US Municipal Strategy Mid-Year Outlook: Keep Cool and Buy Munis

Research evidence excerpt

US Municipal Strategy Mid-Year Outlook: Keep Cool and Buy Munis

North America Insight

May 18, 2026 06:28 PM GMT

Morgan Stanley & Co. LLCMUS Municipal Strategy Mid-Year Outlook Mark T Schmidt, CFA

Strategist

Keep Cool and Buy Munis Mark.Schmidt1@morganstanley.comMorgan Stanley India Company Private Limited+ +1 212 296-8702

Samyuktha Gopal

The economy is running hot – munis are the best way to keep StrategistSamyuktha.Gopal@morganstanley.com +91 22 6995-2022

cool. The world looks risky, alts are tricky, and stocks can make Gowtami P Pyla

you feel dizzy. With this many late-cycle signs, muni demand Strategist

Gowtami.Pyla@morganstanley.com +91 22 6995-2290

should rise. We expect $200bn of inflows, 1.5% excess returns,

5% total returns, and $600-625bn supply.

Key Takeaways

We forecast tighter ratios (65% 10Y) on stronger demand. We now see up to

$200bn of inflows into the asset class this year across SMAs, ETFs, and mutual

funds.

Supply is on track to reach our $600-625bn target, but not exceed it.

Energy prepay and housing should lead the way in issuance, and remain our top

sector recommendations.

We are broadly equal-weight muni duration, though we'd stay selective past 20Y.

A delayed policy repricing favors rolldown (steepeners) over the 30Y point.

A strong economy keeps credit quality intact, but tight spreads make us favor IG

over HY, and coupon spreads over credit spreads.

We start 2H with most of our key forecasts on track. To the extent we mark to

market, it's mostly because the economy is looking better and demand is stronger

than we anticipated.

Despite a resilient US economy, there are still plenty of late-cycle signals – not

to mention an unusual energy shock with uncertain feed-through to US inflation. It

makes munis a late-cycle haven for sure.