Municipal bond prices are off to a strong start so far this year. Yields fell by about 10 basis points last week thanks largely to rising demand meeting less supply, said Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities. Bond yields move inversely to prices. “Lower yields are a reminder for investors to stay engaged and be ready to act,” he wrote in a note Monday. “The risk is investors could miss the window, and yields fall substantially while waiting for a perfect entry point.” Kozlik anticipates that investors are shifting from a “bracing” mentality to a “building” mentality. MUB 1Y mountain iShares National Muni Bond ETF’s one-year performance While investors may have been spooked last year by things like tariffs, there is a bit more calm now, which has them eager to add to their portfolios, he said. In addition, overall credit quality remains good, he noted. “It’s really creating an ideal moment for fixed income buyers to really lean into municipals,” Kozlik said in an interview with CNBC. Yields remain attractive While yields have come down, they are still attractive, said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research. The Bloomberg Municipal Bond Index has a yield-to-worst around 3.5%, which means about a 5.8% tax-equivalent yield for investors in the top tax bracket, he said. That yield would be even higher for those in high-tax states like California and New York, he noted. Yield-to-worst is the lowest possible yield on a callable bond, barring default. Cooper expects those yields to remain range-bound, at least in the near term. Demand is key to the asset’s performance this year, he said. JPMorgan is expecting a record supply of $600 billion into the overall muni market, while Bank of America Securities is projecting $640 billion in new issuance. “Demand is going to be a very important figure,” he said. “If demand continues to be relatively favorable, which it has been … then that should help with positive total returns and help with munis kind of staying in the middle of the pack relative to other fixed income investments.” SCMB 1Y mountain Schwab Municipal Bond ETF’s one-year performance JPMorgan expects rates to be range-bound, but with some volatility this year. It is projecting an average total return of 3.4% for investment-grade munis. Meanwhile, Bank of America Securities expects muni yields to fall in the first half of the year, with an inflection point reached when 10-year AAA-rated munis drop to the 2% area. Yields will rise some in the back half of the year during the “consolidating phase” of the two-to-three year bull market that began in April, strategist Yingchen Li said in his 2026 outlook, released in December. He has a target return of 5.3% on ICE BofA Muni Master Index in 2026. Finding opportunities In this environment, investors should focus on investment grade municipal bonds, Schwab’s Howard said. Credit spreads aren’t attractive, but the economy doesn’t appear to be slowing significantly, he said. “If we go into a downturn, since spreads are relatively tight, you’re not getting that adequately compensated for taking on credit risk, and we just don’t think that it makes much sense to take credit bets in this environment,” he said. In addition, investors should stick with intermediate-term duration since the yield curve is expected to steepen, Howard said. Right now, his expectation is one or two rate cuts from the Federal Reserve this year, with the first one coming midyear. That should pull short-term rates lower, he noted. Investors can either build a bond ladder of varying maturities or buy an exchange-traded fund, which can provide easy diversification, he said. Bank of America’s strategy for 2026 is to buy and hold long-duration, higher-grade munis in the first half of the year and then partially hedge in the second half. It believes 4% coupons will outperform those with 5% or higher coupons. “Investors should keep in mind that the consolidating phase of the market is part of the overall 2-3 year bull market and should be used as opportunities to add,” Li said. Hilltop’s Kozlik likes state and local municipal bonds since credit quality is still very strong. He also likes housing bonds. “It’s mostly the large State Housing Finance Agency issues that I know the credit quality is AA or higher,” he said. “It’s very, very strong in that sector.” He would tread carefully in education bonds, like K-12 and higher education. The area has suffered amid enrollment problems and headline risks, so credit selection is key, he said.
