Municipal bonds issued by state and local governments have performed well in the first half of 2026, with investment-grade munis returning 2.16% and high-yield tax-exempt munis returning 3.74%, translating to tax-adjusted returns of 3.7% and 5.59%, respectively, according to Bank of America. Investors are drawn to these bonds for their stability and tax-exempt income.
Tom Kozlik from HilltopSecurities anticipates continued interest in munis, although he cautions that returns may not be as robust as in the first half due to ongoing geopolitical tensions and energy price fluctuations. Barclays remains optimistic about the asset class, predicting solid returns despite challenges like elevated supply and interest rate uncertainty.
Conversely, UBS has downgraded munis to neutral, citing risks from renewed U.S.-Iran tensions and inflation. AllianceBernstein expresses confidence that demand will match the record bond issuance levels, suggesting that munis could yield favorable returns by year-end.
Analysts recommend focusing on credit selection as local governments adapt to tighter budgets post-pandemic, with opportunities in general obligation and essential service revenue bonds. They highlight the importance of issuer financial health and sustainable spending.
Additionally, there are attractive yields available for longer-dated bonds and specific sectors such as affordable housing and healthcare, which are expected to benefit from demographic trends