Municipal Bond News 10/12/26

Tax-Free Portfolio Upgrade Opportunity…October Rally Follows Muni Sell-off…New Muni Bonds…Rate Hike Outlook in Flux…High Muni Yields Cushion Volatility…Strong Demand For U.S. Bonds…Brightline Muni Bonds Not Part of Bankruptcy…Chicago School Board Election Takes Spotlight…

Tax-Free Portfolio Upgrade Opportunity…High grade muni bonds are most sought, as the yield gap between ‘AAA’-rated and ‘BBB’-rated state and local government bonds has narrowed to about 57 basis points, down from 167 basis points a year ago. The September bond selloff has created an opportunity for investors to trade up into higher-rated muni bonds while reinvesting at higher yields. The 30-year tax-free benchmark yields climbed to the highest in fifteen years, after muni bonds suffered their worst returns since 2008 in September. The surge in yields coincided with record-high trading, highlighting the scale of portfolio repositioning.

October Rally Follows Muni Sell-off…State and local government bonds staged a sharp rally late last week, with top rated 30-year muni yields posting their largest single-day decline in more than a year. Benchmark muni yields declined up to 9 basis points last week, reflecting renewed demand for attractive tax-free income. The rebound comes in another volatile week, as yields rose about 4 basis points during the early part of last week. Top-rated tax-free index yields are currently at 5.2%, down from a 5.31% peak at September-end. Muni bonds continue to offer historically high tax-free income.

New Muni Bonds…High grade GOs (general obligation) bonds from New York City, California and Connecticut are front-and-center. California GOs offered a top yield of 5.12%, while Connecticut GOs were sold at a 5% yield. New York City received two times worth of orders for its $2 billion bond sale, which offered a top tax-free yield of 5.53%. Over the last two weeks, a few issuers have deferred borrowing plans in anticipation of better borrowing conditions. Over $15 billion in new muni bonds were issued last week.

Rate Hike Outlook in Flux…Goldman Sachs has suggested that markets may be pricing in too many rate hikes, amid cooling inflation and a relatively stable labor market, pushing its forecast for the Fed’s next rate hike from October to December. Last week, St. Louis Fed president suggested that interest rates could rise further over the next six to nine months to subdue inflation, while New York Fed president John Williams has signaled that the Fed could afford to wait before raising rates again. Latest Fed meeting minutes suggest that most policymakers anticipate another rate hike in 2026, although officials remain divided over the urgency of further tightening.

High Muni Yields Cushion Volatility…The recent rebound follows a historic September sell-off, and underscores a broader shift for bonds’ historically high yields, which are competitive with long-run stock return averages. Currently elevated yields provide an income cushion to offset any price declines should rates rise further, while falling yields could generate potential price gains.

Strong Demand For U.S. Bonds…U.S. Treasury yields, at a 24-year high, have fueled demand for safe haven U.S. sovereign bonds. Last week’s 30-year Treasury auction was 2.5x oversubscribed, and over 93% was purchased by domestic and international investors. Foreign investors are particularly drawn to U.S. Treasuries, with foreign central banks and foreign investors buying over 72% of the 30-year Treasury auction. 30-year U.S. Treasury yields climbed to 5.73%, the highest since 2002, driven by high oil prices and elevated geopolitical tensions.

Brightline Muni Bonds Not Part of Bankruptcy…Brightline’s bankruptcy filing has drawn attention across the bond market, however, Brightline Trains Florida LLC, the operating company and issuer of $2.2 billion senior municipal bonds, has not filed for Chapter 11 protection. Last week, Fitch lowered its rating on $2.2 billion senior secured muni bonds to ‘C’ from ‘CC’, which reflects its underlying unenhanced credit rating. Assured Guaranty has insured over 50% of Brightline senior tax-exempt bonds, and holds a majority debt voting position. The insured credit rating of the insured Brightline senior tax-exempt bonds is S&P ‘AA’/stable outlook. Assured Guaranty added, “AG’s commitment to insured bondholders remains unwavering, while it continues to focus on protecting its rights, mitigating potential losses and working toward outcomes that support the interests of the parties involved.” Assured Guaranty insured Brightline traded at around 90 cents on dollar last week.

Chicago School Board Election Takes Spotlight…Chicago Public School will be centerstage on Election Day, as it will hold its first election of a fully elected school board. Ushering in new governance for the nation’s third largest school district, all 21 Chicago Board of Education seats, spots for a board president, and district representative are on the ballot. Education-related matters feature high on the November ballot. Further, at least 17 major U.S. cities will hold mayoral election next month. Los Angeles stands out as one of the largest city contests.

Compare 30-Year taxable U.S. Treasury yield 5.51% to 30-Year tax-exempt Municipal Bond yield “AAA” 5.21%; “AA” 5.31%; “A” 5.57%. For investors in the 35% federal tax bracket, a 5.21% tax-exempt yield is equivalent to a 8% taxable yield. Top-rated long-term tax-free bonds yield 92% of comparable taxable U.S. Treasuries.