Municipal bonds offer attractive yields as 2026 gains support demand

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Municipal bonds yields 2026

Highlights

Bank of America reports investment-grade municipal bonds returned 2.16% and high-yield munis 3.74% in the first half, with tax-adjusted returns of 3.7% and 5.59%.
UBS downgrades municipal bonds to neutral citing renewed U.S.-Iran strikes, inflation risk, and curve steepening, while Barclays maintains a positive position through year-end.
AllianceBernstein expects strong demand for new issuance and highlights value in longer-dated, mid-grade, and high-yield municipal bonds as local governments face budget tightening.

First-half performance and outlook

As reported by CNBC, municipal bonds issued by state and local governments are posting strong returns in 2026, with Bank of America calling both investment-grade and high-yield tax-exempt munis clear outperformers in the first half. The bank says investment-grade munis return 2.16% and high-yield munis return 3.74%, equivalent to tax-adjusted total returns of 3.7% and 5.59%, respectively.

Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities, says investors gravitate to munis for stability and that generationally attractive yields should remain available for at least the next few months. The Vanguard Tax-Exempt Bond ETF, for example, has a 30-day SEC yield of 3.5% and an expense ratio of 0.03%.

Barclays says the asset class remains well positioned through year-end despite the Iran conflict, elevated interest rate volatility and record supply. UBS is more cautious and downgrades munis to neutral from attractive, saying renewed U.S.-Iran strikes, inflation risks and curve steepening could create near-term pressure even though its broader second-half view remains constructive.

Credit selection and sector opportunities

AllianceBernstein expects investor demand to absorb heavy issuance and says municipal bonds are likely to finish the year with solid returns. The firm sees particular value in longer-dated bonds and in municipal credit, including mid-grade and high-yield debt, where relative value remains compelling.

Kozlik says investors should focus more closely on credit selection as local governments adjust to tighter budgets after years of federal pandemic aid. He says overall credit quality remains healthy, but issuers now need structurally balanced budgets and sustainable spending tied to recurring revenue rather than one-time support.

Among favored areas, market participants highlight general obligation bonds and essential service revenue bonds, including airports, water and sewer, and housing. AllianceBernstein also points to prepaid energy bonds, affordable housing bonds, alternative-minimum-tax airport bonds for eligible investors, and high-quality hospital and senior living bonds, which it says stand to benefit from supportive demographics and limited new construction.

Our earlier coverage of Austin’s convention center special tax revenue bonds explained how the city is financing the project with senior and junior liens backed by pledged hotel occupancy tax receipts. We noted the stronger security features and higher ratings on the senior bonds versus the subordinate junior bonds, alongside the key risk that travel disruptions or an economic downturn could pressure the pledged revenue stream.

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