Municipal Bond News 2/9/26

Muni Bond Boom Brings Tax-Break For Wealthy Investors…New Muni Bonds…Long Munis Lead on Yield…Central Bankers Debate Inflation, Jobs…Muni Bond Supply Stalls…MTA Boost Capital Upgrades…Illinois Seeks Pension Boost…Disaster Aid Reform…

Muni Bond Boom Brings Tax-Break For Wealthy Investors…“It’s one of those rare moments in finance when an asset class appears to be providing a low-risk, high-reward opportunity for investors as well as cities and states looking to build,” New York Times wrote recently, adding that “municipal debt may continue to sell to high-net-worth households in high- tax states from California to Texas to New York like ice cream on a hot summer day.” President Trump himself is among the investors piling into municipal debt and purchased about $100 million in bonds from mid- November to late December, with a majority of the investments being muni bonds issued by a range of cities, school districts, utilities and hospitals. Wealthier clients are attracted to muni bonds’ tax-exempt income, and they can produce returns, or yields, comparable to stocks in a middling year — and often beat the returns on federal Treasury debt, the base line of the bond market.

New Muni Bonds…The issuance of new municipal bonds this year has been lighter than expected. Colleges and universities, which accounted for the highest issuance of municipal bonds last year, have reduced their borrowing in 2023. However, the primary market is currently seeing significant activity from hospitals, utilities, and the prepaid gas sector. For instance, Delaware’s Christiana Care Health System issued bonds rated ‘Aa2’ by Moody’s and ‘AA’ by S&P, with a top yield of approximately 4.7%. Additionally, Rhode Island’s Brown University Health sold tax-exempt bonds rated ‘BBB+’ at a top yield of around 5%, while Tampa General Hospital in Florida issued new bonds rated ‘A-‘ by S&P and ‘A’ by Fitch, with a top yield near 4.8%.

Long Munis Lead on Yield…Last week, short-term Treasury bond yield fell to the lowest this year and saw its biggest drop of 9 basis points since October 2025. Short-term yields are most sensitive to policy rate expectations. Indications of sluggish hiring in the private sector and AI- related disruptions in the software sector led investors to seek safe haven government bonds. Since mid-January, short-term muni bond yields have dropped 6 basis points, while long-term yields have risen 6 basis points. The yield gap between short-term and long-term muni bonds, 160 basis points currently, is the highest since 2013.

Central Bankers Debate Inflation, Jobs…Federal Reserve Vice Chair Philip Jefferson termed the economy ‘moderately solid’, noting that the labor market is ‘balanced’ and ‘stabilizing’ but warned that progress on lowering inflation would drive future interest rate decisions. Similarly, Fed Governor Lisa Cook sees ‘risks tilted towards higher inflation’. In contrast, San Francisco Fed president described the labor market as ‘precarious’ due to low hiring and suggested the labor market conditions may warrant additional rate cuts. Fed Governor Christopher Waller explained that weak labor market conditions led to his decision to vote for rate cut in January.

Muni Bond Supply Stalls…States and local government issued $34 billion bonds in January, 13% lower than prior month and 7% lower than a year ago. However, January’s primary market activity is higher than the month’s 10-year average issuance of $29.6 billion. Notably, issuers in Texas and New York sold about $5 billion new muni bonds each, up 19% and 16% respectively from a year ago.

MTA Boost Capital Upgrades…MTA made a record $15.8 billion in capital commitments in 2025, the largest single-year investment in its history. “New York is investing in transit like never before, with record levels of investment being made to upgrade our existing system and to bring better transit to more communities,” New York State Governor Kathy Hochul added that “$5 billion in projects made possible by congestion pricing.” The nation’s first-of-its-kind congestion toll has brought in an estimated $548 million for the MTA in 2025.

Illinois Seeks Pension Boost…Governor Pritzker wants to shore up Illinois’ pension funding levels. The Governor proposed to direct surplus income tax income to boost pensions, extend the state’s pension buyout program to reduce costs and redirect debt service savings to boost pension contributions. The lowest rated US state has contributed about $700 million above required levels since 2019. Funding of Illinois pensions is currently at the highest in two decades, Illinois pension plans carry more than $144 billion in unfunded liability, and it spends a fifth of its general fund budget on pensions.

Disaster Aid Reform…Washington is ramping up efforts to overhaul the disaster relief funding as federal recovery costs continue to surge. Lawmakers are advocating for the Fixing Emergency Management for American Act. The bipartisan Act seeks to modernize FEMA and speed up distribution of federal aid to disaster-hit communities. U.S. states have received over $500 billion in federal disaster recovery aid since 2016. Roughly, this equates to 3.5% of aggregate state tax revenue over the last nine years. Relative to tax revenue, Puerto Rico has received the highest federal support (45% of tax revenue since 2016), followed by Florida (9.1%) and Texas (7.8%).

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.