Municipal Bond News 4/6/26

Muni Price Drop Offers Attractive Entry Point…Tax- Free Yields’ Highest in Six Months…Pain At The Pump Should Mean Pain In the Economy, Not Higher Rates…New York City GO Bonds Oversubscribed…Policy Rate Expectations…Fed Officials Weigh Cross-Currents…Vibrant New Muni Bond Issuance…Tax Burden on Wealthy…

Muni Price Drop Offers Attractive Entry Point…State and local government bonds experienced their worst month in more than two years that has cheapened bond prices to a level that is attractive to those looking to buy muni bonds. We may be witnessing ‘some of the most attractive spring entry points in months’ according to Bloomberg. Current muni yields offer ‘one of the highest-yielding spring settings in 17 years.” The financial market downturn, coupled with lower reinvestment demand and tax-related selling in the Spring season, has resulted in lower muni bond prices, making muni bonds attractive to long-term investors.

Tax-Free Yields’ Highest in Six Months…Both absolute and relative yields are the highest they have been since September. Investors in high-tax states can earn over a 7% taxable equivalent yield from top-rated municipal bonds. Currently, tax-free bonds yield about 91% of taxable Treasury yield, up from 85% at the start of the year. Last week, top-rated municipal bond yields decreased by 6 basis points, while comparable U.S. Treasury bond yields stayed the same. This year, yields were generally trending lower until March when the U.S.-Iran war introduced uncertainty and led to volatile market conditions.

Pain At The Pump Should Mean Pain In the Economy, Not Higher Rates…Investors mistakenly think the oil shock will push central banks to tighten interest rate policy, WSJ wrote this weekend. A hit to oil supply could slow the economy, and in the long term that means less inflationary pressure. While the ongoing conflict between inflation and growth expectations continues, several money managers, such as JP Morgan Chase, are preparing for an economic slowdown that could trigger a bond-market rebound and cause yields to come sliding back down. Goldman Sachs has raised the odds of U.S. recession to 30%. An expert mentioned to Bloomberg last week that “yields have risen enough to be broadly attractive.”

New York City GO Bonds Oversubscribed…New York City’s recent $2.3 billion general obligation bond issue attracted nearly five times the amount in orders from investors. “Due to investor demand for the tax-exempt bonds, yields on certain maturities were reduced by up to 12 basis points,” the city stated. The tax-free bonds offered a top yield of 4.83%. New York City comptroller stated that the “sale and the steady demand for the City’s municipal bonds in the face of market volatility is a clear signal of confidence from investors who know that our credit is strong.”

Policy Rate Expectations…Bond markets assign over three-in-four odds that policy rates will stay on hold in 2026. There is only a 13% chance of a quarter-point rate hike that year, while the likelihood of a quarter- point rate cut is even smaller at 9.7%. During the Federal Reserve’s April meeting, bond markets are almost certain that rates will stay the same.

Fed Officials Weigh Cross-Currents…There are many cross currents in the economy, some of which are pushing employment and inflation in different directions. Fed Chair Powell termed the recent surge in oil prices as a supply shock, noting that there is a tendency to look through any kind of supply shock while monitoring inflation carefully. At least three Fed officials including Kansas City Fed chief Jeffrey Schmid, St. Louis Fed president Alberto Musalem and Dallas Fed president Lorie Logan echoed that the war has raised risks of both higher inflation and weakness in the labor market. However, in March, employment levels rose more-than-expected. Overall, there is high level of uncertainty on the economic outlook.

Vibrant New Muni Bond Issuance…In March, $50 billion new muni bonds were issued, marking the highest monthly new bond volume in five months. Last month’s muni issuance is 17% higher than a year ago. State and local government borrowing needs have grown due to a decline in federal funding for infrastructure and higher construction costs. Despite heightened volatility in financial markets, the muni primary market was robust. However, states and local governments’ borrowing costs have risen amid ongoing geopolitical tensions.

Tax Burden on Wealthy…The top 1% of earners contribute approximately 40% of all federal income taxes, while the top 50% of American taxpayers account for about 97% of total federal tax collections. In 32 U.S. states and the District of Columbia, the tax burden increases progressively with income, whereas 10 states have a flat income tax rate. The highest tax burden is faced by top earners in New York City, who are subject to a combined federal, state, and city income tax rate of 51%.

Compare 30-Year taxable U.S. Treasury yield 4.92% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.45%; “AA” 4.59%; “A” 4.86%. For investors in the 35% tax bracket, a 4.44% tax-exempt yield is equivalent to a 6.85% taxable yield. Top-rated long-term tax-free bonds yield 90% of comparable taxable U.S. Treasuries.