Municipal Bond News 3/2/26

Muni Bond Rally Rolls On…Haven Bonds Favored…New Muni Bonds…Insured Muni Bonds…New Jersey Yield Penalty Narrows… Muni Rating Upgrades Outpace…Chicago Credit Downgrade…Lawmakers Eye Private Capital…

Muni Bond Rally Rolls On…Muni bonds’ winning streak continues to power on. Fueled by strong investor demand, top-rated muni bonds have delivered a 6.5% return over the last seven months, which is about 11.8% annualized. The renewed appeal of bonds as a safety net could help draw more demand. However, as we approach tax season, increased selling and lower reinvestment demand in the coming month may result in seasonally higher yields. The credit quality of municipal bonds is generally considered resilient, as U.S. states are required to maintain a balanced budget, and local governments have wide discretion to raise taxes. Investors carry a positive and constructive outlook on the $4.3 trillion muni bond market.

Haven Investments Favored…Currently, we are observing a “flight to quality” which has boosted state and local governments, comparable in quality to United Stated Treasuries. Global investors seek U.S. Treasury bonds amid volatility in financial markets caused by geopolitical tensions. 10-year U.S. Treasury yields dipped below 4% last week, the lowest since November. Long term muni bond yields have dropped about 10 basis points in February. In a month when AI-led recession fears, tariff uncertainty, and geopolitical tensions marred other markets, investors sought the safety net of state and local government bonds.

New Muni Bonds…Over $10 billion muni bonds were issued last week. Large state universities led last week’s primary market roster. University of California, which was last year’s largest bond issuer, sold $2 billion new high-grade bonds at a top yield of 3.8%. Arizona State University sold high grade tax-free bonds at a top yield of 4.05%. Some issuers opted to issue ten-year bonds to take advantage of lower yields for shorter-dated bonds. Notably, Sarasota Memorial Hospital which sold 10-year high-grade tax-free bonds for a 3% tax-free yield. Meanwhile, Dallas Methodist Hospital sold high grade 20-year bonds for a 4.13% tax-free yield.

Insured Muni Bonds…Less than 7% of new issues in the primary market carry bond insurance. The volume of newly insured muni bonds grew 4% last year. That follows 29% insured bond volume growth in 2024 and 10% in 2023. In 2025, over 1,800 muni bond financings, or $43 billion new issue bonds, were wrapped with financial guarantees by bond insurers. Some of the larger insured new deals include $1 billion Dormitory Authority of State of New York bonds, $650 million for Beth Israel Lahey Health and $600 million for JFK Airport Terminal One.

New Jersey Yield Penalty Narrows…The yield gap on New Jersey bonds, relative to top-rated muni bonds, has decreased over the past year. Investors demand as little as five basis points more than top-rated muni benchmarks to own Garden State tax-free bonds. This yield gap was as high as 58 basis points a year ago. The Garden State earned an upgrade to ‘Aa3’ by Moody’s and an S&P upgrade to ‘A+’ last year. New Jersey issued 21% fewer bonds in 2025 from a year ago. New Jersey bonds are currently outperforming, with 2.4% year-to-date returns.

Muni Rating Upgrades Outpace…For the fifth consecutive year, rating upgrades outpaced downgrades in 2025. In the U.S. state sector, the largest issuer of muni bonds, Moody’s upgrades outnumbered downgraded by a ratio of 5:2. However, in the broader muni bond sector, the upgrade to downgrade ratio has narrowed significantly, and favorable outlook changes roughly match unfavorable ones. The sectors that experienced the most downgrades last year were higher education, charter schools, and housing. Credit conditions across the muni bond sector are more uneven now relative to the post-COVID years.

Chicago Credit Downgrade…Last week, Chicago received a rating downgrade to ‘BBB+’ from ‘A-’ by Fitch. Disagreements between the Johnson administration and City Council, along with operating deficits that have persisted since 2023, led to the downgrade. Addressing concerns about the 2026 budget process, the mayor’s office reiterated its concerns with the budget that passed without the mayor’s support. The mayor’s office added that despite the cut in the credit rating, the city has continued to achieve strong investment participation in its bonds and remains investment grade with all four major credit rating agencies.

Lawmakers Eye Private Capital…Lawmakers are eyeing private capital to boost infrastructure, as federal funding from the Bipartisan Infrastructure Law ends this year. To encourage states and cities to privatize assets, the U.S. Department of Transportation is pushing for more private activity bonds and a dedicated Public Private Partnership (‘P3’) office. Transformation of the Union Station in Washington D.C. and New York’s Penn Station is currently being advanced as P3 financing. Among U.S. states, California, Florida, Georgia and Colorado are known for promoting public private partnership financing models, while Puerto Rico and Illinois see fewer private capital investments. In New York, JFK Terminal One, which issued close to $6 billion muni bonds since 2023 is a prime example of a P3 muni bond financing. Notably, last year’s largest bond issue, $3.4 billion Georgia tollway bonds, is a P3 financing.

Compare 30-Year taxable U.S. Treasury yield 4.67% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.11%; “AA” 4.36%; “A” 4.54%. 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.