Beyond Treasuries: the case for taxable US municipal bonds

JavaScript is disabled in your browser. We use JavaScript on this site to enhance your experience.

22 September 2026 Solutions

Investors seeking high-quality income face rising Treasury supply and fiscal uncertainty. In our view, taxable US municipal bonds combine resilient credit quality and attractive spread compensation, offering diversified, higher-quality income relative to Treasuries and similarly rated corporate bonds.

What you need to know

Municipal credit conditions remain favourable, with robust state reserve balances supporting budget flexibility despite a tougher backdrop.
Treasury-level credit quality combines with wider spreads than similarly rated corporates, enhancing potential income versus benchmarks.
Selected revenue bonds provide higher yields than Treasuries and developed sovereigns, offering differentiated, high-quality income.
Opportunities appear selective; dispersion and normalising reserves increase the value of active, research-driven implementation.

Municipal credit conditions remain resilient relative to the federal government

State reserve balances remain near multi-decade highs on an absolute and percentage basis, even as they moderate from pandemic-era peaks. The median balance is projected at 21% of expenditure in fiscal year 2026, versus 14% pre‑pandemic, supporting ongoing budget flexibility. In our view, these cushions reinforce municipal credit resilience, particularly compared with the federal fiscal trajectory, and underpin the asset class’s appeal for high-quality income allocations.

Figure 1: State reserves support budget flexibility despite a more constrained fiscal environment¹

Treasury-level quality, wider spreads than similarly rated corporates

Following the US Treasury’s AA+ standing across major agencies, taxable municipal bonds provide a high-quality alternative. The Bloomberg US Taxable Municipal Bond Index is rated AA overall, with 19% AAA, yet taxable municipals offer spreads over Treasuries that exceed those of similarly rated US corporates. While spreads have tightened alongside rising Treasury yields, in our view, the combination of quality and spread remains compelling for income-focused investors.

Figure 2: Taxable munis provide higher spread compensation than similarly rated corporates².

Muni revenue bonds: differentiated high-quality income

For duration exposure, longer-dated taxable municipal revenue bonds, many linked to essential-service infrastructure, offer higher yields than general obligation bonds and developed market sovereigns of similar maturity, including US Treasuries. Longer-dated AA- and A-rated taxable munis also provide a spread pickup over US investment-grade corporates, with spreads above five-year averages. In our view, selected revenue-backed structures can enhance portfolio income without materially compromising credit quality.

Figure 3: Longer-dated taxable muni revenues yield more than many 30‑year sovereigns, including Treasuries³.

Selecting taxable municipal opportunities

The case in 2026 is selective rather than broad. In our view, income, resilient demand, curve positioning, credit quality and spread compensation drive opportunity. Investors able to diversify beyond government bonds may find attractive high-quality income and exposure to essential public infrastructure. The strongest prospects are likely in selected revenue-backed bonds, where durable cashflows and market complexity support relative value. As dispersion increases and reserves normalise, active management remains central.