U.S. Municipal Bond Market Outlook
Optimism generally prevails for 2026.
Key Takeaways
After a notable turnaround in mid-2025, we anticipate the municipal bond (muni) market to operate in a mostly favorable environment in 2026.
We expect 2026 to have strong muni supply and demand, solid total return potential, and sector-specific opportunities and risks.
We believe that an active approach to muni investing is an effective strategy for generating consistent tax-free income and strong performance potential.
The key market theme in 2025 was the evolution of public and fiscal policies and their influence on municipal bond supply and demand. In 2026, it’s less about new muni-centric policies and more about implementation and adjustment in the coming years.
Federal funding priorities and state-level initiatives will shape municipal subsectors. At the same time, fiscal constraints will test how much we can continue to put into infrastructure and social programs. That’s the balance we’ll be navigating.
How States Are Set to Navigate Fiscal Pressures in 2026
A key market driver began in 2025 and will continue into 2026 and beyond: the cost implications for states of the One Big Beautiful Bill Act (OBBBA). Of course, funding changes stemming from Medicaid and Supplemental Nutrition Assistance Program (SNAP) cuts may take some time to appear in states’ financial data.
Nevertheless, most municipal credits enter this period from a position of strength. State reserves are trending lower but remain well above pre-pandemic levels — a meaningful buffer against future pressures. States continue to be the anchor of stability, and their posture ripples through local governments, schools, transportation and health care.
Sector-by-Sector Outlook for Municipal Bonds
We maintain stable outlooks for the traditional segments of the muni market, including:
Tax-backed credits.
Essential service revenue bonds.
Transportation securities.
Non-traditional sectors, such as gas and energy prepay, charter schools, student housing and affordable housing, also appear stable.
Meanwhile, the outlook isn’t as certain for some higher-yielding segments, including:
Tobacco, due to long-term declines in cigarette consumption.
Private higher education, because of slowing enrollment, reduced grant funding and budget cuts.
Workforce housing, owing to rising expenses, high leverage and declining occupancy.
Mass transit, because of reduced ridership and financial challenges.
Ongoing policy shifts, like reduced federal aid and tariff-related economic impacts, could create additional challenges. Conversely, easing regulations may offer a supportive environment for public power and utilities munis.
How Market Forces Might Influence Muni Supply and Demand
Municipal bond issuance topped $580 billion in 2025, according to SIFMA, an investment industry trade association and data provider. Furthermore, the Municipal Securities Rulemaking Board reported that new-issue volume in 2025 reached a record high for the second straight year.1
Amid mounting infrastructure needs, higher costs and more issuer refinancings of existing munis, our research suggests gross supply may total approximately $600 billion in 2026. Sector trends indicate growth in housing, utilities and energy prepay issuance and modest declines in education and transportation.
Net supply might be tighter, given higher muni refinancings and some pre-funding from the previous year. Additionally, the mounting cost pressures that issuers face directly influence the supply picture. For example, urban interstate construction costs climbed from approximately $8 million per mile in 2018 to more than $12 million per mile by 2023.2
Meanwhile, demand for municipal bonds, particularly via exchange-traded funds (ETFs), has remained strong — a dynamic we expect to persist in 2026. Through the first 11 months of 2025, intermediate-term muni ETFs were standouts. These funds pulled in $8.7 billion from investors seeking potential tax-efficient income, liquidity and tactical flexibility.3
In our view, the robust pipeline of new issuance and resilient demand underscores the growing role of active ETFs in shaping the muni market landscape.
What to Expect Across the Muni Market in 2026
After staging an impressive turnaround in 2025, we expect the muni bond market to offer solid return potential in 2026. In our view:
The municipal yield curve will likely steepen modestly.
High-quality munis may deliver lower short-maturity yields and rangebound yields in the 10- to 30-year maturity range.
Credit spreads should widen slightly.
Municipal-to-Treasury ratios should end the year near fair value, with the two-year muni likely to trade cheaper compared to one- and three-year averages.
Overall, we generally expect the coupon interest rate to comprise most of the total return in the muni market in 2026.
How Active Oversight Helps Assess Muni Market Conditions
We expect 2026 to feature robust supply, solid total return potential and sector-specific opportunities and risks. We’ll continue to monitor the economic environment, including the implications of a persistent K-shaped economy,4 tariff policy uncertainty and lingering inflation. Monetary policy uncertainty and an evolving fiscal landscape will also shape market dynamics.
In our view, this isn’t a backdrop conducive to complacency. Instead, it argues for active management, where we believe selectivity and discipline will likely help drive performance potential and risk management success.
Authors
Senior Portfolio Manager
Senior Director, Product Management
Learn about the tax advantages of municipal bonds.
Municipal Securities Rulemaking Board, “2025 Municipal Market Year in Review: An Extraordinary Year,” January 2026.
Reason Foundation, “28th Annual Highway Report,” March 13, 2025.
Fitch Solutions, “Credit Insights Muni ETF Monitor, as of November 2025,” published December 3, 2025.
An economic environment in which different participants or sectors experience different outcomes. Some see growth (the upper arm of the K), while others struggle (the lower arm of the K).
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
Even though a tax-free bond fund is designed to purchase assets exempt from federal taxes, there is no guarantee that all of the fund’s income will be exempt from federal income tax or the federal alternative minimum tax (AMT). Fund managers may invest assets in debt securities with interest payments that are subject to federal income tax and/or federal AMT. State and local taxes may also apply.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.