Municipal Bond News 1/26/26

Higher Muni Bond Yields Lure Investors…Muni Bond Yields Rise…New Muni Bonds…Muni Bond Market Expands…Puerto Rico Eyes Tax Reform…New York State Budget Plan…Mayor, City Council Spar on Chicago Pensions…The Next Fed Chief…

Higher Muni Bond Yields Lure Investors…Muni bonds’ significant yield advantage over taxable bonds is fueling demand for tax-free state and local government bonds. Top earners in high-tax states stand to earn about 170 basis of additional yield by investing in muni bonds, compared to taxable Treasury bonds. Additionally, a drop in money market and short-term yields is leading investors to look for longer-dated tax-free bonds that currently offer significantly higher yields. Issuance in January is off to a slower start. About $31 billion in new muni bonds have been issued this month, about 25% lower than last month’s tally. Many long-term investors view any pullback in market yields as an opportunity to buy muni bonds and add to tax-free income.

Muni Bond Yields Rise…Muni bond yields rose 8 basis points last week, mirroring a similar surge in taxable U.S. Treasury bond yields. Long term yields on U.S. Treasuries spiked to the highest in four months upon geopolitical concerns such as tensions over Greenland and a sell-off of Japanese bonds driven by fiscal factors. However, Treasury bond losses were pared later last week. In the United States, the Fed-preferred inflation gauge for December aligned closely with expectations and current inflation is the lowest in over three years. Additionally, the U.S. economy posted robust 4.4% growth in the third quarter of 2025.

New Muni Bonds…Over $11 billion in new muni bonds were issued last week. New York City water and Los Angeles Power Water utilities were prominent issuers. Several hospitals have issued bonds in January. Maryland’s Medstar Health system sold bonds rated Moody’s ‘A2’ S&P ‘A’ at a top yield of 4.8%. Connecticut’s Hartford Healthcare issued bonds rated S&P ‘A’ Fitch ‘A+’ at a top yield of around 4.8%. Additionally, Brigham Young Hospital in Massachusetts sold high grade tax-free bonds at a top yield of 4.5%.

Muni Bond Market Expands…The municipal bond market has grown to $4.4 trillion par outstanding bonds, up 4% from a year ago. In 2025, 45 muni bond issuances crossed the $1 billion mark, a record high for mega muni bond issuance. Higher construction costs fueled larger-sized transactions. Mega muni bond offerings enjoyed significant investor demand. Several issuers upsized bond offerings, highlighting a thriving market for tax-free investments.

Puerto Rico Eyes Tax Reform…Puerto Rico’s governor has introduced a $550 million tax reform plan aimed at reducing tax rates for lower-income residents. The administration plans to offset the costs of this tax reform through government spending cuts and the elimination of certain tax exemptions. The oversight board emphasized that while tax reform is necessary for Puerto Rico, it must be fiscally responsible and aligned with the fiscal plan. The board has also highlighted the need to reform the island’s property tax system and conduct a new assessment of property tax values.

New York State Budget Plan…Governor Kathy Hochul has proposed a $260 billion Fiscal 2027 budget for New York State. The biggest state spending growth will be on childcare and early education, school aid and Medicaid. However, federal funding for New York State will drop by $10.3 billion in Fiscal 2027, a 11% decrease from the current fiscal year. MTA continues to be high on the state agenda and is poised to receive $8.6 billion from the budget. Additionally, New York State will maintain its $14.6 billion rainy day fund. The record high spending plan, which is 3% higher than the current year, is fueled by outperforming state revenue.

Mayor, City Council Spar On Chicago Pensions…Tensions have arisen between the city administration and the City Council following Mayor Brandon Johnson’s decision to defer some of the pension funding that was approved by the City Council. The Fiscal Year 2026 budget included a $260 million advance payment for pensions; however, the mayor has opted not to make the full payment. Instead, the city administration provided $130 million this month and promised to fund the remaining amount later this year. The mayor cites cash flow challenges, including delayed property tax receipts, as reasons for this decision.

The Next Fed Chief…BlackRock executive Rick Rieder has emerged as a leading contender in the race for Federal Reserve chair. Prediction markets, including Polymarket currently favor Rieder’s nomination with 45% to 60%. Kevin Warsh, a former Fed governor, is in second place with 25% to 30% odds, followed by current Fed governor Christopher Wallace at high single-digit odds. Once favored by prediction markets, there are slim odds for Kevin Hassett’s nomination. The White House is likely to nominate a candidate in the ‘not too distant future.’

Compare 30-Year taxable U.S. Treasury yield 4.81% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.22%; “AA” 4.48%; “A” 4.89%. For investors in the 35% tax bracket, a 4.22% tax-exempt yield is equivalent to a 6.5% taxable yield. Top-rated long-term tax-free bonds yield 88% of comparable taxable U.S. Treasuries.