Municipal Bond News 3/30/26

Bargains in Long-Term Muni Bonds…Muni Bonds’ March Rout…Experts Mull Peak Yields…New Muni Bond Oversubscribed…Puerto Rico Sales and Use Tax Trend Higher…New York City Rating Outlook Lower…Special District Bonds’ Strong Credit…Rate Policy Expectations…

Bargains in Long-Term Muni Bonds…In the midst of the current turmoil in financial markets, wealthy bond buyers are looking to the $4.3 trillion state and local government bond market in search of bargains. State and local government bonds, particularly longer-dated munis, offer a significant yield advantage over taxable U.S. Treasury bonds. 30-year muni bonds currently offer about 150 basis points of additional yield relative to 10-year munis. In the taxable Treasury bond market, this yield gap is much smaller at about 55 basis points. In the vibrant muni primary market, some issuers offered attractive 5.25% coupons at premium prices, while others issued shorter-dated muni bonds in anticipation of lower future rates. Although large recent new issues were oversubscribed, investors have an opportunity to be more selective in the current market environment. While it is unclear when the conflict in the Middle East will resolve, working with a GMS Municipal Bond Specialist can help long-term investors position their portfolios towards currently higher yields than what might be available after the uncertainty abates.

Muni Bonds’ March Rout…A seven-month muni bond rally was upended with March losses. Top-rated muni bond indices posted a 2.7% loss in March, the worst showing since September 2023. In March, muni bond yields climbed higher week- after-week, echoing similar movements in comparable Treasury bonds. Rapidly shifting geopolitical conditions have led to volatile market conditions. March losses erased prior muni bond index gains and put year-to-date losses at 0.58%.

Experts Mull Peak Yields…The 30-year U.S. Treasury yield, currently at 4.93%, has sparked a debate on whether bond yields are near a peak. “While inflation remains a concern, the potential drag on growth and confidence should start to act as an offset, limiting further upside in yields,” a strategist told Bloomberg last week. While bond markets have largely focused on the inflationary shock from rising oil prices, sending the Treasury market toward its deepest monthly loss since October 2024, some on Wall Street say that yields will slide as the war’s impact on growth becomes more apparent.

New Muni Bonds Oversubscribed…Illinois sold $912 million general obligation bonds last week. The lowest-rated U.S. state offered a 5.07% top tax-free yield. The new bonds fetched more than $1.2 billion in orders from over 70 institutional investors and drew more than $300 million from retail investors. Strong demand “underscores the confidence investors have” in the state’s efforts to improve its fiscal position. Last week’s “municipal bond marketplace was defined by volatility and uncertainty driven by rapidly shifting geopolitical conditions,” Illinois’ director of capital markets stated. Additionally, large university medical centers such as University of Pittsburgh Medical Center and University of Kansas Medical Center were among new bond issuers.

Puerto Rico Sales and Use Tax Trend Higher…Boosting COFINA bonds, Puerto Rico sales and use tax collections continue to trend higher. COFINA bond debt service coverage ratios have remained robust, averaging well above 2.5x in recent fiscal years. COFINA has consistently met its pledged revenue targets ahead of schedule, and less than four months of pledged sales tax collections were adequate for covering 100% of COFINA bond service in recent years. With current employment at a 15-year high and record high tourism, Puerto Rico’s upbeat economy has boosted the Island’s retail sector.

New York City Rating Outlook Lower…Last week, Fitch lowered its outlook to negative from stable and affirmed its ‘AA-’ rating on New York City general obligation bonds. A potential weakening of the city’s financial resilience, widening out-year budget gaps, and uncertain gap-closing solutions that could require city or state approvals drove the lower outlook. “A negative outlook from a credit rating agency is not a downgrade—but it is a warning,” New York City Comptroller added, “New York City needs to address the underlying structural imbalances in our budget. Thankfully, New York City’s economy remains strong, tax revenues are solid, and our bonds continue to be safe, secure, and in demand.”

Special District Bonds’ Strong Credit…Special district bonds, a niche within the housing bond sector, continue to enjoy a strong and stable financial position. Special district bonds are paid by special assessments on homeowners. Such bonds benefit from strong resident incomes and property tax base appreciation. Generally, special districts attract higher income families, which supports the districts’ ability to levy taxes for debt service with minimal collections risk. Leverage for special districts tends to remain stable, as new debt issuance is typically offset by higher revenue or property valuation growth.

Rate Policy Expectations…Bond markets lowered odds of a rate hike in 2026 to about 25% from 35% earlier. Some Fed officials hinted that their next move could be either higher or lower. “We could be back to the era of multiple rate cuts for the year, if inflation behaves,” Chicago Fed President Austan Goolsbee added “I could see circumstances where we would need to raise rates.”

Compare 30-Year taxable U.S. Treasury yield 4.93% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.51%; “AA” 4.75%; “A” 5.01%. For investors in the 35% tax bracket, a 4.44% tax-exempt yield is equivalent to a 6.94% taxable yield. Top-rated long-term tax-free bonds yield 91% of comparable taxable U.S. Treasuries.