Municipal Bond News 5/11/26

Muni Demand Hits Five-Year High…New Muni Bonds…Why Muni Bonds Stand Out…Munis Hold Ground…Chicago Public Schools’ Budget Gap…Empire State Budget Talks…Fed Officials Eye Rate Hold…Rate Policy Odds…

Muni Demand Hits Five-Year High…Demand for state and local government bonds has climbed to its highest level in five years. Record household wealth, market volatility and attractive tax-free yields are driving a sharp increase in retail muni bond purchases. New municipal bond investments this year are running at roughly last year’s pace, with April marking the fourth straight month of stronger retail inflows. Household wealth has skyrocketed, pushing investors into higher tax brackets, and boosting demand for tax-free income. Additionally, muni bonds have been relatively placid compared with other markets, and top- rated muni bonds continue to offer compelling taxable equivalent yields that are significantly higher than comparable taxable counterparts, reinforcing their appeal for high-income investors seeking safety, tax- shelter, and higher income.

New Muni Bonds…State of California’s general obligation bond issue led last week’s primary market. Additionally, Chicago water utility sold $875 million new bonds with a 5.5% tax-free coupon rated ‘A+’ yielding 4.9% for 40 years. Jacksonville Airport sold ‘A1’/’A+’-rated bonds at a top tax- free yield of 4.9%. Norfolk International Airport in Virginia sold Build America insured taxable bonds at top yield of 5.7%.

Why Muni Bonds Stand Out…Municipal bonds continue to offer investors a rare combination of strong credit quality and higher taxable equivalent yields, relative to taxable counterparts. A Jacksonville University study of bonds issued between 2009 and 2023 found that ‘A’- rated taxable muni bonds consistently provided a yield premium over similarly rated corporate bonds., while experiencing zero defaults, compared with 11 defaults in comparable corporate bonds. Muni bonds’ underlying credit strength stems from their public-purpose funding role, the taxing authority of government payors and essential-service revenue base. For investors, that translates into higher tax-free income, stronger downside protection, and valuable portfolio diversification.

Munis Hold Ground…State and local government bond yields remained steady last week, although U.S. Treasury yields fluctuated widely. Bellwether 30-year U.S. Treasury bond yields jumped above 5% early last week, before falling down to 4.94% by Friday. Long term U.S. Treasury yields are hovering near a two-decade high and just below the peak of late-2023, when the Federal Reserve was still trying to contain the post-pandemic inflation surge. The U.S. is not alone in seeing higher borrowing costs, as yields across the Group of Seven countries are at a multi-year highs, driven by the closure of the Strait of Hormuz and skyrocketing oil prices.

Chicago Public Schools’ Budget Gap…Chicago Public Schools (CPS) is projected to face a $45 million deficit in the current school year. This marks the second consecutive year that the nation’s third-largest school district is expected to spend more than its revenue. Last year, CPS recorded an operating deficit of $102 million. Federal pandemic aid, amounting to $2.8 billion, ended last year, and the district is currently over budget by approximately $118 million on staffing costs. CPS CEO Macquline King and board members are seeking increased financial support from the state to cover more of the district’s pension costs, similar to the state funding for other schools.

Empire State Budget Talks…New York State lawmakers are currently negotiating the New York State budget, which is five weeks overdue. Last week, Governor Hochul announced an agreement on a $268 billion state spending plan, although certain issues such as pensions are still unresolved. Governor Hochul, who is seeking re-election, has avoided broad-based tax hikes but is proposing a new property tax on second homes in New York City, which aims to generate $500 million in recurring revenue for the Big Apple. Additionally, the Empire State plans to provide $1.5 billion in extra state aid to New York City.

Fed Officials Eye Rate Hold…Several Federal Reserve officials indicated that there is no urgency to cut interest rates, as the U.S. economy remains solid amid inflationary pressures. New York Fed President John Williams noted that U.S. monetary policy is well positioned to navigate a high level of uncertainty due to the ongoing war. San Francisco Fed President Mary Daly emphasized that progress in reducing inflation has slowed and that the Fed can afford to maintain a restrictive stance because of a strong labor market. In April, job growth was higher than expected, and the U.S. economy grew at a 2% annual pace in the first quarter of 2026.

Rate Policy Odds…Bond markets do not see a strong chance of a rate cut until late next year. There are close to 43% odds of rates staying on hold until December 2027. Additionally, chances of at least one rate hike by next year outweigh odds of at least one rate cut. The extent and duration of the supply disruptions and higher energy prices due to the war in the Middle East are shaping the outlook for rate policy.

Compare 30-Year taxable U.S. Treasury yield 4.96% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.34%; “AA” 4.51%; “A” 4.74%. For investors in the 35% tax bracket, a 4.34% tax-exempt yield is equivalent to a 6.60% taxable yield. Top-rated long-term tax-free bonds yield 87% of comparable taxable U.S. Treasuries.