Municipal Bond News 10/19/26

October Rally Reignites Muni Bond Appeal…Muni Yields Tumble…Issuers Downsize Borrowing Plans…New Muni Bonds…Rate Pause Odds Grow…Bondholders Seek Puerto Rico Oversight Board Removal…U.S. States Leverage Corporate Taxes…Illinois’ Gambling Pays Off…

October Rally Reignites Muni Bond Appeal…Municipal bonds are continuing to attract investors during an October rally. Their appeal stems from two main factors: strong credit quality and high tax-free yields, making the $4.5 trillion municipal bond market increasingly attractive. Last week, inflows into municipal bond funds exceeded $1.6 billion, indicating sustained demand for tax-free income investments. With ongoing volatility in the broader market, investors are drawn to the relative stability of state and local government bonds. Municipal bonds offer credit quality comparable to U.S. Treasury bonds and currently provide tax-free yields that rival the long-term return averages of riskier corporate bonds and equities. This muni bond rebound follows a significant sell-off in September, and has reinvigorated investors to take advantage of elevated tax-free yields.

Muni Yields Tumble…Muni yields dropped sharply last week, falling by about 18 basis points to 5.02% for 30-year munis, and 3.76% for 10-year munis. The rally marks one of the strongest single-day advances for munis in eighteen months. 30-year Treasury yields fell 12 basis points to 5.43%. So far in October, muni bonds have posted 2% index month-to-date returns, outperforming 1.15% index return on comparable Treasuries. Demand for haven investments amid volatile market conditions, and expectations that the Fed will hold rates steady at this month’s meeting boosted bonds. Additionally, a slowdown in issuance has contributed to munis outperforming Treasuries.

Issuers Downsize Borrowing Plans…A jump in borrowing costs has led several issuers including NJ Transportation Trust Fund Authority to defer plans to refinance prior debt. Similarly, MTA and State of Connecticut scaled down new issuances. Refinancing-related new issuances fell sharply in September. Muni yields, at a 15-year high, could test forecasts of record-setting issuance in 2026.

New Muni Bonds…Between $5 to $8 billion in new muni bonds were issued last week, a slowdown from a hectic pace of issuance in recent weeks. State of New Jersey appropriation bonds, a California prepaid energy, a Texas tollway and New York City GOs are among last week’s largest issuances. University of Maryland Medical Center issued $416 million ‘A2’/‘A’ rated muni bonds at a yield of 5.33% for 20-year bonds.

Rate Pause Odds Grow…Odds of an October rate hike dropped to below 13%, with Fed officials reluctant to commit to an immediate rate hike. Fed Governor Christopher Waller indicated that rate hikes may not be necessary at consecutive meetings, although additional rate hikes may be needed. Fed Vice Chair Michelle Bowman also expressed little urgency to act immediately. Fed Chair Warsh reaffirmed the Fed’s commitment to fighting inflation, but declined to signal the Fed’s next policy action. Earlier last week, bond markets assigned near-even odds of an October rate hike, after September inflation was higher-than-expected amid higher oil prices.

Bondholders Seek Puerto Rico Oversight Board Removal…“It is time for PREPA to strike a different path forward. FOMB membership should be changed or the FOMB should be disbanded as an impediment to successfully restructuring PREPA,” Puerto Rico electric utility bondholders stated last week. Bondholders’ criticism centers on the oversight board’s approval of a $5.9 billion ten-year power generation contract involving Power Expectations, LLC, Enchanted Rock LLC, and Reyes Contractor LLC. Bondholders allege that the board failed to conduct basic due diligences as the contractors face allegations of forged signatures, missing performance bonds, and unmet contractual milestones. The board has defended its oversight process, arguing that the alleged misconduct occurred after its review, and board intervention helped prevent the contract from progressing.

U.S. States Leverage Corporate Taxes…Corporate taxes are becoming an important pivot in U.S. states’ revenue trajectory, with governments increasingly wary of leaning on household wallets. Illinois has boosted its coffers with $1.8 billion in recurring annual revenue from new levies on advertising, social media conglomerates, alongside its 9.5% corporate tax rate. New Jersey, with a top marginal corporate tax rate of 11.5%, expects its corporate transit fee to raise about $800 million annually to support NJ Transit. New York extended its 7.25% top corporate income tax rate. These measures support budget flexibility, however, their sustainability will depend on how businesses respond to high tax burdens.

Illinois’ Gambling Pays Off…Illinois’ gambling tax revenue jumped nearly 20% year-over-year in 2026. Strong growth in casino, video gaming and sports betting led to the surge. However, Chicago’s first casino, Bally’s currently operating at a temporary site, is underperforming expectations, and lags rivals. Nationwide, states continue to expand gambling and sports betting taxes to support budgets.

Compare 30-Year taxable U.S. Treasury yield 5.43% to 30-Year tax-exempt Municipal Bond yield “AAA” 5.02%; “AA” 5.26%; “A” 5.53%. For investors in the 35% federal tax bracket, a 5.02% tax-exempt yield is equivalent to a 7.72% taxable yield. Top-rated long-term tax-free bonds yield 92% of comparable taxable U.S. Treasuries.