Investors should still be able to grab attractive yields in municipal bonds the rest of this year. The bonds issues by state and local governments and thousands of various borrowing authorities had a strong showing in the first half of 2026. Both investment-grade and high-yield tax-exempt munis were “clear outperformers,” with the former seeing a 2.16% total return and the latter returning 3.74% in the first half, Bank of America said in a note last week. That translates into 3.7% and 5.59% tax-adjusted total returns, respectively, the bank pointed out. Bond yields move inversely to prices, and total returns incorporate both capital appreciation and income. Muni income is exempt from federal taxation, and state and local taxes too if you live in the state of issuance. Investors gravitated to munis because they were looking for stability in their portfolios, said Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities. He expects that to continue, although perhaps returns may not be quite as healthy as in the first half. “[A]s I see this on again, off again volatility with regard to what could happen in the Middle East, what could happen with energy prices, I still think that these … generationally attractive yields are still going to be available at least for the next couple … of months,” Kozlik said. The Vanguard Tax-Exempt Bond ETF , for instance, has a 30-day SEC yield of 3.5%. It has an expense ratio of 0.03%. VTEB YTD mountain Vanguard Tax-Exempt Bond ETF year to date The strong performance of muni bonds in the face of the Iran conflict, elevated interest rate volatility and record-setting supply makes Barclays somewhat optimistic about the second half outlook. “We remain constructive on the asset class and believe munis can deliver solid returns through year-end,” Mikhail Foux, head of municipal research and strategy at Barclays Investment Bank, said in a note last Friday. “However, we continue to expect a challenging backdrop characterized by elevated supply, uncertainty about interest rates and richer valuations than at the start of the year.” In fact, that environment caused the UBS chief investment office to downgrade munis to neutral from attractive on Monday. “While we maintain a constructive outlook for munis in 2H26, renewed U.S.-Iran strikes, rate volatility and inflation risks could pose near-term challenges,” UBS fixed income strategist Sudip Mukherjee said in a note to clients. “We expect the 10-year Treasury yield to decline by year end. However, near-term rate volatility and curve steepening are key risk factors.” AllianceBernstein is more hopeful, expecting demand to meet the record levels of bond issuance. “With demand where it is — supply probably waning a little bit during the summer, but picking back up in the fall time — we do think municipals will continue holding in there and probably end with a fairly nice return by the end of the year,” said Daryl Clements, municipal bond portfolio manager at AllianceBernstein. ‘Post-golden age realignment’ When looking for opportunities, investors should increasingly focus on credit selection as local governments adjust to tighter budgets, according to Kozlik. While credit quality continues to remain healthy overall, there has been a “post-golden age realignment” underway — with state and local governments readjusting their spending to align with recurring revenues after receiving federal pandemic aid for years, he said. “They’re now having to buckle down and they’re having to figure out what they are going to have to be able to spend in the next couple of budget cycles,” Kozlik said. Kozlik sees opportunities in general obligation and essential service revenue bonds. Specifically, he likes airports and water and sewer, as well as housing — especially the large, single-family state housing agencies. High quality He prefers to stay up in quality with AAA- and AA-rated munis, but said ratings alone are insufficient. Investors should make sure that issuers have structurally balanced budgets and sustainable spending relative to recurring revenues, he said. “Credit selection, even in those categories, is going to be very important,” he warned. MUB YTD mountain iShares National Muni Bond ETF year to date There is also value as farther out on the yield curve, said Matthew Norton, AllianceBernstein’s chief investment officer for municipal bonds. “For the rest of the year, investors can buy municipal bonds at really attractive yields, particularly if you go out long on the yield curve, or you buy municipal credit, which is also very attractive, mid-grade or high-yield municipal bonds,” he said. “Also, given the relative value and how longer municipals are cheap in our view, we do think you additionally will probably get some price appreciation from the long end of the municipal bond,” he added. Still, Norton maintains a barbell strategy, holding both short- and long-dated bonds. Within sectors, Norton and Clements like prepaid energy bonds and affordable housing bonds. They also find alternative-minimum- tax airport bonds attractive for investors who aren’t subject to the levy. In addition, they see opportunity in high-quality hospital bonds and senior living bonds, which will benefit from favorable demographics and limited new construction. The team also continually invests in general obligation bonds.
Munis are having a solid 2026. Investors can still grab ‘generationally attractive yields’
