Municipal Bond News 2/2/26

Why Long-Term Muni Bonds Make Sense Now…Demand For Muni Bonds Accelerates…Muni Bond Rally Outperforms…Demand For Bond Insurance Grows…Fed Stands Pat…Record Reinvestment Demand…New York City Faces Budget Shortfall…Big Election Year For States and Locals…New Fed Chair…

Why Long-Term Muni Bonds Make Sense Now… Demand for longer- dated state and local government bonds has increased for several reasons. Long-term municipal (muni) bond yields currently offer some of the most attractive rates in the fixed income investment market. For example, 30- year muni bonds yield about 1.6% more than 10-year muni bonds. The yield gap between longer-dated and short-term muni bonds is the highest it has been since 2013. This steep yield gap provides long-term investors with an opportunity to lock in historically attractive, tax-free muni yields. Muni bonds are a high-quality asset class, comparable in credit quality to U.S. Treasury bonds.

Demand For Muni Bonds Accelerates…New investments into muni bonds have surged to the highest in four months. Over the past month, longer-dated muni bonds have received the majority of these new tax-free investments. A meaure of investor demand, inflows to bond funds have exceeded $6 billion in January, signaling strong investor interest in tax-free bonds. Additionally, direct purchases of muni bonds by individual investors have increased in recent months.

Muni Bond Rally Outperforms…State and local government bonds have kicked off 2026 with outperforming gains. Muni bond price indices posted near 1% gain in January, following 4.25% returns in 2025. In contrast, U.S. Treasury bond prices were flat last month. The muni bond rally follows an increase in demand from retail investors. Investors looking to invest a record cash pile are seizing attractive yield opportunities in the $4.4 trillion muni bond market.

Demand For Bond Insurance Grows…Assured Guaranty CEO stated “We believe that our insurance can broaden market distribution and attract diverse investors for large and small transactions alike. For investors, it provides safety and security”. Similarly, Build America Mutual noted, “Investor demand for BAM-insured bonds was broad-based across sectors and regions, and grew stronger in the fourth quarter, as total volume surged toward an all-time high and average transaction size increased.” Overall, Bond insurance continues to see significant demand from investors and issuers.

Fed Stands Pat…The Federal Reserve voted 10-2 to hold rates at last week’s meeting. The majority of Fed officials judged current policy rate levels as appropriate. However, Fed Reserve governors Stephen Miran and Christopher Waller pointed to soft labor market conditions as reasons for advocating a rate cut. “The economy has once again surprised us with its strength,” Powell added that since the Fed’s last meeting in December, “upside risks to inflation and downside risks to employment have diminished.” The Fed plans to take a ‘wait-and-see’ approach as it continues to monitor the evolving economic outlook.

Record Reinvestment Demand… February is expected to see the largest reinvestments in recent history. Bondholders are poised to receive $44 billion of debt service payments from states and local governments. This includes $27 billion principal and $17 billion interest payments. Texas issuers have the largest amount of bonds maturing in February, followed by New York issuers.

New York City Faces Budget Shortfall…The nation’s most populated city faces a $2.2 billion budget shortfall in the current fiscal year and a $10.4 billion budget shortfall in Fiscal 27. This is the first time since the Great Recession that the city faces a shortfall of this magnitude so late in the fiscal year, according to the NYC Comptroller. The new mayor plans to propose a balanced budget plan this month. The mayor wants to ‘raise taxes on the wealthiest few in New York City.’

Big Election Year For States and Locals…In 2026, 36 states and three U.S. territories will be holding governor elections. Additionally, 88 state legislative chambers across 46 states will also have elections. A significant 85% of state legislative seats will be available for contenders. Notably, 21 incumbents, including Florida Governor Ron DeSantis and Michigan Governor Gretchen Whitmer, will not be running for reelection due to term limits or other reasons. Illinois Governor J.B. Pritzker is campaigning for a third term. State and local government elections are consequential for tax and economic policies.

New Fed Chair…Kevin Warsh, President Trump’s nominee for the Fed Chair, is well-acquainted with the Federal Reserve. He served at the Fed during the 2008 Great Financial Crisis and was appointed during Trump’s first term. Warsh has advocated for lower interest rates and has called for reforms in Federal Reserve governance. If confirmed by the Senate, Warsh will be at the helm of a Fed that is, from time-to-time, divided on policy rate decisions.

Compare 30-Year taxable U.S. Treasury yield 4.87% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.21%; “AA” 4.48%; “A” 4.78%. For investors in the 35% tax bracket, a 4.22% tax-exempt yield is equivalent to a 6.5% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.