Municipal Bonds Draw Interest After Fed Holds Rates

The Federal Open Market Committee left interest rates unchanged in its first meeting under Chair Kevin Warsh, and Fed funds futures show almost no probability of a July rate cut. Those conditions are leading some investors to reweight fixed-income holdings as they plan for the second half of 2026. Municipal bonds have drawn attention for their tax-exempt income even as issuance is elevated.

Municipal securities pay interest that is generally exempt from federal income tax and, in many cases, from state tax for residents of the issuing state. That tax treatment is most relevant for taxpayers in high-tax states or those in higher federal brackets. Market data and historical patterns show municipal sectors often have lower price swings than many corporate and Treasury segments.

“They are not immune to drawdowns-especially when rates rise quickly-but the combination of coupon income and generally stable credit quality has often helped cushion downside for total returns relative to other fixed income categories,” Cooper Howard of Charles Schwab noted. He added that those characteristics can make municipal bonds an option for investors seeking tax-aware income without high default risk.

Issuance of municipal debt is currently elevated. Higher supply can put downward pressure on prices and make total returns more sensitive to market technicals, while also creating opportunities for managers and traders to find relative value. Cooper Howard observed that increased issuance can cheapen valuations in places and improve the opportunity set for bond selection.

Credit quality varies by issuer. State reserve levels remain above long-run norms and revenue growth has been above trend in recent periods. Defaults among investment-grade municipal bonds have remained low over extended stretches, but some local issuers show weaker fiscal positions than others, so outcomes depend on issuer selection.

Exchange-traded funds provide a way to gain broad municipal exposure. Schwab’s Municipal Bond ETF (SCMB) holds about $3.9 billion, tracks the ICE AMT-Free Core U.S. National Municipal Index and has an effective duration of 6.7 years. The fund reported a 30-day SEC yield of 3.52% and an annual expense ratio of 0.03%, roughly $3 on a $10,000 investment.

Advisors note that whether municipal bonds fit a particular portfolio depends on an investor’s tax bracket, exposure to interest-rate moves and the ability to select or access credit quality. With the Fed holding policy steady and markets pricing out a near-term cut, municipal market performance will reflect issuance levels, rate movements and issuer-level credit trends.