Municipal bonds enter 2026 as a compelling option for investors: attractive yields, strong fundamentals, and structural changes that continue to reshape the market. After a volatile 2025, marked by Treasury market dislocations and record muni issuance, the outlook for this year suggests more stability — and opportunity.
Return Expectations
We think a 4%-5% return is a reasonable return expectation for the national municipal market in 2026, supported by a stable Treasury rate environment and attractive tax-equivalent yields. While last year’s returns fell slightly short of the 5% target, current valuations and curve dynamics make a repeat performance plausible.
Supply and Demand Dynamics
Issuance remains a key theme. After hitting $600 billion in 2025, supply is projected to stay near record levels again this year. Drivers include infrastructure financing, refunding activity, and capital projects — plus ripple effects from the artificial intelligence-driven data center boom. These facilities consume vast water resources, prompting municipalities to invest heavily in water and sewer infrastructure, estimated at $1.2 trillion over 20 years.
Despite heavy supply, demand has proven resilient. ETFs absorbed nearly $40 billion in flows last year, outpacing mutual funds and signaling a structural shift toward more liquid, transparent investment vehicles. Historically, mutual funds were the dominant vehicle for municipal bond investment. But that changed last year and is expected to continue to change in 2026. The number of municipal mutual funds has fallen below 500, while ETF offerings have surged. This migration introduces greater intraday liquidity and price transparency, but it also alters demand dynamics — particularly for bonds beyond 20-year maturities.
Source: LPL Research, Bloomberg 01/09/26
ETFs typically concentrate on shorter and intermediate maturities, leaving the longest tenors dependent on a shrinking pool of mutual funds. As a result, long-duration muni yields may remain elevated, even as shorter maturity yields fall. For investors, this means intermediate maturities (10–20 years) look compelling, offering strong carry and roll-down potential.
Curve Opportunities
The muni curve steepened significantly in 2025, making intermediate maturities (10–20 years) particularly attractive. Investors willing to extend duration selectively can capture additional carry and roll-down potential, enhancing total returns.
Fundamentals Remain Strong
Municipal credit quality looks solid. Tax revenues hit a record $2.1 trillion, and public pension funding has improved dramatically, with nearly half of plans at or near full funding. These factors reduce downgrade risks and support market stability.
Investor Takeaways
Valuations remain compelling, especially versus investment-grade corporates. For investors in higher tax brackets, munis may offer compelling after-tax yields. While supply pressures persist, strong demand and healthy fundamentals suggest another year of positive returns (no guarantees of course).
Bottom Line: Attractive yields, a steep curve, and robust credit fundamentals position municipal bonds as a strong candidate for portfolios in 2026. Expect structural shifts — like ETF growth — to continue shaping the market, but the math still favors munis in our view.
Expect structural shifts — like ETF growth — to continue shaping the market, but the math still favors munis in our view.
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Important Disclosures: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.