Municipal Bond News 12/8/25

2026 Muni Market Outlook…Muni Bonds Outperform…New Muni Bonds…2026 Rate Cuts…Investors Are Selective on College Munis…Airport Bonds Fly High…Puerto Rico Seeks Electric Rate Hike…Chicago Budget Impasse…

2026 Muni Market Outlook…Investors are likely to reposition a record $8 trillion pile of ultra short-term money-market investments, partly into conservative fixed income investments that offer better yields. Municipal bonds stand out as an attractive investment, particularly because their tax- equivalent yields exceed those of U.S. Treasury and corporate bonds for high earners. Additional rate cuts in 2026 could fuel demand for muni bonds. Furthermore, state and local governments are near peak credit conditions. “The non-rated bucket (which includes some of the main HY Puerto Rico and MSA tobacco benchmarks) continues to provide the best value,” Barclay’s noted, adding it estimates 4% returns on investment grade munis and 6% returns on high yield munis. Muni bonds are well positioned for 2026.

Muni Bonds Outperform…Muni bond yields were relatively steady last week. However, U.S. Treasury yields rose 12 basis points last week, the biggest weekly climb since April. The bellwether 10-year U.S. Treasury yield reached 4.14%, amid mixed economic signals. Despite last week’s higher-than-usual slate of new bond issuances, muni bonds outperformed comparable U.S. Treasury bonds, suggesting solid demand for tax-free income.

New Muni Bonds…Over $16 billion new muni bonds were sold last week, the third highest weekly volume this year. The State of Connecticut sold $1.6 billion high grade tax-free bonds at a top yield of 4.14%. San Francisco airport sold $847 million at a top yield of 4.8%. At least three mega muni bond issuances, or transactions exceeding $1 billion, are currently in the primary market.

2026 Rate Cuts…Bond markets expect policy rates to drop towards 3% in 2026, from a range of 3.75%-4% currently. A new Fed Chair is likely to be announced in early January. Betting markets see Kevin Hassett of the National Economic Council as a top contender. The incoming Fed chair will need to corral consensus on rate policy decisions. Central bankers’ views on the rate cuts have diverged from time to time this year. Bond market experts, who are part of the Treasury Borrowing Committee, are providing their inputs on the selection of the next Fed chair.

Investors Are Selective on College Munis…The higher education sector has faced its share of challenges this year, including negative headlines and rating downgrades. However, there are still opportunities for credit selection within this tax-free sector. Flagship public universities and large, wealthy private institutions are expected to outperform smaller colleges. Factors such as enrollment growth and substantial endowments tend to favor larger, comprehensive universities. Additionally, universities with academic medical centers typically experience stronger revenue growth. While state appropriations across the sector have grown for twelve consecutive years, this increase is likely to moderate moving forward. With revenue forecasts strained and expenses rising, a trend towards consolidation in the sector is expected to continue. Investors seeking higher tax-free yields could benefit from the expertise of a Municipal Bond Specialist who can help them select strong college bonds.

Airport Bonds Fly High…High yield airport bond indices have returned 5.6% this year, outperforming overall muni market index returns. During Thanksgiving week, airport daily enplanements peaked at 3.13 million passengers. Daily enplanements crossed 3 million on eight days in 2025, relative to only 2 days in 2024. Soaring demand for air travel has boosted the prospects for airport muni bonds. Bellwether airports including New York’s JFK, San Francisco and Chicago O’Hare have been prominent bond issuers in the primary market.

Puerto Rico Seeks Electric Rate Hike…Puerto Rico’s Energy Bureau is considering hiking electric rates. Luma Energy, the private operator that has overseen transmission and distribution of power on the island since 2021, wants the residential fixed charge to increase from about $4 per month to $15 starting in January. New funding from the rate hike would be used to strengthen the electric utility’s grid. Experts warn that Puerto Ricans could likely see yet another increase in their power bills to pay off that debt if a deal is not reached with bondholders. Additionally, the Island administration seeks to replace Luma and is currently in discussions with U.S. electric companies.

Chicago Budget Impasse…Majority of Chicago’s 50 aldermen are opposed to Mayor Johnson’s budget plan. The Finance Committee of the City Council rejected the revenue measures in the Mayor’s spending plan including a per-employee ‘head tax’ on corporations. Instead, aldermen seek delivery or rideshare congestion surcharges, garbage collection fee and liquor store taxes. Interestingly, Chicago Public Schools, which was set to receive over a half a billion dollars from the city’s tax-increment financing districts, is advocating for the Mayor’s spending plan.

Compare 30-Year taxable U.S. Treasury yield 4.80% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.15%; “AA” 4.43%; “A” 4.67%. For investors in the 35% tax bracket, a 4.11% tax-exempt yield is equivalent to a 6.38% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.