Municipal Bond News 10/5/26

Munis Rebound…Tax-Free Yields Still Stand Tall…It’s a Good Time to Buy Bonds, WSJ Sep 23 Opinion…September Losses Worst in Four Decades… Rate Policy Odds…The Race For Governor…New Muni Bonds…Retail Demand For Munis Grows…

Munis Rebound…Municipal bonds are kicking off the last quarter of 2026 with a sharp rally, after September dealt the worst losses in nearly four decades. Top-rated muni bond yields fell about 15 basis points in the latter half of last week, after climbing sharply earlier last week to the highest in 25 years. Amid elevated volatility, the Treasury bond market set the tone for yield movements in the muni bond market. Progress on lowering inflation and weaker-than-expected employment conditions, along with a respite in oil prices pared odds of a October rate hike. With top-rated 30-year munis currently offering 5%-plus tax-free yields, tax-free yields at such high levels have not been available in decades.

It’s a Good Time to Buy Bonds, WSJ Sep 23 Opinion…“Tax-exempt bonds today offer unusually high returns.” Burton Malkiel, author of bestseller ‘A Random Walk Down Wall Street’ wrote an Opinion in WSJ stating, “Even if the inflation rate increases, the return should comfortably exceed it. Such a return would compare favorably with returns from common stocks with far less volatility.” Additionally, Barron’s recently highlighted the appeal of 30- year munis yielding over 5%, and Barron’s Advisor recommended munis in a September 30 article headlined, “The Best Bonds to Buy Today.”

Tax-Free Yields Stand Tall…Investor interest in muni bonds, known for their high credit quality, is driven by currently high absolute yields, and munis’ yield advantage relative to taxable counterparts. For example, a taxable bond would need to deliver about 8.4% yield for a high income household in a high tax state, in order to match current tax-free muni bond yields. Offering investors with meaningful starting tax-free yields currently near the highest in two decades, the recent bond sell-off has boosted the appeal of muni bonds to long term investors.

September Losses Worst in Four Decades…Muni bonds logged in their worst monthly performance since 1987, recording a 4.7% loss in September. Meanwhile, U.S. Treasury bond indices lost 2.2% in September, and 30-year muni yields reached their highest level since 2011. In September, oil prices surged amid prolonged geopolitical uncertainty, and the Fed hiked policy rates for the first time since 2023. Amid volatile markets, trading in the muni market has surged to the highest since at least 1995, as the sharp yield movements brought investors off the sidelines.

Rate Policy Odds…Expectations for another Fed rate hike reversed sharply last week, with odds of an October rate hike plunging to less than 20%, down from over 70% a week ago. Through December, odds of quarter-point or more in increases fell to 72.5%. Currently, there are about one-in-three chances of a rate hike over the next 12 months. New York Fed president John Williams noted that there is “no need for urgency” for an October rate hike. The shift towards an expected pause helped fuel a late week bond rally.

The Race For Governor…On November 3, 39 U.S. states will vote for a governor. Incumbents seeking a third term include Illinois Governor Pritzker, Connecticut Governor Ned Lamont, and New York Governor Kathy Hochul. 36 U.S. states including Florida and Michigan have open seat races, mainly due to term limits. Currently, Democrats hold 24 governorships and Republicans 26. With so many competitive governor races, political power in Capitol Hill and state capitals is at stake.

New Muni Bonds…In September, $55 billion new muni bonds were issued, up 13.7% from a year ago. This year’s largest new issue to-date, $3.7 billion Alabama Toll Road was issued in September. Additional mega muni deals included New Jersey Transportation Trust Authority, Chicago O’Hare airport bonds, and a California prepaid energy bond issue. However, several issuers postponed bond offering plans, in anticipation of more favorable borrowing conditions, and less volatile markets.

Retail Demand For Munis Grows…Retail investors have boosted their holdings of muni bonds this year. Individuals and investment funds hold over $3.5 trillion of state and local government bonds, up $228 billion from $3.3 trillion a year ago, per SIFMA data. Last week brought the largest-ever muni bond orders to some of the largest institutional investors. Long-term buy-and-hold investors view bouts of market volatility as a good time to lock in some of the most attractive tax-exempt yields we’ve seen in years.

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.