The muni bond landscape picked up significant interest to end 2025, with investors clamoring for the yields available therein. American Century Investments Vice President and Senior Portfolio Manager Joe Gotelli recently sat down with VettaFi to talk about the muni bonds outlook. He covered what’s changed, where the opportunities are, and what’s next.
Key Takeaways:
- Record pace of municipal bonds issuance this year has been met with equally robust demand.
- Underperformance in late spring has turned into summer outperformance as attractive yields continue to draw retail demand.
- High net worth investors continue to place value on strong levels of tax-free income.
Gotelli, who joined American Century in 2008, shared his view on muni bond investing right now, as well as where it might go. In his words, the year has seen the muni bond market move from spring underperformance to a brighter summer. Investors, he said, continue to allocate to munis “pretty strongly” this year, following early underperformance associated with the conflict in the Middle East.
“Some of the underperformance has been taken out of the market, given the strong demand for the asset class in the face of also strong levels of supply in municipal bonds,” Gotelli said. “We’ve seen near record inflows into mutual funds and ETFs. The absolute levels of yields available in our marketplace are quite attractive.”
Muni bond investors are getting more comfortable moving out on the yield curve, he added. He pointed to muni’s having fair value 10 years out, with a richer stance in the two-year space. That, he noted, has shaped his team’s view for the second half.
“As we move through June, the expectation is that interest rate policy is going to be difficult to move significantly in the short term,” he said. “The conflict in the Middle East will continue to be an overhang on the marketplace…so that squarely means that security selection, sector allocation and really creating some extra carry in portfolios is going to be our focus for the second half of 2026.”
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As for opportunity ahead, Gotelli explained that while risk may not be mispriced in an obvious place, there are some spots where the same dollar can take structural rather than credit risk. The energy prepay space, he said, was one such category.
Near term, the issue has more to do with interest rate volatility. Continuing to understand the Fed and ongoing inflation concerns, he said, would be an important task.
“The downside here is really relative risk. If Treasury yields rise modestly, munis probably outperform as long as the flows stay stable,” Gotelli said. “And then on the other hand if Treasury yields were to fall, we’re in an environment where munis are already so fairly valued that we probably just underperform from a relative standpoint. We are not necessarily expecting a large negative total return outcome in the second half of the year.”
Together, that may position funds like the American Century Diversified Municipal Bond ETF (TAXF ) to serve investors’ goals well this year. TAXF works to reduce investors’ overall tax bills, and with those opportunities in muni bonds, it could appeal.
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