The firm’s head of municipals says attractive valuations and improving flows point to further upside for the asset class.
Municipal bonds are drawing renewed attention from investors after a period of underperformance that has pushed yields and spreads to historically attractive levels.
Dan Close, Head of Municipals at Nuveen, tells InvestmentNews that the current environment resembles previous market dislocations that ultimately created compelling entry points for investors. He points to the scale of municipal underperformance relative to broader fixed income markets as a key factor behind the opportunity.
“The muni market underperformed the Bloomberg US Aggregate Bond Index, a broad-based benchmark for taxable fixed income, by more than 400 basis points during the first three quarters of 2025,” he says. “While performance improved in the third quarter, munis continue to lag the broader fixed income index by more than 200 basis points from the start of 2025 through February 2026.”
Dislocations of this magnitude are rare, he notes.
“Over the last twenty-five years, a dislocation of greater than 400bps vs. the Aggregate index has occurred four distinct times: 1) during the 2008 global financial crisis; 2) in 2011 when there were predictions of widespread muni defaults due to rising pension obligations, which did not come to fruition; 3) early 2020 during the Covid pandemic; and 4) in 2025 after the Liberation Day tariff announcement.”
Last year’s supply surge also contributed to the weakness.
“Last year, historic new issue supply of $570 billion in the municipal market combined with anemic inflows supported further underperformance,” Close explains. “Since 2000, when the performance spread for municipals compared to the Bloomberg U.S. Aggregate Bond Index has fallen below 400 basis points, munis have subsequently recovered relatively quickly to match the broader index and continued to outperform the index by a symmetrical ~400bps,” he says.
Relative valuations also stand out when compared with other bond sectors.
“Currently, yields on a diversified municipal bond portfolio are in the 69th percentile of where they have been over the past ten years, while spreads are in the 89th percentile,” Close notes. “By contrast, investment grade corporates offer yields in the 68th percentile but spreads in just the fifth percentile during this same 10-year period.”
A stabilizing role in portfolios
For retail investors who may have overlooked the sector in recent years, municipal bonds can play several important roles in portfolio construction.
“Municipal bonds play a critical role in diversified portfolios by generating income, acting as a ballast, and increasing after-tax risk-adjusted returns,” Close says. “Income drives nearly 85% of total return in investment grade municipals and over 100% of return for high yield municipals. During periods of market volatility, this income return can help absorb market declines,” he adds.
Close also argues that today’s higher starting yields make municipals particularly useful as a portfolio stabilizer.
“Since 2009, the S&P500 has experienced eleven periods of selloffs exceeding 5%, with an average max drawdown of -11.6%. During those periods, municipal bond returns were nearly flat, with a 2.9% average yield on AAA 10-year municipals,” he says. “Yields today are 100 basis points higher than at that time, providing even greater protection for portfolios.”
Why longer maturities look attractive
Another feature of today’s market is the steep municipal yield curve, particularly in the 10- to 20-year segment.
“The Municipal curve from 10 to 20 years is the steepest it’s been in fifteen years,” Close says. “Investors are demanding more yield to lend for longer, driven by fiscal policy and geopolitical risk.”
Supply dynamics have also played a role.
“In 2025, there was record issuance of $570 billion in the municipal market, paired with anemic inflows. However, sustained inflows year to date in 2026 are now driving outperformance more than 70% of the time.”
For investors willing to extend duration, the yield pickup can be significant.
“Nuveen favors longer dated muni bonds as the municipal curve is far steeper than the US Treasury curve,” Close says. “Municipal investors can capture an additional 130–170 basis points to extend from 10 years to 20–30-year maturities compared to Treasuries that only offer a pickup of 60–65 basis points.”
The difference between the curves is notable.
“There is a 75-basis point differential in the two curves, a meaningful figure that has averaged closer to 25 basis points over the last 25 years,” he adds. “We see two paths forward for the curves to normalize: either the Treasury curve steepens, or the municipal curve flattens. Both scenarios bode well for investors willing to extend duration.”
Still, investors should recognize the trade-offs.
“Longer dated bonds come with greater interest rate risk and potential market value fluctuation,” Close cautions. “Should rates move higher, longer bonds would be exposed to potential market losses. However, this is offset by high starting yields that translate into higher coupon payments over time.”
Evaluating tax advantages
Municipal bonds’ tax advantages remain one of their defining characteristics, but investors need to evaluate them carefully relative to their own financial situations.
“The taxable-equivalent yield (TEY) metric reveals the yield an investor would need to earn on a taxable investment – such as a corporate or Treasury bond – to match the tax-free yield of a municipal bond,” Close explains. “Investors should consider factors including in-state tax burden, future tax liability, investment horizon, and current interest rates,” he says.
Future changes in income can also influence the calculation.
“Investors may also consider Required Minimum Distributions or future liquidity events that could increase marginal tax rates,” Close adds. “Extending duration to lock in today’s higher after-tax yields may be attractive as investors think about their personal tax situations.”
Strong credit fundamentals
Despite economic uncertainty, Close believes state and local government credit fundamentals remain solid.
“State and local government issuers remain resilient. Tax collections continue to grow, up nearly 5% through the first three quarters of 2025 as compared to the prior year. This marks the ninth consecutive quarter of growth in this crucial revenue stream,” he says. “Reserve levels stand at all-time highs at 14% of expenditures, compared to 8% pre-pandemic.”
At the same time, governments are preparing for a potentially slower economy.
“State and local governments have budgeted conservatively as they prepare for a potential economic slowdown and federal government pullback,” he says. “Expenditure growth is slowing, and many are seeking to enhance revenues.”
Their flexibility to adjust budgets adds another layer of resilience.
“States have broad authority to raise revenues through taxes and fees and to reduce expenditures through program cuts to balance budgets,” Close says. “While these are difficult decisions to make, this flexibility and historical precedent highlight their resiliency.”
Opportunities across sectors
Within the municipal market, Close sees particularly attractive value in essential services sectors.
“We see opportunities in essential services sectors with monopolistic characteristics such as state and local governments, water and sewer utilities, and public power utilities,” he says. “For state and local governments, we see opportunity in A-rated general obligation bonds at current spreads as compared to other sectors,” Close adds.
Infrastructure investment is another potential driver.
“Public power and water utilities look attractive particularly given expected issuance increases to fund capital projects driven by AI and data center demand for increased power and water,” he says. “In healthcare and higher education, there are attractive entry points for credits with strong fundamentals that may face spread widening driven by headline volatility,” Close notes.
He points to a recent example.
“Last spring, when the Trump administration threatened the university’s tax-exempt status, spreads on Harvard’s Aaa-rated bonds widened from 29 to over 80 basis points,” Close says. “Since that time, spreads on Harvard’s bonds have reverted to their pre-headline levels.”
A recovery may just be starting
Flows returning to the municipal market could signal the early stages of a recovery.
“The combination of renewed inflows and historical return patterns during recovery cycles creates a compelling environment and opportune moment for municipal allocations,” Close says. “Flows have returned to the municipal market, which received $17.6 billion inflows year-to-date in 2026 across open-end funds and ETFs,” he notes. “Inflows are highly correlated with positive returns.”
If historical patterns hold, the rally could have further to run.
“The municipal market is also in the early stages of its recovery, with potential for approximately 600 basis points of additional positive performance if history is a guide,” Close says. “Currently, munis are underperforming the Bloomberg US Aggregate Bond Index by more than 200 basis points from 2025 through February 2026, having recovered from its underperformance of over 400 basis points in 2025.”