Oct 19, 2026
The Midterms can change spending, but not America’s fiscal path
Digging into the rare opportunity in muni bonds today
Published October 19, 2026
Three forces are converging to make municipal bonds very appealing today: Higher yields, heavier supply and the simple math of taxes. Real yields for munis are currently at their highest levels since 2020, when the market was being upended by the COVID-19 pandemic. That creates an opportunity to use high-quality munis to lock in more attractive, tax-efficient income.
With that in mind, we see opportunity in munis for U.S. taxable investors heading into Q4.
For most taxable U.S. investors, the appeal of municipal bonds is enduring: They provide steady income and meaningful tax advantages via the tax-exempt status of the income received. Munis have long played a stabilizing role in portfolios, but they’ve often been overlooked relative to equities and other investments. That’s changed dramatically in 2026; therefore, we think they deserve another look.
This year, bonds have sold off and yields have risen as markets repriced the path of policy rates amid higher energy prices, heavier global borrowing needs and more-hawkish central banks. It’s one of the largest bond market moves in recent decades.1
This wave of falling bond prices and rising yields intensified in September, when benchmark U.S. Treasury bond yields hit their highest levels in more than 20 years. For munis, the move was amplified by elevated issuance from state and local borrowers. In September, it caused muni prices to underperform Treasury bond prices—an unusual dynamic that creates an opportunity to lock in higher muni yields.
Yield to worst across fixed income sectors
Percent, past 15 years
Source: Bloomberg Finance L.P. FactSet, J.P. Morgan Credit Research, J.P. Morgan Asset Management as of October 9, 2026.
Indices used are: US Treasuries: Bloomberg US Treasury Index; Municipals: Bloomberg Municipal Bond Index; IG Corps: Bloomberg US Corporate Index, MBS: Bloomberg US MBS Index ; US HY: Bloomberg US Corporate High Yield Index; ABS: J.P. Morgan ABS Index; CMBS: Bloomberg Investment Grade CMBS Index; EMD (USD): J.P. Morgan EMIGLOBAL Diversified Index; EMD (LCL): J.P. Morgan GBI-EM Global Diversified Index; EM Corp: J.P. Morgan CEMBI Broad Diversified; Leveraged Loans: JPM Leveraged Loan Index; Euro IG: Bloomberg Euro Aggregate Corporate Index; Euro HY: Bloomberg Pan-European High Yield Index. Yield to worst is the lowest possible yield that can be received on a bond apart from the company defaulting, and considers factors like call provisions, prepayments and other features that may affect the bond’s cash flows. ABS data begins in 2012. *All sectors shown are yield to worst except for Municipals, which is based on the tax-equivalent yield to worst assuming a top income tax bracket rate of 37% plus a Medicare tax rate of 3.8%.
Guide to the Markets – U.S. Data are as of October 9, 2026.
In our view, these higher yields have reset the risk-reward tradeoff in a way that long-term investors rarely see, especially in high-quality fixed income. Importantly, the repricing has been driven primarily by higher rates and not a broad deterioration in the essential services munis help finance. Investors can potentially get more income today for taking high-quality duration risk than they have in years
Even if we continue to see short-term volatility in bond prices, a higher starting yield can make a big difference. Locking in higher tax-exempt income today can support returns over time via compounding interest without requiring perfect rate timing.
Here, we’ll explain why this combination of timely factors and municipal bond characteristics creates a highly appealing environment for bond investors.
The uses of municipal bonds
State and local governments issue muni bonds to finance critical infrastructure and other needs. Municipal bonds not only fund specialty projects, but they also fund the backbone of local economies, like water and sewer systems, schools, roads and bridges, hospitals, transit and public power. If you’ve ever turned on the tap, driven on a toll road, dropped kids at a public school, or walked into a local hospital, you’ve relied on what muni bonds help build. In a very real sense, most Americans already live like muni investors.
The income from municipal bonds is exempt from federal taxes, including the 3.8% Medicare surtax on net investment income (or NIIT). In many cases, it’s exempt from state taxes as well.2
While munis have lower nominal, or pre-tax, yields, the after-tax income is what should matter most to potential and current investors. An individual’s tax rate makes a significant difference, particularly for residents of high-tax states. That’s why the right comparison for munis is not “yield vs. yield,” but “after-tax income vs. after-tax income.”3
This after-tax income, also known as tax-equivalent yield, is used to estimate what a taxable bond would need to yield to match a muni’s after-tax income.
The chart below compares the tax-equivalent yields of AAA grade and BBB grade munis to U.S. Treasury bonds. The additional yield from munis reflects their tax benefits and the additional risk compared to Treasuries, while the following two charts show the fiscal health of U.S. municipalities compared to the federal government and the corporate sector.
Muni tax-equivalent and Treasury yield curves
State and local, federal and corporate debt
% of GDP, 1988 - 2025, end of fiscal year
State rainy day fund balances
Median savings balances as a % of total spending, 1988 - 2026, fiscal year
Source: J.P. Morgan Asset Management; (Muni tax-equivalent and Treasury yield curves) Bloomberg Finance L.P., FactSet, Federal Reserve, S&P Global; (State and local, federal and corporate debt) BEA, Census Bureau, Congressional Budget Office (CBO), Federal Reserve, Treasury Department; (State rainy day fund balances) NASBO Fiscal Survey of States.
Municipal tax-equivalent yields are calculated based on municipal bond curves for each credit rating according to S&P Global and assume a top income tax bracket rate of 37% plus a Medicare tax rate of 3.8% for a total tax rate of 40.8%. (State and local, federal and corporate debt) State and local debt are based on the Census Bureau’s Annual Survey of State and Local Government Finances. FY25 federal debt as a % of GDP figure based on preliminary data from the Treasury Department and BEA. (State rainy day fund balances) A rainy day fund, also known as a budget stabilization fund or reserve fund, is a collection of funds that local governments use to prepare for financial emergencies and future stability. *Estimates are sourced from NASBO’s Fiscal Survey of States. Figures for FY25 are preliminary while figures for FY26 are based on enacted budgets.
Guide to the Markets – U.S. Data are as of October 9, 2026.
How can you evaluate which muni bonds to invest in?
When evaluating individual bonds, we focus on the boring but powerful drivers of muni credit, favoring investment grade and higher-quality muni issuers. Essential-service revenue streams (like water/sewer), conservative debt service coverage, strong reserves and manageable pension/OPEB trends are things we look for and are especially important when reaching for longer maturities.
While muni bonds are theoretically riskier than Treasuries, which are regarded as the safest investments available, defaults are very rare at the highest-rated levels. According to Moody’s, the 10-year default rate for AAA rated muni bonds is 0.0%, and for AA rated munis, it’s 0.2%.4
In our view, today’s environment rewards an up-in-quality approach because it is possible to capture higher yields without needing to compromise on credit standards.
Ways to invest
There are three main ways to access munis, each with its own trade-offs.
Individual bonds give you direct ownership of specific securities, with a known maturity date and coupon, which appeals to investors who want full control and a predictable, bond-by-bond cash flow schedule. An investor could pick their own muni bonds to invest in their own brokerage account.
Separately managed accounts (SMAs) are portfolios of individual bonds built and managed by a financial professional. Like owning bonds directly, SMAs typically offer defined maturities and cash flows, which many investors find appealing when the goal is reliable, tax-efficient income, but with professional selection and ongoing oversight. The trade-off is that, depending on account size and mandate, diversification may be narrower than a pooled vehicle.
ETFs offer broad diversification, daily liquidity and quick implementation. The trade-off is that you own shares of a pooled portfolio rather than specific bonds held to maturity, so your cash flows and tax outcomes will behave differently than they would with direct ownership.
How do changes in tax laws affect the appeal of munis?
Several states have recently passed laws that either increase their top marginal tax rates or create a new personal income tax on high earners. If tax rates rise further, the value of tax-exempt income can become even more pronounced.
We can help
Municipal bonds can potentially provide tax-efficient income, portfolio stability, and diversification, but the right approach depends on your tax profile, state of residence, time horizon and liquidity needs. To learn more about the ways muni bonds can play a role in your portfolio, about investing in the current fixed income environment in ways that will serve your long-term goals, as well as how to compare opportunities on a tax-equivalent yield basis, contact your J.P. Morgan team.
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10-year Treasury yields rose 110 basis points over the first three quarters of 2026, the fourth-largest move in the first three quarters of a year since 1962.
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Source: Internal Revenue Code (IRC) § 103 and § 1411. Interest from municipal bonds is excluded from gross income for federal income tax purposes and is omitted from Net Investment Income (NII) calculations for the 3.8% Medicare surtax under IRC § 1411(c)(5). State and local tax exemption depends on the issuing state; interest is typically tax-exempt if issued within the taxpayer's resident state
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TEY = Muni yield / (1 − your marginal tax rate). For example, a 4.5% muni yield for an investor facing a 40.8% top federal rate (37% + 3.8% NIIT) is roughly 7.6% tax-equivalent. That “TEY gap” often makes investors do a double-take because it can materially change how munis stack up versus taxable bonds.
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Moody’s U.S. Public Finance: U.S. municipal bond defaults and recoveries, 1970 to 2024
KEY RISKS
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal and accounting advice. J.P. Morgan Chase & Co. and its affiliates do not provide tax, legal or accounting advice and are not responsible for any adverse tax consequences or liabilities. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Investing in fixed income products (such as bonds) is subject to certain risks, including, but not limited to, interest rate, credit, inflation, call, default, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).
Investors should carefully read the prospectus or other offering documents which include information on the investment objectives, risks, charges and expenses along with other information about the fund before investing.
Important Information
Municipal bonds stand out for their risk-reward profile, tax benefits and resilience, especially as interest rates and inflation reshape fixed income.
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