Municipal Bond News 1/12/26

Favorable Outlook For Muni Bonds…Record High Muni Bond Trading…Robust New Muni Bond Issuance… Wall Street’s Rate Cut Expectations…Rating Agencies Monitor Chicago Budget…Lawmakers Push For Federal Transit Funding…Higher Taxes on Wealthy…Top Muni Bond Issuers…

Favorable Outlook For Muni Bonds…The muni bond market enters 2026 with a strong outlook. Trends of 2025 are expected to continue, supported by moderating inflation and lower interest rates. State and local governments’ overall credit quality is stable, although the ratio of rating upgrades to downgrades could decrease. Bond selection could be crucial in certain tax-free sectors impacted by federal policy changes. The Bond Buyer forecasts near 5% returns for investment grade muni bonds in 2026, following 4.8% 2025 index returns. Moreover, long-term tax-free yields are now approximately 270 basis points above where they were five years ago, presenting an opportunity for historically high tax-free income.

Record High Muni Bond Trading…The municipal bond market is thriving. Led by higher demand from individual investors, state and local government bonds saw record high trading activity, while average trade sizes trended lower in 2025. There was a record 17.6 million trades executed in the muni market last year, up 22% from last year per Municipal Securities Regulatory Board (‘MSRB’). April 2025 saw the highest monthly trade count for municipal bonds ever recorded. Additional trade count record-highs were set in eight of 10 months last year. MSRB chief stated, “We believe 2026 will see a continuation of these multi-year trends.”

Robust New Muni Bond Issuance…In 2026, state and local government bond issuance is likely to match or exceed 2025 primary market volume. The largest underwriter of state and local government bonds, Bank of America forecasts $640 billion new muni bonds will be issued in 2026. In 2025, $580 billion new muni bonds were sold, 19% higher than $507 billion issued in 2024. This marks the second consecutive year of record- new issue volume, bringing scores of new tax-free fixed-income opportunities to investors.

Wall Street’s Rate Cut Expectations…Major Wall Street banks forecast at least two rate cuts in 2026. Morgan Stanley expects a later start to rate cuts than earlier anticipated, with 25 basis point rate cuts forecast in June and September, versus prior forecasts of January and April. JPMorgan Chase no longer expect the Federal Reserve to cut interest rates this year. Citigroup expects 75 basis points of rate cuts to begin in March, with policy rates dropping to 2.75%-3% this year. Meanwhile, bond markets anticipate the next rate cut in June, with another rate cut in the fourth quarter.

Rating Agencies Monitor Chicago Budget…In 2026, rating agencies will closely monitor the implementation of Chicago’s budget closely. S&P indicated that although Chicago’s Fiscal 2026 budget supports its ‘BBB’ rating/negative outlook, the city narrowly avoided a government shutdown, and the budget still relies heavily on one-time measures. Moody’s commented that the budget is credit negative and a step backward from recent strides towards structural balance, although the city still remains in a stronger position than a decade ago.

Lawmakers Push for Federal Transit Funding…On Capitol Hill, congressional committees are currently discussing ‘The Freedom to Move Act’, which seeks to provide federal grants to transit operators to cover lower farebox collections. Public transit ridership has plateaued at around 80%- 85% of pre-pandemic levels. Some agencies including New York’s MTA and New Jersey Transit have secured multiyear funding to offset farebox losses, while others face long-term structural budget gaps. Despite the decline in ridership, lawmakers recognize the strategic importance of transit systems for regional economic vitality, which is driving efforts to find funding solutions. Sustained political and funding support from federal, state and local sources will be critical for maintaining credit quality.

Higher Taxes on Wealthy…Wealthy individuals in high tax states including New York and California face an onslaught of income tax hikes. In California, lawmakers are debating a ballot measure that could bring a one-time 5% wealth tax on billionaires. New York’s new Mayor Zohran Mamdani seeks a 2% city income tax on incomes exceeding $1 million, which is subject to state approval.

Top Muni Bond Issuers…Three states accounted for nearly 40% of 2025 new municipal bond issuance. One in five new muni bonds sold last year was for schools and colleges. California issued the $83.6 billion bonds last year, highest volume of municipal bonds in 2025, followed closely by $82.5 billion in Texas, and well ahead of New York’s $63 billion. In Texas, bond issuance surged 21% over prior year. 90% of 2025 new muni bonds were tax-exempt. Three-quarters of last year’s new muni bonds financed new infrastructure capital.

Compare 30-Year taxable U.S. Treasury yield 4.85% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.14%; “AA” 4.41%; “A” 4.70%. For investors in the 35% tax bracket, a 4.16% tax-exempt yield is equivalent to a 6.4% taxable yield. Top-rated long-term tax-free bonds yield 85% of comparable taxable U.S. Treasuries.