Ignore the week-to-week headline-generating noise on the financial markets.

The important story is a lot more boring – and heartening – for municipal bond investors. It’s about states’ balance sheets, which are at near-record highs.

“With the ink freshly dry on most fiscal 2026, budgets, there is a distinct trend emerging,” according to Lord Abbett. “States are heading into the next fiscal year with reserve levels that are twice as strong as their historical average; revenue growth that has continued to beat forecasts; and the slowest rate of budgeted spending growth in more than a decade.”

In total, states held $327 billion in reserves at the end of fiscal 2025, the investment firm said. That represents about 25.2% of state spending in that year. Not as high as during the pandemic, when federal stimulus aid was flowing, but significantly above the long-term average of 9.6% since 1979.

Strength of states matter for munis

We track the “state of the states” (“State of Issuers Aids Robust Muni Market”) for a reason: States issue about 40% of municipal bonds.

Healthy state finances lower credit risk. Larger rain-day funds and cautious budgets give issuers room to absorb slower growth, revenue hiccups or one-off shocks. That cushion supports stronger ratings.

Importantly for individual investors, it means their tax-exempt income is anchored by issuers with more tools to deal with the unexpected.

Strong state finances mean fewer surprises. Bonds from healthier issuers tend to sell more easily, trade more smoothly and swing less in price. In that setting, high-quality municipals can do their job: Deliver dependable tax-free income.

Value check: Munis vs. Treasuries

High-quality municipals still offer compelling value on a tax-equivalent basis. The municipal-Treasury ratio, a gauge of relative value, was recently 89% on 30-year, AAA-rated bonds, a level that leaves long, high-grade munis looking very attractive.

Steady flow to munis

How are investors reading the markets?

In late September, equity flows were headline-driven and uneven, while muni demand has been mostly steady and driven by fundamentals.

Equity funds swung from a massive $43.2 billion outflow in the week of Sept. 17 to a $12.06 billion inflow in the week of Sept. 24, a headline-driven bounce, not necessarily a lasting change in investor behavior.

By contrast, municipal bonds logged five straight weeks of inflows ending Sept. 22 before a modest, late-month dip.

Of course, the fiscal backdrop could change, but today it’s hard to miss: Strong state finances, solid relative value and supportive money flows.

In this market, municipal bonds aren’t serving as a refuge. Investors are pouncing to lock in historically high after-tax income and a good night’s sleep.