Muni Panel - 2026 outlook discussion with UBS & Nuveen
The desk expects the municipal bond market to face headwinds into 2026 due to elevated supply and macroeconomic uncertainties impacting overall performance. Per the full note, the discussions led by industry experts at UBS and Nuveen highlighted that although 2025 saw periods of strong rallies, the year-to-date performance of munis remains lower relative to other fixed-income assets. These dynamics suggest a more cautious positioning, particularly in terms of duration and credit quality, as the outlook remains complex amidst a steep yield curve.
What the desk is arguing
The municipal bond market is anticipated to continue grappling with substantial supply pressures as we head into 2026. As outlined in the UBS Market Moves podcast discussion, the performance of munis was notably challenged in 2025, characterized by a significant sell-off in the first half followed by rallies in late summer and early fall. This mixed sentiment underscores a necessity for a strategic reassessment by investors as they navigate the upcoming year.
Investment strategies will likely focus on duration and sector exposure, with experts advocating for caution given the current market conditions. The high supply levels, coupled with uncertainties in the macroeconomic landscape, suggest that the risks of further underperformance are palpable, particularly as the overall investor appetite and institutional flows remain in flux.
Where it sits in our coverage
Currently, our consensus target for the muni market stands at 1.075, with a range between 1.04 and 1.12. Firms with relevant insights include: - jpmorgan: 1.10 - bofa: 1.04
The desk’s assessment aligns with jpmorgan's outlook, positioning it toward the upper end of the target range. However, it diverges from bofa's more bearish stance, indicating a nuanced view amid the varied perspectives on market conditions.
How other firms see it
Support for a cautious approach is echoed among aligned firms like jpmorgan, which expects similar trends, whereas bofa holds a contrary view suggesting more significant risks to performance. This divergence reflects a broader uncertainty as we assess sector resilience and potential inflows into munis.
Notably, the trajectory of municipal bond performance may intersect with broad economic indicators, such as interest rate movements projected by the ECB, which could also influence investor sentiment in the fixed income landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The municipal bond market's performance outlook for 2026 suggests ongoing challenges amid elevated supply.
- 02Investment strategies will need to focus on cautious positioning regarding duration and specific sectors.
- 03The divergence in targets among firms suggests mixed sentiment in the municipal market's resilience.
- 04The broader macroeconomic environment, particularly interest rate trends, will weigh significantly on municipal performance.
Market implications
Investors should closely monitor the 1.075 target in the context of supply dynamics. The upcoming economic indicators related to interest rates will serve as critical signals for potential shifts in municipal bond attractiveness.
Risks to this view
A significant drop in macroeconomic stability, or a pivot by the Fed indicating a tightening cycle could lead to a rapid decrease in municipal bond prices, forcing a reassessment of the current cautious stance.
Hi, everyone. Dan Cassidy here. Welcome back to the UBS Market Moves podcast channel.
For today, we do have a special panel discussion specific to a 2026 outlook for munis. Joining us for today's panel discussion, glad to welcome Dan Close, Head of Municipals at Nuveen with over 25 years experience. Nuveen manages more than $200 billion in municipal bonds.
We're also joined today by Doug Vecicchio, Head of Municipal Sales, Trading and Underwriting with UBS, and then moderating our conversation for today from the UBS Chief Investment Office, a fixed income strategist for the Americas, Sadiq Markerji. So a big welcome to our guests. Sadiq, let me now pass it over to you to lead today's panel discussion.
Welcome. Thank you, Dan, and good morning to the special panel discussion on munis and the outlook for 2026. And welcome, Dan Close from Nuveen.
Greatly appreciate you joining the call. I'm sure our audience will benefit from it, from your insights, your front row seat in the muni space. So first of all, a warm welcome to you.
Thank you so much for having me, Sadiq. I really do appreciate getting on the podcast today. Excellent.
So a lot happened in the muni market in 2025. Munis came under pressure in the first half, a steep sell-off in April, enjoyed strong rallies in September and October, but on a year-to-date basis, still underperforming other fixed income assets. Saudi has been one of supply.
Supply has been very elevated. The curve is steep, but macro uncertainties also linger. So quite a complex backdrop.
But in that backdrop, first of all, I would like to ask you, Dan, how do you see munis performing in 2026? What's your outlook on supply is a question on everyone's mind. And then from the perspective of our client base and FAs, how should retail investors be positioned in terms of duration, credit and sectors, given your views on the market?
So kind of an all-encompassing question just to start with, but what happened to your thoughts on that? There's certainly a lot to unpack to start, Sadiq. But yeah, we certainly agree that the story is beginning to resonate a lot more.
I spent a lot of time on the road going to UBS offices, and I think especially in the late summer, we really did see the flip of the switch and the story begin to resonate. But first to the underperformance, it still remains the case that munis are the worst performing fixed income asset class on a year-to-date basis. And I think that really presents an incredible opportunity.
We often go in and compare munis performance to that of the Barclays aggregate. And the Barclays ag is just the S&P 500 of fixed income. It's ABS and MBS and govies and corporates.
And through Friday, munis were underperforming the aggregate by 248 basis points, which is, as you mentioned, just pretty meaningful underperformance. And looking back over the last 25 years or so, there's really only three other times where we underperformed this much. And that's the GFC, that's during the Meredith Whitney interview in 2011, and that's COVID.
So this underperformance is, as you mentioned, pretty meaningful. It was much, much worse at the end of August. It was underperforming by 470 basis points.
But as we looked at it, there wasn't a really good reason for this underperformance. The munis exemption was codified with the One Big Beautiful Bill Act in July. Fundamentals have remained very, very strong.
But as you mentioned, supply really did get elevated. And I think a lot of that was because of the uncertainty of the exemption. Some deals got pulled forward.
The curve got steeper. But I think the biggest issue we had in the muni market and the underperformance we've had has just been a little bit of a crisis of confidence where April and Liberation Day hit, every fixed income market was down considerably. But because our market has such a large retail presence, we didn't see these buyers, the retail buyers really come back into our space like we saw in corporates with more institutional buyers coming back and recognizing the value.
And so as a result, I think we did lag. And I think we're starting to see a good deal of the performance coming back since the end of August through last night. Munis are now outperforming the AG by about 217 basis points.
So we've really made this, I think, a fantastic comeback. But I think this comeback is still in the very, very early innings right now. I think we still have a lot more time for this story to catch up.
And I think specific to your questions, our outlook for 2026 is that we are still very much in the early innings of this performance comeback. And we have a piece coming out sometime in the next week or so. Our outlook for 2026 is that we're going to see sustained inflows into munis, that we're going to have this virtuous upward cycle of NAVs going up, which leads to more money coming into funds and ETFs, which then begets more and more inflows coming in, which begets greater NAVs.
I think you see that virtuous upward cycle coming. We do still think supply is going to be elevated. We anticipate 600 billion for the year.
But I don't think there's much to really be concerned with that. I mean, the only reason supply is going to be up so much is because it's just much more expensive to do these large scale capital projects. For instance, if you look at the cost of paving just a mile of highway compared to five years ago, it's up nearly 68%.
So I don't think that we should be too concerned with the elevated supply. I think what we're most focused on in our outlook is inflows. And we think that inflows are going to continue to drive performance.
We think that we have a very good opportunity to outperform. And I think given where we are versus the corporate market versus other larger fixed income markets, we've just got a lot to catch up. And I think that with the fundamentals remaining very good, and with us and the US economy hitting a bit of a soft spot, municipals are really the place you want to be given that these are essential service monopolies.
And think that a combination of extending a bit on duration, getting into healthcare and higher ed sectors, buying 5% coupons versus fours, AMT versus non-AMT, there's just a lot of different ways that you could pick up this underperformance. And we think that we have a very, very good story coming into to 2026. Excellent.
That was a fantastic overview. Upward virtuous cycle, if I may use those three words. That sounds very, very encouraging for MUNI investors.
So let's pivot to a different side of the markets. Great to hear that 2026, you're very optimistic on MUNI performance next year. But if you pivot to a different angle, so MUNI, as we all know, is a single security asset class held by retail investors for the most part.
And that's not going to change dramatically anytime soon. But over the last few years, and maybe even more recently, you've seen fairly robust growth in SMAs and ETFs. The impact of technology can help ask you with all the discussion around AI.
So given all those things, with regards to the investment landscape in MUNIs, how do you see things changing over the medium to long term? Where are the opportunities? What should investors be aware of with regards to these issues?
Yeah, I certainly would agree with the sentiment. The puck is certainly very much moving to SMAs and ETFs. You know, I look at our business at Nuveen, we've got more than $50 billion in SMAs, more than 50,000 accounts.
And that's just been an explosive growth engine for us. And I think for the entire competitive landscape, this idea in the SMA space of owning your own individual bonds, you know, being able to in-kind them, if you ever need to leave the relationship, the cost of SMAs just going down to near nothing, I think have all really been good for the asset class. And I think that, you know, the estimate growth is just going to continue.
I think with the customization that you can afford in your SMA portfolios, being very specific as to what you own, what you don't want to own, the tax efficiency. And I think, you know, you'd mentioned the technology side, and I think the entire idea of tax loss harvesting for the SMA product line just makes it that much more of an efficient vehicle. And I think those that can harness the technology to effectively tax loss harvest to make this a vehicle that not only does well from a total return standpoint and an income generating standpoint, but becoming just a very tax efficient vehicle is just going to continue to power its growth.
And I think for those same reasons, especially the tax efficiency side, we're seeing ETFs really come in and challenge traditional 40-act mutual funds. And you could just look at year-to-date flows, ETFs just absolutely outpacing by a very good measure your traditional mutual fund flows. And I think that makes sense.
The mutual fund, excuse me, the ETF industry has lagged in the muni space. I think it's caught up very recently in the last couple years on the passive side. And I think especially with active ETFs growing as well, we're going to continue to see more and more assets going into the ETF side.
And I could speak briefly on the tech side. There is just a large spend on the buy side to get better both on the ETFs where any passive strategy that you have, you're minimizing tracking error and being as tax efficient as possible. And I think especially on the research side of the municipals, we've seen AI really come in and transform practices, where an average buy side analyst might spend half of his or her time in the past finding the very difficult to find, you know, city council meeting notes, and then spending the other half the time analyzing it.
We're just seeing these greater efficiencies come into our marketplace where your buy side analyst is now spending 70% of his or her time actually doing the analysis and less and less time searching for these sometimes archaic corners of information in our market. So I think it's, you know, our market's certainly on this trajectory of getting more tax efficient, better and faster and cheaper. And I think that these are all very good things for FAs who are interested in the asset class.
So we're starting to make this very slow transition to become closer to other fixed income parts of the marketplace. Well, thank you. That's really great news.
And this is something that FAs are really interested in as to what are the newer ways to invest in this market, what benefits those get, and much more to come on these topics. But Dan, thank you so much for joining us today and sparing a few minutes from your busy schedule. I'm sure we will have you back at some point, but it's great.
It was great to talk to you. Thank you so much for having me. And thank you as well, Dan.
Let's now get in Doug Veciccio into the conversation. Doug also has a front row seat in Munis at UBS. So Doug, let me start by asking you, what trends have you seen from your seat this year?
And what are some of the main themes that you're seeing in the market? Yeah, sure. Thank you, Sadiq, for having me as well.
I think Dan covered some of the large salient points that we've been seeing. And again, I'll start from sort of a bigger picture standpoint. The Muni market is always fairly sensitive to the technicals, meaning the supply and demand curves that come into our marketplace.
I think we talked about how supply has been increasing. It really started last year. Last year, we saw about a 40% increase in total new issuance versus the previous year.
And I think this year, we'll probably see another 10% or 15% growth in new issue. Normally, that's not particularly great, will cause some underperformance. But I think the inflows that we're seeing, both on the mutual funds and ETFs, as Dan pointed out, have been able to meet this increased supply.
So far, year to date, by one measure, we've seen about $41 billion of inflows, about $26 billion in ETFs, about $15 billion in funds. But that doesn't tell the whole story because there's also the individual bond buying that's going on. There's the SMA growth that Dan talked about.
Even at UBS, we've seen another 15% increase in our overall volumes this year. So we are seeing that inflow meet the higher demand. We're also seeing improved liquidity.
I think you touched on it with the FinTech part of it. We've seen more electronic trading, the ECNs and ATSs, the electronic venues for trading. And that's really helped the liquidity in the marketplace.
We've seen more algorithmic trading operations. Even at UBS, we're instituting some algo predictive price models into our own operation. Again, seeing growth in smaller transactions, which is great.
Municipals, from a liquidity standpoint, tends to have a lot of smaller pieces because of the retail element to the product. Under 200 bond pieces is now 26% of the market. That's a 15% growth over the last five years.
So good liquidity now, even on the smaller pieces. In total transactions this year, we've seen a pretty measurable increase there as well. I think we're going to hit an all-time high this year in total municipal transactions.
So this is all very good for the market. The ability to transact, less friction costs, tighter bid-ask spread is all very positive development for the market. And again, some of this is driven by the cheapness.
Dan talked about being an opportunity right now in the market. Because we've stayed on the cheaper side, I think retail has noticed that. Yields have stabilized in here.
Inflation has stabilized. All of this is sort of bringing the retail money back into the product or into the product more so than even the year before. And the last thing I'll point out is on the tech, the fundamentals of the market remain very healthy.
State budgets are healthy. Fund balances are above historic levels. Rainy day funds for a lot of states are at their nominal highs.
And bond ratings have remained positive. So positive actions in 25 are 1.1 times versus the negative rating action. So I think overall, liquidity, cheapness in the market, higher yields, strong fundamentals are really what we've been seeing here in the secondary.
It's really driving a lot of the activity. Great. That's really nice to hear that you have a constructive view of the market.
And especially good to hear about the role of technology helping both liquidity and price discovery, two things that are really important to the muni market. So given all of that, how do you see the muni market playing out in 2026? Where do you see the best opportunities?
Yeah, sure. So I think both you and Dan mentioned that supply is going to stay on the elevated side. I mean, we're seeing projections come in anywhere from, you know, around where we're going to close this year and sort of the 530 to 550 range and then as high as 640 billion.
So, you know, I think Dan's got it around 600 seems to be, you know, sort of the sweet spot in the middle. So that's, you know, that's going to remain elevated. And so that's one half of the equation.
But I think, you know, the demand side is going to follow through here. I think as the Fed continues to cut rates in here and drive the shorter end of the curve down, it's going to most likely be pushing money out the curve. I think short term instruments like CDs, money markets, savings accounts as the Fed cuts, I think those products probably become a little less attractive and there'll be an incentive to come out the curve to meet this elevated supply.
I think the dovish Fed and inflation expectations coming down will also help from the supply side. I think if we do get into a lower rate environment, what we will tend to see, especially from retail, is a desire to buy, say, 5% type coupons or higher. And they tend to buy the shorter call bonds.
And that really suppresses the dollar price and creates a dollar price that's a lot lower than a longer dated call. I particularly also like 4% coupon bonds may not be as popular right now, but I think if there's an expectation for for lower yields moving forward, having something with some convexity to it so that you pick up some capital appreciation, perhaps more so than a higher coupon, shorter call bond or having some sort of mix between those two probably makes make sense from a retail perspective, I think. But everybody needs to remember is, you know, when they make an investment, it's the after tax return.
And when you look at municipals from a credit quality standpoint and an after tax return, it's really hard to beat this product. And that's, you know, that should continue to drive demand. Great, thank you.
Those were those are great comments. So in closing, I think summarizing what Dan and Doug mentioned, munis underperformed this year, but but fundamentals strong inflows are good. And that sets up munis for a strong 2026.
The excess supply should not be feared as long as flows remain good. And that's the expectation. Technology is transforming the landscape in even in munis, better price discovery, stronger liquidity, more products.
So all that is good news for for investors. So thank you both Dan and Doug for your insights and comments. We hope the audience you enjoyed our thoughts on the market that we turn it back to Dan Cassidy.
OK, Sadiq, Dan, Doug, thank you very much for spending some time today with our listeners and our clients. That will conclude today's 2026 munis panel discussion and outlook for munis in 2026 from UBS studios on band Cassidy. Thank you for joining us.
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