Municipals Thoughts from the Municipal Bond Desk
Mark Paris , Tim Spitz
July 18, 2026
Municipals US municipal bond quarterly market recap and outlook
Second quarter 2026 recap
Key takeaways:
- Municipal bonds delivered positive second-quarter returns, led by high-yield munis and lower-quality credits in general.
- Despite heavy new issuance, particularly a May supply surge, investor appetite was strong enough to digest record supply.
- Muni yields remained near historic highs, creating compelling income opportunities versus other fixed income assets on both a tax-equivalent and absolute basis.
- The senior living muni bond sector stands to benefit from favorable demographics, limited new supply, improving occupancy, and a rather stable credit outlook.
Municipal bonds generated positive returns during the second quarter, supported by steady demand for tax-exempt income, healthy credit fundamentals, and attractive yields. Investment grade, high yield, and taxable munis returned 2.50%, 3.35%, and 0.74%, respectively.1 Higher-quality credits generally underperformed lower-quality credits.
The quarter opened on a strong note, with munis demonstrating notable resilience in the face of a heavy new-issue calendar. Although the elevated pace of issuance periodically tested valuations, particularly during a supply surge in May, investor demand remained strong enough to absorb the added volume, which helped sustain municipal gains through the end of the quarter.
Munis outperformed most other segments of the fixed income market,1 as macro uncertainty led investors to reprice their expectations for Federal Reserve (Fed) monetary policy. While US consumer activity and labor conditions held up better than many expected, energy-related price pressures and geopolitical turmoil kept inflation elevated relative to the Fed’s long-term objective, reducing the urgency for near-term monetary policy easing.
Outlook
Looking ahead, we see compelling opportunities in munis. Steady issuance and ongoing demand for tax-exempt income, combined with high absolute yields and solid fundamentals, support a favorable investment environment. We remain committed to our time-tested, long-term investment approach, leveraging our seasoned credit research team to identify market dislocations as we seek to add value for shareholders.
Read the complete quarterly update.
Learn about our municipal bond funds.
Related insights
Important information
NA5787009
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The Bloomberg Municipal High Yield Index is an unmanaged index considered representative of bonds that are non-investment grade, unrated, or rated below Ba1.
The Bloomberg Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
The Bloomberg Municipal Taxable Bond Index measures the US municipal taxable investment-grade bond market with an effective maturity of at least one year.
Credit risk is the risk of default on a debt that may arise from a borrower or issuer of bonds failing to make required payments.
Fixed income investments are subject to the credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high-quality bonds and can decline significantly over short time periods.
Inflation is the rate at which the general price level for goods and services is increasing.
Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/or interest.
The opinions referenced above are those of the author as of July 29, 2026. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. All fixed income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/ or repay the principal on its debt. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
Leaving Invesco.com
This link takes you to a site not affiliated with Invesco. The site is for informational purposes only. Invesco does not guarantee nor take any responsibility for any of the content.
Americas_United States_Invesco US