The municipal bond market has rebounded from the technical pressures of the first half of 2025 caused by record-setting issuance.¹ As 2026 begins, we believe that municipal fiscal conditions continue to be strong. State budgets for fiscal 2026 overall reflect a healthy environment, and general fund balances remain well above the historical average even as they continue to ease from 2023’s peak. Though state general fund revenue has fallen off the record pace of fiscal 2021 and 2022 as the impact of Covid–era relief waned, it has continued to grow, and modest revenue gains are expected in fiscal 2026. Budgets enacted to date suggest flat general fund spending in 2026, and most states plan to maintain or increase the size of their rainy-day fund—many of which are already at nominal highs—in anticipation of future needs.²

Another sign of fiscal strength can be found in improved pension funding, as the aggregate median ratio for local-government pensions climbed to 80% in fiscal 2024 from 78% in fiscal 2022. While this can be attributed in part to market performance, local governments have increased contributions and tweaked their benefit structures, demonstrating improved funding discipline and better long-term sustainability.³

Overall, muni bond ratings activity has been positive in 2025, but not by much: Positive activity (including both upgrades and favorable outlook revisions) outpaced negative activity at a rate of 1.4x year to date through November.⁴ Both defaults and first-time distressed debt remained very low in 2025.⁵

Muni yields are still attractive relative to their historical averages, in our view, and current dynamics provide particularly favorable conditions managers to uncover attractive opportunities through fundamental, research-driven credit selection.

Select energy names rallied in early January—particularly oilfield services, US refiners and producers with historical exposure to Venezuela—as investors priced in the possibility that the country’s long-sanctioned oil sector could reopen following the arrest of Venezuelan President Nicolás Maduro.¹ With more than 300 billion barrels of accessible resource—the largest proven oil reserves in the world—markets are excited by this possibility.² We believe that any potential meaningful impact is likely to unfold far more slowly than markets anticipate given the estimated cost and complexity of such an endeavor.

Despite making up approximately 17% of global oil reserves, Venezuela produces less than 1% of global crude supply, a fraction of its capacity.³ Years of sanctions and chronic underinvestment have left production capacity severely impaired, and most of Venezuela’s oil is extra heavy crude, which is more expensive and difficult to extract, transport, process and refine. Estimates suggest that it would require tens of billions of dollars to rehabilitate Venezuela’s existing oil fields and pipelines in order boost output within a few years.⁴ The country’s entire energy complex is operating well below any comparable global resource base.

In our view, any material contribution to global oil supply would likely take two to three years at a minimum with nearly $100 billion of investments. Moreover, large energy companies have publicly expressed the need for improved fiscal terms, as well as broader security and legal assurances, which we believe reflects the broader risks of the current geopolitical landscape.⁵

Without any quick fixes in sight, we believe that select legacy energy businesses in possession of scarce, vital assets in stable jurisdictions with a record of prudent stewardship of capital may be better positioned to meet the world’s long-term energy demands.