Source: LPL Research, Bloomberg 07/31/26
Disclosures: Past performance is no guarantee of future results.
Municipal-to-Treasury ratios round out the picture. Ratios in the mid-60s percent range at five years and low-70s at 10 years reflect persistent SMA and ETF demand concentrated inside 10 years, while 30-year ratios near the mid-80s screen cheaper on a relative basis. We recognize the long end offers absolute yields above 4.00% on AAA paper, and for investors with genuine long horizons and tolerance for volatility, a modest allocation there can make sense. But the incremental yield beyond 20 years comes with disproportionate duration risk in a market still capable of the kind of rate scare we saw in March. The intermediate range offers the better risk/reward in our view: most of the yield, most of the roll, potential for lower volatility.
Credit: The Golden Age Is Behind Us, and That’s an Opportunity
Municipal credit remains fundamentally sound, with nearly 95% of the Bloomberg Municipal Index rated A-/A3 or better, a historically high figure. But investors should be clear-eyed about the direction of travel. The golden age of municipal credit, the post-pandemic stretch when unprecedented federal fiscal support flooded state and local balance sheets, drove reserves to record highs, and produced years of upgrades outpacing downgrades, is likely behind us. That federal support has run off. Revenue growth has slowed while spending pressures have not, and downgrade activity has picked up, concentrated in K-12 school districts facing enrollment declines, hospitals and higher education institutions under operating pressure, and local governments confronting a growing property tax backlash that limits revenue flexibility.
None of this signals a credit crisis. Reserves remain elevated relative to history, default rates are low, and pension funding is in solid shape. What it does signal is dispersion: a widening gap between issuers that built durable financial cushions and those that used temporary money to fund permanent commitments. With credit spreads still near the tight end of their post-crisis range, the market is not yet paying investors to take that dispersion risk indiscriminately. This is precisely the environment where active management and rigorous security selection should earn their keep. When the tide of federal support was lifting every credit, owning the index was enough. As that tide recedes, knowing which issuers you own, and why, becomes the difference between collecting tax-exempt income and explaining a downgrade. We’d stay up in quality as a core position and treat lower-rated exposure as a bond-by-bond decision rather than a beta trade.
AI Meets the Muni Market: A Public Finance Story in the Making
It wouldn’t be an Outlook publication in 2026 without talking about artificial intelligence (AI). The AI buildout has bled in the taxable markets built on hyperscaler bond issuance, data center securitizations, and private credit. Increasingly, it’s a municipal story too, and it cuts both ways.
On the opportunity side, unprecedented electricity load growth is flowing directly into public power balance sheets and bond calendars. Electric power issuance is up more than 25% year to date as public utilities finance generation, transmission, and grid upgrades to serve data center demand. The gas prepayment sector, long a niche, has grown to more than 5% of the municipal index with roughly $100 billion outstanding, offering incremental yield with structural complexity that demands genuine analysis rather than index-level exposure. And for host communities, hyperscale facilities can create a substantial new tax base: capital-intensive, property-tax-rich projects landing in jurisdictions that finance schools and services off assessed value.
The risks are equally real and more political than financial. Data centers generate enormous investment but comparatively few permanent jobs, straining the traditional economic development calculus. More importantly, ratepayer backlash over data-center-driven electricity costs has become a live electoral issue. Moratorium legislation has surfaced in numerous statehouses, and utility commission races are being won and lost on the question of who pays for grid expansion. For municipal credit analysts, the questions are practical: Is load growth contracted or speculative? Are hyperscalers bearing interconnection and generation costs, or are they socialized across the rate base? Does the local tax arrangement survive a change in political leadership? Utilities and municipalities that answer those questions well will see genuine credit improvement. Those that don’t will discover that concentrated counterparty exposure and angry ratepayers are a poor combination. Here again, selectivity and active oversight, not sector avoidance, is the right posture.
The Midterms: Low Legislative Risk, Local Noise
November’s midterm elections matter less for the municipal market than the headlines suggest, and that’s the point. Unlike the 2025 reconciliation fight, when elimination of the tax exemption was genuinely on the table, there is little appetite or legislative bandwidth in Congress to reopen municipal tax treatment in an election year. The realistic federal agenda is modest and, if anything, muni-friendly: industry advocates continue pushing to restore advance refundings and raise the bank-qualified cap, most plausibly attached to must-pass surface transportation legislation. Neither is priced in; either would be a pleasant surprise.
The more tangible election effects are timing and local. Some rate-sensitive and policy-exposed issuers, hospitals and higher education in particular, may defer borrowing until post-election policy clarity, which could modestly thin the fall calendar. At the state and local level, affordability politics are the theme to watch: property tax backlash is constraining local government revenue flexibility in several states, and ballot initiatives targeting wealth and property taxation bear monitoring in the handful of large states where the muni market is unavoidably concentrated. None of these rise to actionable credit calls today, but they reinforce the case for issuer-level research over index complacency. A divided-government outcome in November, the historical base case for the midterms, would likely extend the current policy stalemate. For municipal investors, that amounts to the status quo: no threat to the exemption, no new fiscal support, and a market left to trade on its own technicals.
What Does This Mean for Investors?
The second half of 2026 favors the patient. A Fed on hold anchors the front end and makes cash progressively less compelling. Record gross supply is being neutralized by even stronger reinvestment demand, with the summer months offering the year’s best technical backdrop. A historically steep curve makes the intermediate range the sweet spot, delivering most of the available yield plus roll-down return without long-end volatility. The golden age of fiscally supercharged municipal credit is likely behind us, downgrades are picking up, and widening dispersion is exactly the environment where active management and disciplined security selection should outperform (no guarantees of course). Stay up in quality, favor the intermediate part of the curve, and let historically elevated tax-equivalent yields do what they were designed to do: compound.
Asset Allocation Insights
LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its recommendation for a tactical equity overweight and fixed income underweight. This reflects an expectation of further easing of geopolitical and commodity supply concerns as a result of the U.S.-Iran conflict, alongside a more cautious outlook for select areas of core fixed income. Overall, our tactical views emphasize a modest equity overweight expressed via a defensive factor tilt, a continued focus on quality bond sectors, caution in rate‑sensitive fixed income sectors, and an ongoing allocation to diversifying strategies and alternatives. Within fixed income sectors, we remain underweight investment grade corporates and mortgage-backed securities (MBS) as spreads remain tight relative to historical standards, diminishing the risk/reward profile of the sectors.