As Operation Epic Fury unfolds over the coming days and weeks, the global financial markets are likely to display heavy volatility, with subsequent moves in asset valuations not necessarily intuitive. The immediate response for oil and natural gas prices is an upward spike, given the potential for supply disruptions, particularly for movements through the Strait of Hormuz. Equity markets immediately encountered a "risk-off" trade, but recovery is noted as of this writing, with a rotational shift into haven stocks. Bond yields are signaling a greater concern over inflation — with stagflation a feared scenario — and interest rate shifts rather than a "flight-to-quality" bid as energy-related shocks set in.
During episodic geopolitical stress, muni market stakeholders should remain vigilant in their respective roles. Supply and demand dynamics could be influenced by heightened uncertainty, but I would suggest staying focused on what we know. Many issuers will be relying heavily on their municipal advisors for strategic guidance and a fresh perspective on overall risk assessment in terms of market access, investor appetite, execution, spread conditions and liquidity. This is a time when issuer disclosure can make a difference, with any shift in revenue performance, real or perceived, becoming a pronounced material event. Again, we are in the early stages of the Iranian crisis, without an understanding of the full set of ramifications.
For now, the duration of the U.S. and Israeli military campaign is unknown, challenging the current views on monetary policy and the overall investment calculus. Treasury yields are not expected to follow a singular trajectory as the struggle between a desire for haven assets and positioning for higher inflation may hold bond prices to a wider trading range. While munis may initially move in sympathy with U.S. Treasury securities, existing fundamentals and technicals may allow the asset class to chart its own course.
Any attendant boost to muni yields will offer even greater opportunity to capture tax-exempt income. As I stated in my 2026 muni market outlook, performance is expected to be driven by "carry" attribution. Sector allocation, yield-curve management, best execution, and security selection with active fundamental credit analysis can go a long way toward investment performance as opposed to making bets on interest rates.
Since the beginning of the year, Lipper fund flows have been strong, and I would argue they should remain so. Barring any domestic attacks on U.S soil, including cyber attacks, the municipal securities market should remain resilient and relatively insulated from these developing events. I suspect the Trump administration desires to stabilize oil prices as soon as possible, but it is too soon to offer meaningful prognostications.
For now, I do not see a substantive impact on muni credit. Nevertheless, a greater emphasis may be placed on high-quality municipals, such as strong state and local general obligation bond issuers displaying diversified tax bases, high reserve levels, and budgetary flexibility, and essential purpose revenue bond credits having consistent operating performance, tight legal provisions, and clearly defined bondholder rights and remedies.
Energy-centric local economies and port credits may fall under pressure given the potential for supply chain disruptions. Specific travel-related displacement may place some pressure on various airports, but I would note this sector is historically resilient with ample liquidity on hand.
The market can witness a period of spread widening in certain areas of the muni high-yield space, while spreads on higher-quality credits can tighten. Depending on the depth and breadth of the Middle East crisis, elevated bid-wanted lists and perhaps a degree of price discovery could ensue, but I do not foresee a material seizing up of credit.
SMA portfolios will maintain a quality bias, with selective duration extensions and potential sector rebalancing. Should a protracted war materialize, heavier Treasury issuance and deficit expansion could place upward pressure on long-end bond yields.
