Fidelity's Return to Municipal Bond Underwriting and Implications for 2026

Fidelity Investments' re-entry into municipal bond underwriting in 2025 marks a pivotal moment for a market segment long shaped by institutional dynamics and structural evolution. After a decade-long absence, Fidelity's return coincides with a broader resurgence of confidence in the municipal bond sector, driven by legislative clarity, robust investor demand, and transformative shifts in market structure. As the sector looks ahead to 2026, Fidelity's strategic moves-coupled with macroeconomic tailwinds-position municipal bonds as a cornerstone of diversified fixed-income portfolios.

Structural Shifts Reshape the Municipal Bond Market

The municipal bond market has undergone profound structural changes in recent years, with electronification and algorithmic trading redefining liquidity and participation. According to a report, over 50% of interdealer trades in 2025 were routed through electronic exchanges, a trend that has spurred a surge in trade counts and fragmented market dynamics. This shift has democratized access, enabling odd-lot buyers and institutional investors alike to capitalize on tax-exempt yields. Fidelity's launch of two municipal bond ETFs in Q2 2025-Fidelity Municipal Bond Opportunities ETF and Fidelity Systematic Municipal Bond Index ETF- further underscores the sector's embrace of passive and active strategies to meet evolving investor preferences.

The rise of electronic trading platforms has also amplified the role of ETFs and separately managed accounts (SMAs), which attracted $46 billion in net inflows in 2025 alone, compared to $17.4 billion in 2024. This liquidity-driven growth reflects a broader realignment of market structure, where traditional dealer-driven models are increasingly supplemented by algorithmic execution and real-time price discovery. Fidelity's re-entry into underwriting, therefore, not only aligns with these structural shifts but also reinforces institutional confidence in a market that now balances innovation with stability.

Institutional Confidence Bolstered by Policy Clarity and Credit Fundamentals

A key catalyst for renewed institutional confidence has been the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, which preserved the tax-exempt status of municipal bonds and capped the SALT deduction at $10,000 for high-income taxpayers. This legislative clarity alleviated prior uncertainties about potential policy changes, stabilizing issuance volumes and investor sentiment. Fidelity's return to underwriting follows a strategic vacuum left by Citigroup's exit in 2024, signaling a sector-wide recognition of municipal bonds' enduring appeal amid rising interest rates and inflation-driven fiscal pressures.

Credit fundamentals further underpin this confidence. State and local governments have maintained strong tax revenue growth, high reserve balances, and historically low default rates, according to Fitch Ratings and S&P Global. These metrics, combined with attractive tax-adjusted returns, have made municipal bonds a defensive asset class in an era of macroeconomic volatility. Fidelity's bond managers emphasize that the sector's "carry benefits" from long-end securities-coupled with a steep yield curve- position it to outperform in 2026, particularly as the Federal Reserve's rate-cutting cycle gains momentum.

2026 Outlook: Record Issuance, Active Management, and Sector-Specific Risks

The municipal bond market is poised for record issuance in 2026, driven by infrastructure needs, inflation-linked cost increases, and the depletion of federal stimulus funding. While elevated supply could temper returns, the sector's appeal remains intact due to its tax-exempt yields and diversification benefits. Fidelity's re-entry into underwriting is expected to amplify this trend, providing institutional investors with access to high-quality credits and innovative structures.

However, not all sectors are equally resilient. K-12 school districts, hospitals, and higher education institutions face fiscal pressures from demographic shifts and policy changes, such as the 2025 federal reconciliation bill's impact on Medicaid funding. For these segments, active management and fundamental credit analysis will be critical to navigating risks. Fidelity's emphasis on quality-centric portfolios-focusing on credits with diversified revenue bases and tax-rate flexibility- aligns with this defensive approach.

Structurally, the market's electronification is likely to persist, with trade sizes shrinking and trade counts rising as algorithmic strategies dominate. This fragmentation, while enhancing liquidity, also demands greater precision in execution. Fidelity's underwriting capabilities, combined with its ETF offerings, provide a dual pathway for investors to navigate these dynamics: leveraging active management for yield capture while benefiting from passive strategies for broad exposure.

Conclusion: A Sector Transformed, but Anchored by Resilience

Fidelity's return to municipal bond underwriting is more than a strategic move-it is a testament to the sector's adaptability in the face of structural and macroeconomic change. As 2026 unfolds, the interplay of record issuance, electronification, and institutional confidence will define the market's trajectory. For investors, the key lies in balancing duration extension, credit selectivity, and active management to harness the sector's potential while mitigating sector-specific risks. In this evolving landscape, Fidelity's re-entry not only reinforces the market's foundational strengths but also signals its readiness to thrive in a new era of innovation and demand.