Municipal Bond News 5/19/25

The Case For Muni Bond Investments…New Muni Bonds Oversubscribed…SALT Reform Advances…Bellwether Yields Surge…Fewer Rate Cut Odds…Experts Mull Muni Bond Returns…California Braces For Deficits…Illinois Revenue Outlook Worsens…Lawmakers Seek PREPA Debt Fix…

The Case For Muni Bond Investments…High tax-free yields, low muni bond valuations relative to Treasuries, high credit quality and seasonal tailwinds make a compelling case for investing in state and local governments. April’s financial market meltdown has led to a bright entry point to lock in high tax-free yield. “High tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade,” Kiplinger wrote last week. Muni bond indices offer over 7% taxable equivalent yield for top earners in high tax states. Such attractive yields in high grade muni bonds are rare and may not last long. The historically low valuations of muni bonds in early April

New Muni Bonds Oversubscribed…Orders aggregating more than two times the amount of bonds offered by the New York City Transitional Finance Authority led to lower than anticipated yields. New Dormitory Authority of State of New York bonds received “very strong investor demand” fetching a top yield of 4.79%. Additionally, Houston Hospital sold $800 million bonds, the first of a three-part offering, with a top yield of 4.88%.

SALT Reform Advances… The House Budget Committee narrowly approved President Trump’s “Big Beautiful Bill” on Sunday. Lawmakers seek to permanently extend 2017 tax cuts and raise the cap on state and local government tax deductions (‘SALT’) to $30,000 annually for families earning up to $400,000. Some Republican lawmakers had advocated for a higher SALT cap. Now that the bill has passed the Budget Committee, it heads to the Rules Committee and eventually to the House floor. House Speaker Mike Johnson is hoping for a full House floor vote by the end of this week.

Bellwether Yields Climb…Long term U.S. Treasury yields rose to over 5%, the highest since November 2023. On Friday, Moody’s downgraded the U.S. sovereign credit rating to ‘Aa1’ from ‘Aaa’. Moody’s was the last of the three rating firms to remove the top rating from sovereign U.S. credit. S&P was the first to move in 2011, while Fitch Ratings followed in 2023. Currently, all three agencies rate the nation at ‘Aa1’ or ‘AA+’. State and local government bond yields jumped 5 basis points last week, lower than the 15-basis point yield surge seen in comparable U.S. Treasury bonds.

Fewer Rate Cut Odds…Paring back rate cut odds, bond markets expect the earliest rate cuts by September, with another to follow by year-end. A few weeks ago, markets were betting on four rate cuts this year. Goldman Sachs now expects three quarter-point rate Fed cuts starting in December instead of July. Citigroup expects rate cuts to begin in July, instead of June forecast earlier. Barclays now expects the Federal Reserve to deliver just one interest-rate cut this year.

Experts Mull Muni Bonds Returns…Current high tax-free yields provide a ballast to muni bond returns during an economic downturn. Experts reckon that muni bonds are well positioned to deliver strong returns this year amid volatile market conditions. Muni bonds are less sensitive to tariffs than corporate bonds, and state and local government credit conditions are strong. Wells Fargo strategists expect muni bonds returns to be in the “low single digits” but “further support for municipal-bond performance could come from a renewed flight of capital toward assets considered to be of higher quality and better shielded from tariffs.” Several muni bond sectors such as essential infrastructure, water, sewer tend to be insulated.

California Braces For Deficits…California faces a $12 billion budget deficit in Fiscal 26. A $363 million surplus, projected in January, has changed to a deficit. California’s unemployment and economic outlook has worsened this year. Additionally, volatile financial markets have marred revenue forecasts. Extended tax payment deadlines for Los Angeles cloud the Golden State’s revenue outlook. Governor Newsom’s latest spending plan for Fiscal 26, $322 billion, is about $15 billion higher than current year, and relies on drawing down $7 billion from state reserves. The state aims to close the deficit, about 5.8% of general fund spending, by cost cutting, revenue measures and borrowing strategies. California has grappled with deficits for three straight years, a shift from a $100 billion surplus recorded as recently as 2022.

Illinois Revenue Outlook Worsens…Illinois’ Fiscal 26 revenue could be 1% or $500 million lower than projected in February. Lower sales tax forecast is a factor. To raise revenue, the governor proposes increased tax rates on table games at some casinos, and a pause in the final transfer of state sales tax revenue on gas purchases to the state Road Fund. Despite challenges, the governor aims to continue to boost the state’s budget stabilization fund and its pension-funding ratio, and ensure timely payment of Illinois’ bills per the state’s deputy budget director. Lawmakers have less than a month to approve a final state budget.

Lawmakers Seek PREPA Debt Fix… “Rather than follow the First Circuit’s ruling [on bondholders’ lien on revenues], it appears that the board has instead chosen to prolong PREPA’s bankruptcy by openly ignoring the court’s ruling and continuing its fight to reduce the amount paid to bondholders,” U.S. Rep. Scott Fitzgerald, R-Wis., said that the oversight board’s $400 million worth of expenses on lawyers, consultants are inconsistent with the federal administration’s efforts to reduce waste, fraud and abuse. Fitzgerald wants to meet Puerto Rico’s oversight board no later than May 30 to help resolve the nearly eight-year bankruptcy process for the island’s troubled power utility. Puerto Rico’s financial oversight board, Governor Jennifer Gonzalez and legislators hopes to find revenue sources during the commonwealth’s budget talks to help repay the Island’s electric utility debt.

Compare 30-Year taxable U.S. Treasury yield 5.03% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.47%; “AA” 4.73%; “A” 5.07%. For investors in the 35% tax bracket, a 4.5% tax-exempt yield is equivalent to a 6.9% taxable yield. Top-rated long-term tax-free bonds yield 89% of comparable taxable U.S. Treasuries.