Municipals

Thoughts from the Muni Desk

February 12, 2026
Mark Paris
Mark Paris
Chief Investment Officer, Head of Municipal Strategies, Invesco Fixed Income
Tim Spitz
Tim Spitz
Head of Municipal Business Strategy and Development
Bridge from underneath

Key takeaways

Fed chair nomination

1

Market expectations about monetary policy didn’t change when Kevin Warsh was nominated as the new Fed chair.

Supportive technicals

2

Forecasts of negative net new issuance in February suggested it could be another positive month for municipals.

Muni performance

3

Munis compare favorably with stocks, on a risk-adjusted basis, and outperformed all taxable fixed income assets over the most recent 10-year period.1

Tim: President Trump announced he would nominate Kevin Warsh as the next Federal Reserve (Fed) chair.2 What do you think that means for Fed monetary policy in 2026?

Mark: At this point, I don’t expect a dramatic shift. It’s worth remembering that monetary policy is set by the full Federal Open Market Committee (FOMC), not just the chair, and there are 12 voting members. Jerome Powell is also expected to remain on the Board of Governors through January 2028, so there’s still a lot of continuity built into the process. Warsh does have a reputation as an inflation hawk, though, so even if he’s generally supportive of lower rates, I think he’d be willing to hold policy steady if inflation pressures reemerge. All in all, my outlook hasn’t really changed. I still expect the Fed to cut rates twice in 2026, which is broadly in line with market expectations.

Tim: Shifting gears a bit, January seemed pretty constructive for munis. Market technicals supported prices, which could be a positive signal heading into February, right?

Mark: Yes, absolutely. I believe munis are very well-positioned for February. Supply pulled back in January, which is typical for that time of year, while demand stayed strong. Tax-exempt issuance came in around $35 billion, which was slightly below the record set in January 2025, but still well above the five-year average for the month.3 At the same time, we saw consistent inflows and solid reinvestment activity.3 I believe this pattern could continue in February. If new issuance totals $37 billion as expected, and reinvestment flows are closer to $41 billion, that could imply negative net new issuance of roughly $4 billion.3 From a technical standpoint, this may be a very supportive backdrop for munis.

Tim: Munis still tend to get labeled as a low-return asset class, though I’ve always thought that reputation was a bit unfair. Would you agree?

Mark: I agree. A lot of that perception comes from comparing muni returns directly to stocks, which isn’t always the most appropriate benchmark. In January, for example, both investment grade and high yield munis lagged stocks, but they outperformed other fixed income sectors on a tax-equivalent basis.4 And looking at their risk-adjusted returns, the picture becomes even more compelling.5 Historically, muni bonds have posted comparatively strong Sharpe ratios, one of the most common measures of return per unit of risk. Over the last 10 years, high yield muni bonds have outpaced many stock indexes and all taxable fixed income assets.5 Tax-exempt investment grade munis also outperformed all taxable fixed income asset classes, and even the Russell 2000 Index, on a tax-equivalent basis for investors in the highest tax bracket.5 While muni bonds underperformed in 2025 relative to other asset classes, I’d expect risk-adjusted returns to potentially revert closer to their long-term averages.4 I think the setup for 2026 is more favorable.

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  • 1

    Source: J.P. Morgan Municipal Monthly, January 2026, as of Feb. 2, 2026. Sharpe ratio is a measure of risk-adjusted return calculated by dividing an investment’s excess return (return above a risk-free rate) by its volatility, as measured by standard deviation. A higher Sharpe ratio indicates a higher return per unit of risk taken. The 10-year Sharpe ratio on the High Yield Municipal Index has outpaced all fixed-income and half of the stock indexes listed, while tax-exempt investment grade municipals outperformed all taxable fixed-income and US domestic small-cap stocks when grossing up income by the top federal tax rate. Sharpe ratios: Nasdaq-100 Index 1.0, Standard & Poor’s 500 Index 0.90, Dow Jones Industrial Average Index 0.80, Bloomberg Municipal High Yield Bond Index (tax-equivalent*) 0.70, Bloomberg US Corporate High Yield Bond Index 0.60, Bloomberg Municipal Bond Index (tax-equivalent*) 0.60, Russell 2000 Index 0.40, Bloomberg Municipal High Yield Bond Index 0.30, Bloomberg Corporate Bond Index 0.20, Bloomberg Municipal Taxable Bond Index 0.10, Bloomberg Municipal Bond Index 0.00, Bloomberg US Aggregate Bond Index -0.10, Bloomberg US Mortgage-Backed Securities Index -0.10, and Bloomberg US Government Index -0.20. 
  • 2

    Source: Bloomberg L.P., as of Feb.  2, 2026.
  • 3

    Source: J.P. Morgan Municipal Morning Intelligence, as of Feb. 2, 2026.
  • 4

    Source: J.P. Morgan Municipal Monthly, January 2026, as of Feb. 2, 2026. The Bloomberg Municipal Bond Index returned +0.94% in January, slightly underperforming the Bloomberg Municipal High Yield Bond Index +0.98% but outperforming taxable fixed income indexes such as the Bloomberg US Government Index -0.09%, Bloomberg Municipal Taxable Index +0.05%, and Bloomberg US Corporate Bond Index +0.18%. Stocks are represented by the Russell 2000, Dow, S&P 500, and Nasdaq-100, which returned 5.4%, 1.8%, 1.4%, and 1.2%, respectively, for the month of Jan. 2026. 
  • 5

    Source: J.P. Morgan Municipal Monthly, January 2026, as of Feb. 2, 2026. The 10-year Sharpe ratio on the High Yield Municipal Index has outpaced all fixed-income and half of the stock indexes listed, while tax-exempt investment grade municipals outperformed all taxable fixed-income and US domestic small-cap stocks when grossing up income by the top federal tax rate. Sharpe ratios: Nasdaq-100 Index 1.0, Standard & Poor’s 500 Index 0.90, Dow Jones Industrial Average Index 0.80, Bloomberg Municipal High Yield Bond Index (tax-equivalent*) 0.70, Bloomberg US Corporate High Yield Bond Index 0.60, Bloomberg Municipal Bond Index (tax-equivalent*) 0.60, Russell 2000 Index 0.40, Bloomberg Municipal High Yield Bond Index 0.30, Bloomberg Corporate Bond Index 0.20, Bloomberg Municipal Taxable Bond Index 0.10, Bloomberg Municipal Bond Index 0.00, Bloomberg US Aggregate Bond Index -0.10, Bloomberg US Mortgage-Backed Securities Index -0.10, and Bloomberg US Government Index -0.20. 

    * Assuming a top tax rate of 40.8%, 37% federal tax rate, and 3.8% net investment income tax (NIIT), effective Jan. 1, 2026, which is the top marginal tax rate for single taxpayers with more than $640,600 in taxable income or couples with more than $768,700. NIIT is the net investment income tax for single taxpayers with more than $200,000 in taxable income or couples with more than $250,000. Past performance does not guarantee future results. Source: Irs.gov, as of October 9, 2025

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