Munis rebound in 2026: where to find yield

Municipal bond prices recovered after a weak start to 2026, and intermediate municipal bonds currently offer a meaningful yield gap versus government money market funds for top-bracket taxpayers, market participants said during a Tuesday webcast hosted by SS&C ALPS Advisors and Brown Brothers Harriman.

Greg Steier, co-head of fixed income and lead municipal portfolio manager at Brown Brothers Harriman, said the market is on track for a third straight year of record new issuance. During a live poll of webcast attendees, more than half correctly estimated the municipal market at about $4.5 trillion. Panelists also cited roughly $150 billion in inflows to municipal funds and ETFs over the past two-plus years.

Steier highlighted the yield differential on a pre-tax equivalent basis, saying the gap between intermediate munis and government money market funds runs 150 to 200 basis points for investors in the highest federal tax bracket. He said investors willing to extend maturities can find roughly 4% on a 20-year municipal bond, which converts to nearly 7% on a pre-tax equivalent basis for top-bracket filers.

Speakers discussed shifting rate expectations as part of the market backdrop. At the start of 2026, markets priced in two Federal Reserve rate cuts; that view has since moved to imply about two rate increases before mid-2027. Panelists also cited recent hostilities in the Middle East as a factor that has put simultaneous pressure on both inflation and economic growth.

The webcast outlined how the municipal market structure creates pockets of extra yield. Household investors dominate muni ownership and concentrate buying on familiar issues, such as highly rated general obligation bonds from their home states. That concentration can leave less-followed sectors offering higher yields than credit quality alone would suggest.

Housing authority bonds were offered as an example. For programs the panel follows, between 85% and 90% of the underlying loans carry federal government backing, yet those housing-related bonds typically trade about 90 to 100 basis points wider than generic municipal issues.

The ALPS BBH Intermediate Municipal Bond ETF (MNBD) reflects that search for yield, with about 20% of the fund invested in housing-related munis. Danny Schwab, lead fund strategist at SS&C ALPS Advisors, said the fund has outperformed its benchmark by 458 basis points since its May 2022 launch.

Panelists pointed to occasional cross-market transactions as another feature of the current market. An example cited during the webcast was a recent prepaid gas municipal deal that included participation from Alphabet Inc., an unusual intersection of corporate and municipal credit that managers said requires attention.