Summary

• Over the quarter, Franklin Federal Tax-Free Income Fund outperformed its benchmark, the Bloomberg Municipal Bond Index, despite increased yields in the US Treasury market.
• The Fund's yield curve positioning detracted from relative performance, primarily driven by an overweight to municipal bonds with 20 or more years to maturity.
• Franklin Federal Tax-Free Income Fund's rating allocations benefited relative returns, led by an overweight to bonds with no external credit rating and an overweight to BBB rated bonds.
• Looking ahead to 2026, demand will play a crucial role as supply is projected to reach historical highs, primarily driven by infrastructure capital requirements that require non-stimulus funding.
• Rainy-day funds remain healthy at the state and local government levels, which should bolster fiscal resilience despite ongoing expense growth and slower economic expansion.

Key Takeaways

• Markets: In the first quarter of 2026, new issuance of municipal (MUNI) bonds exceeded the average seen in the past few years (Source: Barclays (BCS)). The war in the Middle East which began at the

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