Municipal Bond News 10/26/26

Munis Steal the Spotlight…Munis Draw Historic Demand…New Muni Bond Issues…October Rate Hold Likely…Voters to Decide Taxes…Chicago Budget Seeks Corporate Tax Hike…Hospital Consolidation Increases…Odds on Midterm Election Outcomes…

Munis Steal the Spotlight…Muni bonds rallied sharply last week, posting 3.18% month-to-date index returns in October, outperforming Treasuries and corporate bonds. Demand for muni bonds has accelerated and lighter new issuances supported the muni bond market’s outperformance. Investors sought the safety of bonds amid a sharp technology-sector selloff. Longer- dated muni bond index yields fell eight basis points to 4.94% last week. Muni bonds are poised for the strongest October returns in at least three decades.

Munis Draw Historic Demand…Investor orders to buy tax-free bonds flooded the muni bond market last week. Investors have poured over $75 billion of cash inflows to muni bond investment vehicles so far this year, the second highest demand level on record, and 44% higher than last year’s pace. Active tax-loss harvesting and portfolio repositioning has led to a sharp increase in buying and selling of muni bonds this month. Just seven trading days in October exceeded the trading volume of 93% of full months between 2007 and 2021, per Bloomberg. The wake of the September sell-off has renewed investor interest in tax-loss harvesting.

New Muni Bond Issues…In recent weeks, new issuance calendars have become lighter, with only a single new issuance exceeding $1 billion last week. MTA issued $738 million high-grade bonds, with a top yield of 4.2% for 11-year tax-free bonds. Los Angeles schools offered ‘AAA’-rated bonds at a top yield of 5.05%. High borrowing costs are dampening refinancing activity. States and local governments crossed the $500 billion issuance mark last week. In 2025, this threshold was crossed in early November.

October Rate Hold Likely…Bond markets assign 90% odds that the Fed will leave policy rates unchanged in October. However, higher-than-expected inflation has led Wall Street to anticipate one additional rate hike in 2026. All eyes will be on this week’s Fed meeting.

Voters to Decide Taxes…More than a dozen U.S. states are asking voters to decide on tax-related measures on November 3. Nine income tax-related measures are on the ballot, the highest number recorded in the 21^st century. California, Washington and Colorado are specifically seeking a levy on millionaires and billionaires to shore up state coffers. On the other hand, North Carolina is among six U.S. states’ asking voters to lower state income taxes. Property tax relief is on the Florida ballot. About 66% of voters in a WSJ September poll said that they would favor raising the federal income tax for people who earn more than a million dollars a year. Voting outcomes could be a bellwether for future federal tax policy.

Chicago Budget Seeks Corporate Tax Hike…Mayor Johnson unveiled a $17.6 billion budget for Fiscal 2027, aimed at closing a $882 million deficit. The mayor seeks to revive a controversial corporate head tax to generate roughly $102 million, and proposes to raise cloud taxes to generate an additional $234 million. Sports betting tax could be doubled, while a new packaging tax is also planned. The plan avoids property tax hikes, but 29 alderpersons and business groups are opposed to corporate tax hikes. State approval may be needed for some higher corporate taxes.

Hospital Consolidation Increases…Margin pressures are driving another wave of hospital mergers. Rising labor costs, tighter reimbursements and growing capital needs are pushing hospitals to consolidate and increase financial stability. Hospitals increasingly favor familiar partners and established markets to reduce merger risks. This year, 56 hospital M&A transactions have been announced so far, up from 46 recorded in all of last year, per Kaufman Hall. For muni bondholders, successful consolidation could improve operating margins and liquidity, while additional borrowing and integration costs could add to expenses.

Odds on Midterm Election Outcomes…Major prediction markets, Kalshi and Polymarket, are signaling a potential shift in congressional control ahead of November 3 midterm elections. These platforms, where participants trade contracts based on the outcomes of future events, currently indicate a strong likelihood that Democrats will regain control of the House of Representatives, with over 90% probability. The Senate remains far more competitive, with current odds of Democrat control between 63% and 67%. These market-implied odds can change rapidly, however, they suggest that investors are increasingly positioning for the upcoming election outcomes.

Compare 30-Year taxable U.S. Treasury yield 5.31% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.94%; “AA” 5.21%; “A” 5.46%. For investors in the 35% federal tax bracket, a 4.94% tax-exempt yield is equivalent to a 7.6% taxable yield. Top-rated long-term tax-free bonds yield 93% of comparable taxable U.S. Treasuries.