Municipal Bond News 5/18/26

Shiny Tax-Free Yields Lure Investors…Bellwether Yields Climb…New Muni Bonds…State Bailout For Big Apple…PREPA Bondholders Appeal Judge Swain Ruling…Revenue Outperformance Erases California Deficit…Assured Guaranty Leads Brightline Debt Talks…Bond Market Rate Expectations…

Shiny Tax-Free Yields Lure Investors…A broad slate of new tax-free bond offerings, appealing muni bond prices and relentless demand are driving today’s muni bond market. Currently, benchmark yields are among the highest we’ve seen in recent history. Top-rated tax-free indices yield about 4.4% tax-free, which is equivalent to over 7% for top earners in high tax states. Steady demand from households, the largest holders of state and local government bonds, continues to boost muni bonds. Amid near-term volatility and rate uncertainty driven by geopolitical concerns, investors are hunting for tax-free income and stepping into higher tax-free yields. Oversubscribed new muni offerings and strong cash inflows into the tax-free fixed income sector underscore the muni market’s momentum. Against this backdrop, GMS Municipal Bond Specialists are helping investors navigate an attractive tax-free income market.

Bellwether Yields Climb…Long-term Treasury bond yields surged 15 basis points last week to over 5.12%, the highest since 2007 upon higher-than-expected inflation. Benchmark 10-year U.S. Treasury yields climbed to 4.58%, reaching the highest level in a year. Reflecting expectations for higher-for-longer policy rates, 2-year U.S. Treasury rates shot up to 4%. However, muni bond yields rose about 6 basis points, far less in comparison to U.S. Treasury yields, underscoring that stable domestic demand for tax-shelter tends to buffer muni bonds from cross currents of global capital flows.

New Muni Bonds…Over $12 billion new muni bonds hit the primary market last week, including several billion-dollar-plus offerings. Dormitory Authority of State of New York, Atlanta water utility, and State of Connecticut were prominent in last week’s primary market. San Francisco airport issued over $1 billion high-grade bonds at a top tax-free yield of 4.7%. Additionally, Columbia University issued ‘AAA’ rated bonds last week.

State Bailout For Big Apple…Generous state aid has provided a major boost to the New York City budget. Mayor Zohran Mamdani unveiled a $125 billion Fiscal 27 spending plan that taxes homes of the wealthy, forgoes a property tax hike, preserves the city’s rainy-day funds, and brings generous state aid to New York City. The City’s $5.4 billion budget gap has been filled with $4 billion in cash assistance from the State of New York, and $1.7 billion in cost savings. The Mayor abandoned his call for a broad-based property tax hikes and instead seeks a tax on New York City second homes worth more than $5 million that could raise over $500 million for the city. Further, lawmakers are planning a new tax on cash purchases of $1 million plus homes that could raise $160 million for NYC. The Mayor said the aid marks a new chapter in cooperation between city and state government in New York.

PREPA Bondholders Appeal Judge Swain Ruling…Bond insurer Assured Guaranty, holders of Puerto Rico electric utility bonds and the bond Trustee have appealed Judge Swain’s rejection of their $3.7 billion administrative expense claim in the First Circuit Court of Appeals. Bondholders argued that they have a protected interest in these net revenues reported by PREPA from the start of the bankruptcy in 2017 to 2023, as highlighted by the First Circuit’s earlier ruling that affirmed bondholder’s lien on net revenues. Assured Guaranty also pointed out that Judge Swain was wrong in saying the bondholders were not vigilant in defending their rights, Assured Guaranty said that bondholders made many efforts since the start of the bankruptcy to lift the stay, gain receivership and gain adequate protection on its lien.

Revenue Outperformance Erases California Deficit…A revenue windfall will help California wipe off earlier deficit projections. Governor Newsom’s final spending plan for the Golden State does not anticipate any deficits in the current fiscal year and through 2028. The Golden State’s current year tax collections are $16.5 billion higher than projected in January, and $53 billion more than November projections. Additionally, California plans to deposit $9.7 billion to its surplus fund and plans to maintain nearly $30 billion in reserves. Key revenue measures include a sales tax on digital and business-to-business software. The proposal cuts general fund spending by $1.8 billion and delivers $300 million to subsidize affordable healthcare plan premiums. Lawmakers have until Jun 15 to enact the Golden State’s Fiscal 27 spending plan.

Assured Guaranty, Bondholders Lead Brightline Debt Talks…Brightline’s creditors are currently in talks with Brightline, with some eyeing control of the railroad in exchange for a large investment. Assured, Guaranty, Invesco and Nuveen lead a group of holders of Brightline’s $2.2 billion senior bonds. Assured Guaranty, which has guaranteed about $1.1 billion or 51% of Brightline’s senior bonds must consent to any debt restructuring. Meanwhile, distressed specialists Redwood Capital, Aristeia Capital and Nut Tree Capital Management, and Israel-based Phoenix Financial hold subordinate bonds. Assured Guaranty CEO noted, “However, if you look at our structure in terms of capital, the capital stack is roughly $7 billion. We’re half of the top $2.4 billion. You say to yourself, is the company worth at least $2.4 billion? The answer resoundingly comes back absolutely,” adding, “As I said, I don’t mind owning a railroad for $2.4 billion.” Assured Guaranty insured Brightline bonds carry a ‘AA’ insured rating and Assured’s guaranty of full and timely debt service payments.

Bond Market Rate Expectations…The odds of the Federal Reserve hiking policy rates by 25 basis points in December have more than doubled in a week, and there are three-in-five chance that policy rates could be 25 basis points higher in January 2027. Prospects of oil prices, likely higher for longer, are weighing on inflation expectations. However, some Wall Street firms anticipate rate cuts, although later than earlier projected. Goldman Sachs sees rate cuts in December 2026 and March 2027, while Bank of America expects rates to stay on hold until July 2027. Meanwhile, JPMorgan Chase expects the next Fed move could actually be rate hike.

Compare 30-Year taxable U.S. Treasury yield 5.12% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.40%; “AA” 4.62%; “A” 4.81%. For investors in the 35% tax bracket, a 4.4% tax-exempt yield is equivalent to a 6.77% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.