Investment perspectives
Municipal bond yields at nearly their best in a decade
October 22, 2026
Municipal bond yields have reached levels that provide tax-sensitive investors with a rare opportunity. While the broader fixed income market has weakened through 2026, municipal bonds have experienced an even steeper decline—not due to softening fundamentals, but because of technical supply-and-demand imbalances.
Unlike much of the year though, when strong supply was met by healthy demand, investors have recently grown more cautious about deploying new capital as they contend with the impact of falling bond prices and elevated volatility.
The yield of the Bloomberg U.S. Aggregate Index rose 83 basis points in the third quarter, primarily due to stronger growth expectations but also fiscal deficit concerns and stubborn inflation. Given the aforementioned technical headwinds, municipal bond yields climbed 120 basis points. After converting Bloomberg U.S. Municipal Index yields to a taxable-equivalent basis, the additional yield pickup over that of the Bloomberg U.S. Aggregate Index has recently been among the greatest in a decade.
Tax-equivalent spreads over broad bond market may represent an opportunity
Notes: Municipal bonds generally pay interest that is exempt from federal income tax, making them particularly attractive to investors in higher tax brackets. Tax-equivalent yield is the yield a taxable bond would need to offer to match the after-tax income from a tax-exempt municipal bond. It is calculated using an assumed combined federal tax rate of 40.8%, consisting of the 37% top federal marginal tax rate plus the 3.8% net investment income tax, which helps fund Medicare.
Source: Bloomberg indexes, using yield-to-worst data as of October 16, 2026.
“Tax-sensitive investors have the opportunity to allocate to the sector at a time when the future for potential returns looks to be in their favor,” said Nate Earle, head of municipal fixed income within Vanguard Client Portfolio Management. “While municipals are unlikely to cheapen significantly versus taxable bonds from current levels, they do have the potential to rally considerably just to get back to long-term median valuations.”
With tax-equivalent yields near 8%, the value proposition appears compelling. But the reason that investors may view these yields as among the best opportunities in a decade isn’t just the yield levels, but also the balance-sheet strength supporting the issuers themselves. Fundamentals are broadly stronger than they have been in years. Further, Vanguard expects the technical factors pressuring valuations to reverse course as we enter the winter months.
“Seasonal issuance pressures typically ease during the winter holiday period through January,” Earle said. “With November approaching, many issuers are working within a narrowing window to bring deals to market. Issuance does not stop when that window closes, but primary market activity often slows meaningfully through year-end.”
Investors who were eager to add municipal bond exposure earlier in the year at less attractive yields may find current levels more appealing.
Notes:
All investing is subject to risk, including possible loss of principal.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Municipal bond fund distributions, including any market discount recognized by the Fund’s investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund’s distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.