I’m so glad I live in a world where there are Octobers. – L.M. Montgomery, “Anne of Green Gables” (1908)
I’m so glad I live in a world where there are Octobers.
Have U.S. bond yields already hit their highs for 2026? The retreat in the 10-year Treasury yield from 5.31% in early October to below 5% raises the possibility that another autumn turning point is behind us. In Another October Peak for Treasury Yields?, we considered whether the October 2023 peak in Treasury yields might repeat itself in 2026. Municipal closed-end funds (CEFs) might seem like an obscure place to look for further evidence, but their distinctive seasonal behavior offers another perspective on the forces shaping bond markets.
Municipal CEFs have exhibited remarkably consistent seasonal behavior. Since 2006, October has been their weakest month, averaging a total return of negative1.2% and producing losses in 15 of 20 years. January has been the strongest, averaging a 2.7% gain with positive returns in 17 of 20 observations. Median returns of negative 0.7% in October and positive 2.6% in January suggest the pattern is not simply the result of a few extreme years. November has also been favorable, averaging a 1.3% gain.
Tax-loss selling offers a compelling explanation. Although often associated with equities, tax-loss harvesting is also an important feature of fixed income markets. Municipal investors are especially sensitive to taxes, given that tax advantages are central to the appeal of the asset class. Selling securities at a loss to offset taxable gains can create additional pressure toward year-end. Municipal CEFs are particularly susceptible because their shares can trade at discounts to the net asset value (NAV) of their underlying bond portfolios. Tax-driven selling can widen these discounts, allowing investors to acquire exposure to the underlying bonds at a lower price relative to NAV. Fund leverage can further amplify the effect of changes in bond prices and financing costs.
This behavioral explanation has academic support. A 2006 study published in The Journal of Finance found a January effect in municipal CEF shares that was absent from their underlying assets, with tax-loss selling explaining much of the difference. Nearly two decades later, the recurring seasonal pattern suggests that tax considerations and investor behavior continue to exert an influence on municipal CEF returns.
Higher bond yields throughout much of 2026 have left many investors with unrealized losses, increasing the incentive for tax-loss harvesting as the year draws to a close. This selling might have reinforced weakness across fixed income markets, particularly in municipal bonds, and added to the upward pressure on yields in October. If October ends up marking the high in Treasury yields, improving bond prices could provide one source of support for municipal CEFs as seasonal selling pressure begins to subside.
Historical seasonality does not guarantee a recovery, and October losses have not reliably predicted unusually strong subsequent gains. Still, the possibility that Treasury yields have peaked coincides with a historically favorable period for municipal CEFs. Even a modest recovery in the underlying bonds could be amplified if discounts to NAV narrow as tax-related selling diminishes. Investors might find that the end of seasonal selling pressure offers as much opportunity as the direction of interest rates.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
