American Century’s Gotelli: Munis See Strong Demand, Yields

Joe Gotelli, vice president and senior portfolio manager at American Century Investments, reported that record municipal bond issuance this year has met strong investor demand, producing attractive yields and prompting managers to focus on security selection and carry as they position portfolios for the second half of 2026.

He noted the market shifted from underperformance in late spring to outperformance in summer as investors responded to high absolute yields. Gotelli pointed to substantial inflows into municipal mutual funds and ETFs, steady retail demand and continued interest from high-net-worth buyers seeking tax-free income.

Portfolio teams are extending duration and moving further out on the yield curve. Munis are priced near fair value at the 10-year point and appear richer in the two-year sector. That relative valuation has led managers to add carry while remaining selective across sectors and securities.

Gotelli highlighted near-term influences on returns, noting U.S. interest-rate policy is unlikely to change significantly in the short term and that the conflict in the Middle East remains an overhang on markets.

“We’ve seen near record inflows into mutual funds and ETFs. The absolute levels of yields available in our marketplace are quite attractive,” he noted.

He identified areas where investors can take structural risk instead of credit risk, citing the energy prepay sector as one example. Monitoring Treasury yields and inflation remains important for assessing relative performance.

“If Treasury yields rise modestly, munis probably outperform as long as the flows stay stable. And then on the other hand if Treasury yields were to fall, we’re in an environment where munis are already so fairly valued that we probably just underperform from a relative standpoint. We are not necessarily expecting a large negative total return outcome in the second half of the year,” Gotelli explained.

He suggested municipal bond strategies such as the American Century Diversified Municipal Bond ETF (TAXF) can help reduce taxable income while accessing current yield levels. Active security selection and thoughtful allocation remain central to managing risk and pursuing income in the municipal market.