Municipal Bond News 12/1/25

Muni Bonds Poised For Favorable Returns…COFINA Bonds Are A Sweet Spot…Wall Street Divided On Rate Cut…Muni Bond Demand To Outpace Supply…MTA Deficit To Shrink…Primary Market Slows Down…Muni Bond Rating Update…State Revenue Growth Slower…

Muni Bonds Poised For Favorable Returns…As we approach 2026, investors have a ‘constructive’ outlook on muni bonds. In the first half of the year, muni bond returns underperformed taxable U.S. Treasury bonds due uncertainty over federal legislation and a surge in primary market bond issuances. However, muni bond prices have gained in recent months. This positive shift has been sparked by the passage of the One Big Beautiful Bill Act and encouraging policy rate cuts in September and October. With demand for muni bonds soaring this year, muni bonds have logged an impressive positive 4.15% year-to-date muni bond index return. Historically, December has generally been a favorable month for muni bond investors, with an average return of 0.54% over the past 25 years. Investors are optimistic that the $4.2 trillion muni bond sector will end 2025 with positive returns.

COFINA Bonds Are A Sweet Spot…Experts suggest that “the Puerto Rico sales tax bonds will likely be refinanced with an investment-grade rating in the next few years,” Barron’s quoted last week. The COFINA Bonds, issued in 2017, provide investors with strong protections and less leverage, making them an interesting investment which offers ‘triple-tax- exempt’ yield. Earlier this year, a different institutional investor mentioned to Bloomberg that if Puerto Rico wishes to enter the municipal market, it could seek a credit rating for these bonds, and “we believe that will turn out well.” Notably, COFINA bonds are significant holdings for several large institutional investors, such as Goldman Sachs, with over 77% of COFINA bonds being held by institutions.

Wall Street Divided on Rate Cut…J.P. Morgan has joined Goldman Sachs and Citigroup, saying it expects a quarter point rate cut on December 10. However, Morgan Stanley, Bank of America and Nomura do not expect any additional rate cuts in 2025. Recent data has produced mixed signals, creating uncertainty about the economic outlook. Bond markets assign four-in-five odds of a December rate cut.

Muni Bond Demand To Outpace Supply…December is a time for investors to optimize their investments by harvesting any tax-losses and repositioning tax-free portfolios in anticipation of 2026 investments. Bondholders will receive $33 billion in principal repayments from maturing and called bonds, as well as coupon payments, from states and local governments in December. with approximately $30 billion in new tax-exempt bonds expected to be issued, reinvestment demand is set to outstrip supply, creating a favorable environment for muni bond returns.

MTA Deficit To Shrink…New York’s MTA estimates that its deficit will shrink by $418 million over the three years, owing to expense cuts and higher revenue. Since the introduction of congestion tolls on January 1, 2025, the MTA has generated $468 million through October. An uptick in real estate tax collections will also boost MTA revenue. Real estate tax collections are estimated to bring in $1.1 billion annually starting in 2027. in line with the 10-year average, after falling to $719 million in 2024. Furthermore, the nation’s largest transit agency seeks to cut costs by $675 million over the next four years, in addition to mandated annual spending reductions of $500 million. MTA’s CFO now projects a $160 million gap in 2027, less than 1% of that year’s operating budget.

Primary Market Slows Down… In November, the municipal bond market saw a notable dip in new issuances, with states and local governments issuing $37 billion in muni bonds—a 33% drop from October. It’s interesting to note that only two issuances, including Chicago O’Hare’s insured bonds, exceeded $1 billion. This trend of declining supply has been consistent over the last four months. During Thanksgiving week, the market was quieter, with under $2 billion in new bonds issued.

Muni Bond Rating Update…In 2025, there has been a slower pace of muni bond rating upgrades compared to the post-pandemic years of 2022-2024. Interestingly, for the second quarter in a row, Moody’s saw more downgrades than upgrades. On a positive note, Fitch’s upgrades have outnumbered downgrades by 1.7 times. While this ratio has decreased from last year’s 3.23, most rated muni bonds still hold a stable outlook.

State Revenue Growth Slower…U.S. state revenue will likely slow in Fiscal 2026. However, spending pressure are outpacing revenue growth. Accordingly, 23 U.S. states including Florida and Michigan have lowered Fiscal 26 spending from prior year. The spending pressures are sharpest in healthcare, housing and natural disaster spending per the National Association of State Budget Officers. Largely, U.S. states continue to maintain or grow rainy day funds to guard against uncertainty. However, few states such as California and Maryland are drawing from rainy day funds to balance budgets.

Compare 30-Year taxable U.S. Treasury yield 4.69% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.11%; “AA” 4.44%; “A” 4.68%. For investors in the 35% tax bracket, a 4.11% tax-exempt yield is equivalent to a 6.32% taxable yield. Top-rated long-term tax-free bonds yield 88% of comparable taxable U.S. Treasuries.