Municipal Bond News 10/20/25

Haven Demand Boosts Muni Rally…New Muni Bonds…Demand For Muni Bonds Soars…Fed Eyes Easier Monetary Policy…Technology Taxes Sought For Chicago Budget Fix…Rate Cut Odds…PREPA Bondholders Unite…U.S. States Mull Federal Shutdown Response…

Haven Demand Boosts Muni Rally…Haven demand, or a ‘flight-to- safety’ boosted muni bond prices last week. Muni bonds yields fell about 12 basis points last week, echoing similar moves in U.S. Treasury bonds. Loan troubles at two West Coast regional banks and heightened tariff concerns amid a government shutdown led to volatile market conditions. Muni bond prices have risen since September, putting them on track for the best monthly performance since 2023.

New Muni Bonds…At least six mega muni bond offerings, or new transactions greater than $1 billion, are currently being offered in the primary market. City of New York $1.5 billion general obligation bonds sold last week received orders worth 1.5x the amount of bonds offered. Long term New York City general obligation bonds offered a top yield of 4.66%. Current muni bond yields offer historically high tax-equivalent yields for top earners.

Demand For Muni Bonds Soars…Prospects of rate cuts have fueled cash inflows into muni bond investments. A bellwether of investor demand, cash inflows to muni bond funds, has exceeded $37 billion so far this year, compared to $42 billion in all of 2024. In 2023 and 2022, the muni bond market experienced bond fund outflows, which led to negative muni bond index returns. September cash inflows, about $8 billion, are the highest in eleven months.

Fed Eyes Easing Monetary Policy…Several Federal Reserve officials want to ease monetary conditions by stopping the sale of Fed-owned securities, alongside additional rate cuts this year. Since 2022, the Fed has been reducing its large portfolio of securities, a process known as quantitative tightening. Stopping this sales process is expected to lead to lower market rates. Recently, Fed Chair Powell mentioned that the Fed might end quantitative tightening soon. Other central bankers, including Boston Fed President Susan Collins and Christopher Waller, also support rate cuts and a less strict monetary policy.

Technology Taxes Sought For Chicago Budget Fix…New taxes on technology companies and large corporations, a social media usage tax and a record transfer out of the city’s tax-increment financing districts could help close Chicago’s $1.2 billion budget gap. The Mayor’s Fiscal Year 2026 budget proposal estimates that approximately $438 million in new recurring revenue could be generated from these new taxes. This includes reinstating a $21 per employee corporate head tax, hiking taxes on the city’s personal property lease tax on cloud software and infrastructure paid by technology companies, a congestion surcharge for Uber and Lyft, as well as a ‘social media tax’ on Meta, YouTube and a tax on wealthy yacht owners. Additionally, the proposal seeks to sweep more than $1 billion out of surplus tax increment financing districts. The plan reduces supplemental pension payments that are not required legally. To further cut costs, the budget plans to save $200 million through a hiring freeze and other measures. “We are asking large corporations and big tech companies that have made trillions of dollars to pitch in a little bit more,” Johnson said. The $16.6 billion spending plan is 3% lower than the current year budget. City Council will vote on the plan over the next few months.

Rate Cut Odds…Wall Street banks, including Goldman Sachs and Morgan Stanley, expect two more quarter point rate cuts this year. Bank of America expects only one rate cut for the year but has moved its forecast for that cut up to October, from December. In the absence of official economic data, economists have been looking at alternative or private economic indicators, which indicate a softer labor market. Fed Chair Powell said he felt there was adequate insight for the Fed’s upcoming meeting, but that “we’ll start to miss that data, particularly October data,” if the shutdown persists. Traders currently assign near certain odds of a 25-basis point rate cut at month-end.

PREPA Bondholders Unite…About 90% of PREPA bondholders are currently opposed to the board’s debt plan. BlackRock and other bondholders have terminated their debt settlement with the board and pledged to cooperate with bondholders and bond insurers opposed to the board’s latest debt plan. PREPA’s largest creditors including Assured Guaranty, MBIA, GoldenTree Asset Management, Invesco Advisers, Goldman Sachs Asset Management, were opposed to a 2023 board proposal that locked in higher recoveries to settling bondholders that included BlackRock and Nuveen. The latest cooperation agreement unites over 90% of PREPA bondholders and stipulates that bondholders do not negotiate side deals at least until next August.

U.S. States Mull Federal Shutdown Response… Responses from U.S. states to federal funding gaps during a government shutdown can differ significantly. Some states may try to bridge the gaps caused by the suspension of federal programs, while others might align their actions with the federal government’s approach. On average, U.S. states derive 36% of revenue from the federal government, ranging from over 50% for Louisiana and 22% for North Dakota. “The federal government shutdown poses limited immediate credit risk for most U.S. public finance sectors because most municipal issuers have strong liquidity and budget reserves, but risks escalate if the shutdown is prolonged,” a Moody’s analyst added “This is especially the case in regions with high federal employment, and for mass transit agencies that rely on federal grants for debt service, capital grants, or operations.”

Compare 30-Year taxable U.S. Treasury yield 4.58% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.14%; “AA” 4.41%; “A” 4.60%. For investors in the 35% tax bracket, a 4.14% tax-exempt yield is equivalent to a 6.37% taxable yield. Top-rated long-term tax-free bonds yield 90% of comparable taxable U.S. Treasuries.