Municipal bonds, or munis, had a rough start to 2026, but they have since bounced back. A Tuesday webcast sponsored by SS&C ALPS Advisors offered advisors a detailed look at why that recovery matters.
Key Takeaways:
- Munis have bounced back from a rough 2026 start, as the market targets a third straight year of record issuance.
- Intermediate munis currently offer 150 to 200 basis points of yield advantage over government money market funds.
- MNBD has outperformed its benchmark by 458 basis points since its May 2022 launch.
Speakers from SS&C ALPS Advisors and Brown Brothers Harriman & Co. said current yields are creating income opportunities in intermediate munis. Overlooked market niches, they added, offer extra yield for investors willing to look past the most familiar bond types.
Many investors may underestimate the muni market’s scale. During a poll at Tuesday’s webcast, more than half of attendees correctly placed it at $4.5 trillion.
Greg Steier, co-head of the fixed income team and lead portfolio manager for municipal bonds at BBH, said the market is on pace for a third straight year of record new issuance. About $150 billion has flowed into muni funds and ETFs over the past two-plus years, he added.
Rate expectations are also part of the backdrop. Markets entered 2026 pricing in two Federal Reserve rate cuts. That view has since shifted to two rate hikes expected before mid-2027, Steier said. Hostilities in the Middle East created simultaneous pressure on both inflation and economic growth, complicating the Fed’s path forward.
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Intermediate munis currently offer a yield advantage over government money market funds for investors in the top tax bracket, Steier said. On a pre-tax equivalent basis, that gap runs 150 to 200 basis points. Investors comfortable with longer maturities can get close to 4% on a 20-year muni. That works out to nearly 7% on a pre-tax equivalent basis.
Finding Yield in Overlooked Munis
Muni market dynamics create pockets of extra yield for active managers. Household investors, not institutions, dominate the ownership base. Demand clusters around familiar bond types, such as highly-rated general obligation bonds from a buyer’s home state. That concentration leaves less-recognized corners of the market paying more than their credit quality would warrant, Steier said.
Housing bonds were one example discussed. State housing authorities issue bonds mainly to fund mortgages for low-to-moderate income buyers. Between 85% and 90% of the underlying loans in the programs BBH follows carry federal government backing, Steier said. Despite that quality, these bonds typically pay 90 to 100 basis points more than generic munis.
Close to 20% of the ALPS BBH Intermediate Municipal Bond ETF (MNBD ) is in this area, Steier said. Since launching in May 2022, the fund has outperformed its benchmark by 458 basis points, according to Danny Schwab, lead fund strategist at SS&C ALPS Advisors.
Alphabet Inc. (GOOGL) participated in a prepaid gas muni deal last month, Steier noted. It was an unexpected crossing of corporate credit into the muni market, he said, one that keeps bond managers on their toes.
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