of over +100 bps relative to a traditional municipal money market index. Our team remains excited about the opportunity set in front of us.

Fast cars can be impressive, but they can also prove temperamental and dangerous if they are poorly engineered. Race results often depend on design nuances that are invisible to the untrained eye. With proper engineering, speed, handling, and aerodynamics work in harmony – much like in a well-constructed portfolio. We focus on niche sectors and securities with non-standard structures that avoid the concentrated demand of traditional municipal investors. Steering clear of this congestion allows us to build portfolios of above-average quality that also produce above-average income. Why sit in traffic when you can enjoy the open road? Thank you for your trust and for joining us on the ride.


Performance as of June 30, 2026
	Total Returns		Average Annual Total Returns
Composite/Benchmark	3 Mo.	YTD	1 Yr.	3 Yr.	5 Yr.	10 Yr.	Since Inception
BBH Municipal Fixed Income Composite (gross of fees)	1.89%	2.10%	6.43%	4.89%	2.27%	2.83%	3.74%
BBH Municipal Fixed Income Composite (net of fees)	1.83%	1.97%	6.16%	4.63%	2.02%	2.57%	3.48%
Bloomberg Municipal Index 1-10 Yr Blend (1-12)	1.34%	1.11%	4.48%	3.42%	1.36%	1.92%	3.21%
Returns of less than one year are not annualized. Inception date: 05/01/2002. Past performance does not guarantee future results. Sources: BBH & Co. and Bloomberg


Representative Account Top 10 Obligors As of June 30, 2026
State of Texas	2.8%
Texas School Bond Guarantee Program	2.5%
Southeast Energy Authority Energy Supply Revenue Bonds Series 2025E	2.5%
South Carolina Mortgage Revenue Bonds	2.3%
Missouri Housing Development Commission Single Family Mortgage Revenue Bonds	2.3%
Port of Seattle - GARBS and PFCs	2.3%
State of New Jersey	2.3%
Houston Airport Enterprise, TX	2.0%
Oregon School Bond Guarantee Program	2.0%
Texas Department of Housing and Community Affairs Single Family Mortgage Revenue Bonds	2.0%
Total	23.1%
Sources: Bloomberg and BBH Total may not sum due to rounding.

¹ One basis point (bp) is equal to 1/100th of 1%, or 0.01%.

RISKS

There is no assurance that a portfolio will achieve its investment objective or that the strategy will work under all market conditions. The value of the portfolio can be affected by changes in interest rates, general market conditions and other political, social and economic developments. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.

Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, maturity, call and inflation risk; investments may be worth more or less than the original cost when redeemed.

Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.

The Strategy also invests in derivative instruments, investments whose values depend on the performance of the underlying security, assets, interest rate, index or currency and entail potentially higher volatility and risk of loss compared to traditional stock or bond investments.

As the Strategy’s exposure in any one municipal revenue sector backed by revenues from similar types of projects increases, the Strategy will become more sensitive to adverse economic, business or political developments relevant to these projects.

The Representative Account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the strategy.

The objective of our Municipal Fixed Income Strategy is to deliver excellent after-tax returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying municipal fixed income accounts with an initial investment equal to or greater than $5 million that are managed to an average duration of approximately 4.5 years. Portfolios that subsequently fall below $4.5 million are excluded from the Composite.

Bloomberg 1-10 Year Municipal Bond Index is a component of the Bloomberg Municipal Bond index, including bonds with maturity dates between one and 17 years. The Bloomberg Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. One cannot invest directly in an index.

Bloomberg US Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $300 million par amount outstanding and with at least one year to final maturity.

Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers. The Index is a component of the US Credit and US Aggregate Indices.

“Bloomberg®” and the Bloomberg Indexes are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes byBrown Brothers Harriman & Co (BBH). Bloomberg is not affiliated with BBH, and Bloomberg does not approve, endorse, review, or recommend the BBH Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the fund.

Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

To receive additional information regarding IM, including a GIPS Composite Report for the strategy, contact John Ackler at 212 493-8247 or via email at john.ackler@bbh.com.

Gross of fee performance results for this composite do not reflect the deduction of investment advisory fees. Actual returns will be reduced by such fees. Net of fees performance results reflect the deduction of the maximum investment advisory fees. Returns include all dividends and interest, other income, realized and unrealized gain, are net of all brokerage commissions, execution costs, and without provision for federal or state income taxes. Results will vary among client accounts. Performance calculated in U.S. dollars.

Holdings are subject to change.

Credits: Obligations such as bonds, notes, loans, leases and other forms of indebtedness, except for Cash and Cash Equivalents, issued by obligors other than the U.S. Government and its agencies, totaled at the level of the ultimate obligor or guarantor of the Obligation. Issuers with credit ratings of AA or better are considered to be of high credit quality, with little risk of issuer failure. Issuers with credit ratings of BBB or better are considered to be of good credit quality, with adequate capacity to meet financial commitments. Issuers with credit ratings below BBB are considered speculative in nature and are vulnerable to the possibility of issuer failure or business interruption.

Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2026. All rights reserved.

NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE MONEY

IM-18783-2026-07-10 Exp. Date 10/31/2026