Municipal Bond News 1/20/26

Long Term Muni Bonds Are A Buy…New Muni Bond Offerings…Retail Demand For Muni Bonds Grows… Central Bankers Lean Towards Rate Hold…California Budget Gap Declines…Transportation Spending Boost… Seniors Housing Rebounds…Race For Fed Chief…

Long Term Muni Bonds Are a Buy…Longer-dated municipal bonds are among the best income investments right now. Although short and intermediate term muni bonds are not particularly compelling income opportunities on their own, there is a significant yield pick-up offered by longer maturities of municipal bonds. This incremental yield for longer maturities is much larger than what investors can get from Treasuries, corporate bonds or other taxable bonds. As Barron’s recently pointed out, long-dated high-quality muni bonds’ 4.5% tax-free yield (equivalent to near 8% for top earners in high-tax states) stands out as particularly attractive. While shorter-dated muni bonds are fairly priced right now, the long end is attractively priced, making them a smart investment choice for high net worths.

New Muni Bonds Oversubscribed…Orders aggregating to four times the $1.5 billion New York City Transitional Finance Authority bonds issued last week led to lower than anticipated yields. These tax-free top-rated bonds which offered a top yield of 4.6%. Nashville, TN airport, sold $1.28 billion bonds rated S&P ‘AA-‘ Fitch’ A+’ that fetched a 4.7% tax-free yield for long-term bonds. Muni market yield have been relatively steady and stable since October.

Retail Demand For Muni Bonds Grows…Retail investors’ demand for muni bonds soared in 2025. Direct holdings of municipal bonds by mom- and-pop investors grew by nearly $100 billion in the first three quarters of 2025. Majority of the new muni investments were made in the third quarter. Notably, the Fed resumed cutting rates in September. Individual investors, commonly known as households or retail, are the largest holders of state and local government bonds. 48% of all outstanding muni bonds are held directly by household investors. Individual investors are drawn to municipal securities because of the tax exemption and their relative safety given historically low default rates.

Central Bankers Lean Towards Rate Hold… At least seven voting members of the Federal Open Market Committee are inclined to pause interest rates at next week’s Fed meeting. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid, who dissented on the December rate cut, believe the Fed is well-positioned to hold rates steady and prefer to keep monetary policy modestly restrictive. Some members who supported the December rate cut, including Fed Vice Chair Philip Jefferson, San Francisco Fed President Mary Daly, New York Fed President John Williams, and Michelle Bowman, have also indicated a preference for maintaining current rates. Philadelphia Fed President Anna Paulson, who did not have a vote at the December meeting, favors modest rate cuts later this year if the job market weakens or if inflation eases.

California Budget Gap Declines…Governor Newsom has outlined a $349 billion Fiscal 2027 spending plan for the Golden State. The budget plan closes an expected $2.9 billion gap, which is much smaller than the $18 billion budget gap estimated by the state legislative office in November. Outperforming revenue collections have led to the smaller-the-expected budget gap. California’s general fund revenues have outperformed budget by $10 billion in the first half of the current fiscal year. However, federal cutbacks on health and human services will cost the Golden State about $1.4 billion. California’s rainy-day fund is projected to rise to $14.4 billion in Fiscal 2027 from $11.2 billion in the current year budget. The budget is $27 billion higher than current year.

Transportation Spending Boost…This year marks the conclusion of the $1.2 trillion Infrastructure Investment and Jobs Act. In 2026, spending on transportation infrastructure projects is projected to hit a fresh record. The U.S. transportation construction market is expected to grow nearly 3% to a record $209.1 billion in 2026. However, future federal funding for transportation funding is uncertain. Congress will be crafting the next surface transportation measure, which will start in the House Transportation & Infrastructure Committee. Advocates are urging lawmakers to increase funding to keep pace with inflation.

Seniors Housing Rebounds…The senior’s housing sector is experiencing a resurgence. In the third quarter of 2025, occupancy rates at seniors housing facilities rose to 88%. This marks the seventeenth consecutive quarter of increasing occupancy across the sector. Following significant occupancy losses during 2020, 2021, and 2022 due to the COVID-19 pandemic, there has been a notable reduction in the nationwide inventory of seniors housing units. Additionally, new construction has declined to a record low in 2025.

Race For Fed Chair…Prediction markets now indicate that Kevin Warsh is the leading candidate to become the next Fed chair, with odds of around 58% to 60%. In contrast, Kevin Hassett’s odds have sharply declined to less than 18% as the White House considers keeping him in his current role. Fed member Christopher Waller remains a distant third, with approximately 14% market odds, should someone from within the Fed be chosen.

Compare 30-Year taxable U.S. Treasury yield 4.83% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.14%; “AA” 4.42%; “A” 4.66%. 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.