Muni mutual funds see near-record inflows

Municipal mutual funds are seeing near-record inflows year-to-date as demand for municipal bonds remains robust amid surging supply, a shift in asset allocation models and evolving investor preferences.

Investors most recently added $2.33 billion to mutual funds for the week ending May 27, bringing positive flows to date for 2026 to almost $40 billion, according to LSEG Lipper.

This is the second-highest figure since 1992, according to J.P. Morgan strategists led by Peter DeGroot.

This current inflow cycle ? which started in 2024 after the Federal Reserve ended its rate-hiking campaign ? has seen cumulative total flows of more than $145 billion from 2024 through the end of May. This more than reverses the record $125 billion of outflows between January 2022 and January 2024 during the Fed's aggressive rate-hiking period, said Sam Weitzman, a product manager at Western Asset.

The sizable inflows have proven to be a good thing for the muni market, as supply remains robust, said Chad Farrington, co-head of municipal bond investment strategy at DWS.

Issuance through May stood at $235.028 billion, up 4.3% year-over-year, according to LSEG.

If not for the outsized and consistent inflows, the market would probably see weakness as it might not be able to digest the influx of supply, Farrington noted.

One possible reason for the year's stronger flows is the "stark contrast" in relative value between muni and equity markets, J.P. Morgan strategists said.

"The taxable equivalent yield on Bloomberg's [Investment-Grade] Municipal Index is near decade highs while the current earnings yield on the S&P 500 Index nears decade lows, they said, noting this relationship is likely to contribute to a growing shift in asset allocation models.

Additionally, there's so much money "sloshing" around, and everybody's done well at pretty much every asset class, "so you could make the argument ? that people are taking some of their chips off the table after doing so well across many different asset classes," said Jeff Timlin, managing partner and head of municipal bond investing at Sage Advisory.

Absolute yields are at or near their highs in over a decade, so "people will say, 'OK, let's migrate a little bit of risk away from certain areas that we've done well with, put it into a tax-efficient area that is going to be a bit more defensive and lock in some of the returns seen, generate again tax free income, and set and forget it,' and then rebalance a person's overall risk profile," he said.

Taking some of the gains and still leaving the majority of the overall capital that market participants initially put in is a "prudent strategy" and doesn't necessitate a big correction in the market, Timlin said.

This year, demand has been a defining story for the muni market, said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

By 2026, weekly muni fund flows had, on average, almost doubled, as investors look for stability, tax-free income, and attractive yields, he said.

This increase in demand has surprised some, as the first five months of 2026 have been volatile, Kozlik said.

"The result has not been broad losses, but a shift in what investors are now choosing to value," he said.