The muni market is thriving through the first half of 2026 despite ongoing headwinds.
So far this year the market has faced rising inflation, geopolitics and issuer-level dispersion, all of which are valid concerns for participants.
Despite these factors, Charles Schwab Director of Fixed Income Research and Strategy Cooper Howard believes munis remain attractive, especially for investors in the higher tax brackets due to their fundamentals: a combination of high credit quality and after-tax income, coupled with lower volatility than other bond sectors. The securities also retain solid, broad state and local credit fundamentals.
"In our view, the current muni market — characterized by complexity and significant dispersion across sectors, structures, coupons and credit profiles — presents an expanded opportunity set for experienced active managers," Lord Abbett Director of Tax Free Fixed Income Daniel Solender
Having access to "a broader inventory of new issues — including institutional offerings that may not be widely available through traditional retail distribution channels — can provide a meaningful advantage in identifying relative value opportunities," he said.
Demand has been insatiable this year, with the trend of positive municipal bond fund flows that started in 2024 continuing.
Inflows ($48.2 billion) so far this year are on pace to surpass last year's total ($63 billion), according to data from LSEG Lipper.
However, the strong pace of inflows this year has not fully offset the outflow totals from 2022, suggesting steady inflows could continue if rates remain supportive of individual investor demand, Solender said.
In the second half of the year, Howard thinks "demand is the key swing factor."
"Elevated issuance is likely to define the market in the back half of the year," Howard said. "Supply has stayed high because infrastructure costs remain elevated, post-pandemic fiscal support has faded, and issuers still need financing for important projects."
The market is banking on firm investor demand from fund flows, reinvestment and separately managed accounts, to allow the market to absorb the increasing supply without major disruption.
"If demand weakens, yields may need to rise to clear the market, which would pressure prices and total returns," Howard said.
Moving forward, he recommends staying "selective and somewhat defensive on rates and credit in the muni market."
Even though the outlook looks "constructive," risks continue to rise with current events.
