Achieving Superior Returns in the Municipal Bond Market

Q2 2026 Performance Exceeds Expectations

In the second quarter of 2026, the Franklin Federal Tax-Free Income Fund's Advisor Class, after accounting for all fees, significantly outperformed the Bloomberg Municipal Bond Index, its designated benchmark. This positive outcome underscores the effectiveness of the fund's strategic investment decisions during a dynamic market period.

Strategic Allocations Driving Success

The fund's strong performance was largely attributed to its strategic positioning within the municipal bond market. A notable overweight allocation to municipal bonds with maturities extending 20 years or more proved beneficial. Additionally, the fund's preference for bonds rated BBB and A, alongside careful security selection within the A and AA rated segments, contributed positively to returns.

Navigating Market Dynamics and Yield Shifts

During the second quarter of 2026, the municipal bond market experienced sustained activity, with new issuances maintaining a robust pace, exceeding the previous year's figures by over 8%. Concurrently, the yield on the benchmark 10-year US Treasury note increased by 15 basis points, reaching 4.47% by the end of the quarter. This upward movement in yields reflects broader shifts in the fixed income landscape, which the fund successfully navigated.

Tactical Adjustments and Risk Management

To optimize performance and manage risk, the fund also made tactical adjustments, including an overweight position in municipal bonds that lacked external credit ratings. Conversely, an underweight allocation to municipal bonds with maturities ranging from five to ten years helped mitigate potential negative impacts from that segment of the market. These decisions collectively enhanced the fund's overall performance profile.