What Could Muni Investors Expect in 2026?

Lawrence Gillum (00:00):

Municipal investors had a positive year in 2025, and with elevated yields, still sound fundamentals, and some surprising shifts beneath the surface, the muni market may be offering more opportunity and more nuance than many realize. So in this edition of the LPL Street View video, we examine what could be in store for the muni market in 2026, amid still attractive yields and changing market dynamics. Before we look ahead, let's look back at 2025 because we think last year's themes will persist in 2026, Treasury market volatility, record issuance, and big structural shifts in investor behavior, all shaped muni performance last year. In April, for example, we saw one of the sharpest spikes in Treasury yields since 2020 and muni yields moved higher alongside them. The good news is that interest rate volatility fell significantly toward the end of last year and entered 2026 at the lowest level since 2021.

Lawrence Gillum (00:58):

On the supply side, issuance hit record levels in 2025, nearly 600 billion, driven by infrastructure needs, refundings and new capital projects. We expect another 600 billion in issuance again this year, and you can't have a 2026 outlook without talking about artificial intelligence. And yes, even in the normally staid muni market, AI infrastructure will also play a role. Data center expansion requires massive water and utility upgrades, and that will increasingly flow through the muni market. One of the biggest structural shifts in the market remains the surge into ETFs. In 2025, muni ETFs saw nearly 40 billion in inflows, double the prior year, while mutual fund flows continued to shrink. This shift improves liquidity and transparency, but also changes demand patterns, especially for long duration bonds where mutual funds have historically been the key buyers. Turning to the yield curve, the muni curve steepened meaningfully in 2025. The chart shows two municipal yield curves, the orange line, which is from December 2024, and the blue line, which is from December 2025.

Lawrence Gillum (02:03):

The December, 2025 curve is noticeably steeper. Short maturity yields have moved lower, while longer term yields have moved higher, creating a wider spread between the front end and the long end. The middle portion of the curve, roughly the 10 to 20 year range stands out because yields there remain elevated without requiring investors to move into the longest maturities. That's why we believe intermediate maturities offer the most attractive balance of income and risks today. And fundamentals remain solid. State and local tax revenues hit a record 2.1 trillion supported by strong income and sales tax collections, and the public pension picture is improving. Nearly half of plans are now fully funded or close to fully funded. So what does this mean for investors? Valuations remain attractive, especially versus investment grade corporates. In fact, muni tax-equivalent yields look compelling for investors in tax brackets of about 28% or higher.

Lawrence Gillum (02:58):

And despite the expected records apply again in 2026, we believe demand will remain strong enough to absorb it, particularly with ETFs continuing to gain traction. So all in, we believe another 4–5% type return is realistic for munis in 2026, no guarantees of course, but the combination of yield levels, supportive fundamentals, and attractive valuations make this set up a constructive one. LPL advisors, make sure you check out the full muni outlook in the new Rate and Credit View available on the Resource Center. That's it for now, but for more information on global capital markets, make sure you're following us on our social media accounts. Take care.