Quarterly municipal bond outlook: Muni bonds have been resilient amid uncertainty

Municipal bonds faced a challenging first quarter of 2026, with gains exceeding 2% in January and February giving way to a rate-driven selloff in March as geopolitical risk escalated. Despite the difficult environment, taxable-equivalent yields remain near historic highs, credit spreads are attractive and fund inflows set a record — and we believe the case for municipals remains strong.

Key Takeaways

• Despite a turbulent first quarter, the steep municipal yield curve may reward investors who extend duration, with 20-year AAA yields above 4.00%.
• With reinvestment demand projected to surge 40% and net supply expected to remain negative, we believe technical conditions favor municipal total returns through year end.
• Security selection in the health care and higher education sectors presents an opportunity for investors willing to look past current pressures.