High Issuance, High Opportunity: How Advisors Can Navigate The 2026 Municipal Bond Landscape

The municipal bond market enters 2026 from a position of both heavy supply and resilient fundamentals, creating a nuanced landscape for advisors who want to use munis as a core tool in building diversified, tax-aware portfolios. At the 2025 Charles Schwab IMPACT conference in Denver, Cooper Howard, Fixed Income Strategist at the Schwab Center for Financial Research (SCFR), framed the opportunity plainly: issuance has been huge, valuations require discipline, and advisors who can combine structure, credit awareness, and tax intelligence are positioned to add meaningful value for clients.

Issuance, Returns, And The 2026 Backdrop

Howard sees supply as the defining storyline for both 2025 and 2026. Issuance has been elevated for two consecutive years, weighing on relative performance versus other fixed income sectors. As he put it, “The biggest story in 2025 has been the amount of issuance that we’ve seen, coming off very strong issuance in 2024, and we’re on a pace that’s likely to beat that number.”

That flood of new paper has contributed to munis lagging corporates and Treasuries on a total return basis this year, even though their structural advantages remain intact. Looking ahead, Howard expects issuance to remain a key driver into 2026, especially as deals that were pulled forward in anticipation of tax changes taper back toward more normal—but still substantial—levels. For advisors, that means supply-and-demand dynamics will matter as much as macro headlines when evaluating relative value across the curve.

Despite the technical headwind, Howard remains constructive: “My view is that we should continue to see strong fund flows, which should be a sign of strong demand.” If demand keeps pace with issuance, he believes muni total returns can hold up “fairly okay” relative to the broader fixed income landscape.

Credit Quality: Strong Fundamentals, Realistic Expectations

Under the surface, Howard characterizes muni credit as fundamentally sound, even if the peak in credit quality is likely behind the market. The key buffer he highlights is the strength of state and local “rainy day funds” that were rebuilt aggressively after the pandemic-era fiscal support and tax-revenue boom.

“Many states have built up their rainy day funds quite substantially, to the point where they’re much stronger than they were pre-COVID,” he explained, likening them to a household savings account that can cushion a downturn. Those reserves, combined with generally high average credit ratings across the core muni universe, support the view that a cyclical slowdown in 2026 should not translate into widespread muni distress or headline-grabbing default risk.

That backdrop is consistent with SCFR’s published research, which emphasizes that municipal bonds remain one of the higher-quality fixed income segments, with a large share of the investment-grade universe rated AA or AAA and historically low default rates compared with corporates. For advisors, that translates into an asset class that can still serve as a stabilizing, income-oriented anchor in client portfolios, particularly for higher-income investors who benefit most from tax-exempt income.

Duration, Curve Positioning, And A Barbelling Blueprint

On the portfolio-construction side, Howard’s team continues to favor an “up-in-quality” stance within the muni universe, grounded in the view that spreads on lower-rated issuers are not sufficiently attractive to justify their additional credit risk. Most of the market is already high quality, but he sees the best risk-reward in the upper tiers of the investment-grade spectrum.

From an interest-rate perspective, SCFR’s base case is that longer-term yields remain range-bound, even with the possibility that inflation surprises could push them higher at the margin. For the typical muni investor, Howard favors an intermediate average duration—around six years—but stresses that the current curve structure creates a tactical opportunity further out.

“There are more attractive opportunities on the long end of the curve,” he noted, recommending a barbell approach as a practical way to reconcile those long-end opportunities with an intermediate-duration target. That means pairing shorter-term holdings with longer-dated bonds to:

Capture higher relative yields and tax-adjusted advantages further out the curve.
Retain flexibility and reinvestment optionality through the short end, especially in a shifting policy environment.

SCFR’s broader work underscores that intermediate and longer maturities currently offer more attractive tax-adjusted spreads versus Treasuries than very short maturities, but that concentration at the extreme long end alone can add unwanted volatility. A well-executed barbell can therefore help advisors blend income, resilience, and optionality in a single muni allocation.

Vehicles: Balancing Diversification And Behavioral Preferences

Asked how advisors should weigh individual bonds, ladders, and ETFs, Howard emphasizes that there is no one “right” vehicle—only trade-offs that need to be aligned with client preferences and portfolio needs. “It comes down to behavioral bias and investor choice,” he explained.

Funds—whether mutual funds or ETFs—offer powerful structural benefits:

Broad diversification across hundreds of issuers, geographies, and parts of the curve for every dollar invested.
Operational simplicity and immediate market exposure, making them efficient building blocks for scalable models.

By contrast, individual bonds appeal more directly to client psychology. “With an individual bond, you know exactly what you’re getting, when you’re getting it, and how much it will pay you, barring default,” Howard noted. For clients who view munis as the “safe” part of their portfolio and are uncomfortable watching net asset values fluctuate, that certainty of cash flows and final maturity can be especially reassuring.

However, there are real constraints:

Achieving adequate diversification with individual bonds typically requires higher account sizes and at least 10 distinct issuers with differentiated risks.
Trading costs and market access can be more challenging at smaller ticket sizes relative to institutional fund structures.

Howard’s bottom line: “It’s not one or the other that we favor—it’s about what makes sense for the investor.” For advisors, that opens the door to blended approaches—using ETFs and mutual funds for broad, core exposure, complemented by customized ladders or individual positions where client-specific tax, liquidity, or behavioral issues warrant.

High-Yield Munis: Different Animal, Selective Use

When the conversation turns to high-yield municipal bonds, Howard’s tone becomes notably more cautious. “Even though it has the name municipal bond in it, the high-yield muni market is a very different animal than the investment-grade municipal bond market,” he stressed.

Traditional investment-grade munis are typically backed by states, cities, or essential-service utilities with relatively stable revenue streams such as taxes or usage fees. In contrast, high-yield muni issuers often rely on more speculative or project-based cash flows—everything from niche industrial developments to specialized facilities—which inherently carry higher operational risk. “You’re taking on a lot more credit risk, and it’s also a much smaller, more illiquid market,” Howard said.

Today, his caution is rooted in valuations as much as structure:

The yield spread between high-yield and investment-grade munis is near the tightest levels of the past decade, meaning investors are not being paid much extra for the added risk.
After accounting for duration, the yield per unit of risk for high-yield munis actually looks less compelling than for investment-grade munis and even some other riskier asset classes.

“The question you have to ask yourself is, are you getting compensated for taking on those additional risks? Right now, we don’t think that you are,” Howard said, underscoring SCFR’s preference for restraint in this segment.

Where the story shifts is in comparison with high-yield corporates rather than investment-grade munis. Because high-yield munis are tax-advantaged, they can deliver competitive or even superior after-tax income for investors in higher brackets, with somewhat lower historical volatility and default rates than similarly rated high-yield corporate bonds. For high-net-worth clients willing to accept the risks, a small, professionally managed allocation may make sense in the context of the broader fixed income sleeve.

Tax Policy, OBBA, And Supply Dynamics

The One Big Beautiful Bill Act (OBBA) loomed over the muni market for much of 2025, particularly around concerns that the longstanding tax exemption for municipal interest could be scaled back or removed. Many issuers rushed deals to market to “front load” borrowing before the legislation was finalized, contributing to the record issuance that Howard highlighted.

In the end, OBBA turned out to be far less dramatic for muni investors than feared. “From a tax perspective, it really didn’t change anything to make munis more or less attractive,” Howard observed. The bill:

Left the core federal tax exemption for municipal interest intact.
Avoided imposing caps on the amount of tax-exempt interest that investors can claim.
Did not broadly restrict issuer access to the tax-exempt market.

Howard jokingly called it “somewhat of a nothing burger for the muni market,” aside from some niche provisions such as allowing tax-exempt financing for certain spaceport projects. The more practical implication for 2026 is likely a moderation in issuance from peak 2025 levels as the front-loaded deals work through the pipeline. For advisors, that shift could support a more favorable technical backdrop, with less supply pressure and better conditions for total returns if demand remains steady.

Advisor Opportunities: Beyond “In-State Only”

Looking across advisor practices, Howard sees one recurring mistake: an overreliance on in-state-only portfolios outside a handful of very high-tax states. The appeal is understandable—interest from home-state bonds is often exempt from both federal and state income taxes—but he cautions that this can come at the expense of diversification and even after-tax yield.

“The only states that I think a pure in-state portfolio clearly makes sense are California and New York,” he said, citing their combination of deep, broad issuance and very high marginal tax rates. For many other investors, a more nationally diversified approach can actually deliver better risk-adjusted, after-tax outcomes:

Adding out-of-state bonds broadens the issuer base and reduces concentration in a single state’s fiscal or political profile.
In some cases, slightly higher nominal yields on out-of-state bonds can more than offset the state tax cost, resulting in a higher after-tax yield.

“I actually think that in many instances, those investors might benefit by the added diversification of adding bonds from outside of their home state, even though they might have to pay state income taxes on it,” Howard noted. This is a concrete, advisor-controlled lever—tax-aware security selection across states—that can directly enhance client outcomes and differentiate fiduciary advice.

Why Schwab Center For Financial Research Matters For Advisors

For advisors navigating this complex muni environment, the Schwab Center for Financial Research offers a combination of market insight, practical implementation guidance, and client-ready education that can meaningfully support practice growth and portfolio quality.

Key advantages SCFR brings to advisors and their clients include:

Deep, ongoing muni research spanning market outlooks, sector-level commentary, and implementation frameworks on topics like duration positioning, curve strategy, and structure selection.
Clear, plain-English education on nuanced areas such as tax-equivalent yield, high-yield munis versus corporates, and the impact of policy changes like OBBA.
A research philosophy grounded in risk management, diversification, and tax awareness—the same levers that matter most to high-net-worth and mass-affluent clients seeking durable after-tax income.

For advisors building or refining their municipal strategies as 2026 approaches, Howard’s message is both realistic and optimistic: issuance and valuations demand selectivity, but strong credit fundamentals, attractive tax-adjusted yields, and thoughtful portfolio design still make munis a powerful tool for diversified, tax-efficient fixed income.

To dive deeper into SCFR’s latest municipal bond outlooks, tools, and implementation ideas, visit the Schwab Center for Financial Research online and explore their most recent insights on the muni market, high-yield opportunities, and 2026 fixed income strategy.