In the first Federal Open Market Committee (FOMC) meeting under new Federal Reserve Chairman Kevin Warsh, the central bank, as expected, stood pat with interest rates. Add to that, Fed funds futures imply almost zero chance of a July rate cut.
Based on those combined factors, fixed income investors have right to be apprehensive heading into the second half of 2026. However, there are some bright spots in the bond world to consider, including municipal bonds. To be sure, advisors and investors evaluating munis as second-half fixed income ideas need to consider supply issues (there’s plenty of supply in the market) and issuer-level divergences, among other factors.
Still, municipal bonds offer an array of benefits, particularly for investors in high-tax states or upper-tier tax brackets. Among the asset class’s perks are a penchant for reduced volatility.
“They are not immune to drawdowns—especially when rates rise quickly—but the combination of coupon income and generally stable credit quality has often helped cushion downside for total returns relative to other fixed income categories,” noted Cooper Howard of Charles Schwab. “For investors who want tax-aware income without taking on outsized default risk, that matters.”
Munis Sporting Fabulous Fundamentals
As noted above, there’s dispersion at the issuer level, meaning not all cities and states have the same credit quality. However, in broad terms, municipal bonds do offer risk-averse investors sleep-at-night levels of credit quality.
“State reserve levels are still elevated by historical standards, revenue growth remains above its longer-term trend, and defaults for investment-grade municipals remain exceptionally low over long periods,” added Howard.
Looking ahead to the second half of 2026, advisors and investors are right to be cognizant of elevated muni supply, but that’s not necessarily a reason to outright avoid these bonds.
“That elevated supply does not automatically imply a poor outcome for total returns. In fact, it can create opportunities by improving bond selection and occasionally cheapening valuations. But it does mean total returns are more sensitive to market technicals than they would be in a low-supply environment,” observed Howard.
Schwab issues the Schwab Municipal Bond ETF (SCMB ). That $3.9 billion ETF tracks the ICE AMT-Free Core U.S. National Municipal Index and has an effective duration of 6.7 years. SCMB has a 30-day SEC yield of 3.52% and annual expense ratio of 0.03%, or $3 on a $10,000 investment.
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