Municipal Bond News 5/26/26

Muni Bonds On A Roll: High Yields, High Demand…Hospital Bonds Gain Steam…Munis Outshine Treasuries…‘Higher-For-Longer’ Rate Expectations…Muni Rating Upgrades Surpass…State and Local Governments Borrow Large…U.S. States Brace For Slower Sales Tax…Lower Federal Disaster Aid…

Muni Bonds On A Roll: High Yields, High Demand…Tax-free yields, now sitting at 2026 highs, are pulling investors to the municipal bond market as demand accelerates. A measure of investor activity shows that weekly purchases of municipal bonds surged by 75% last week from a week ago, marking the highest demand level since February. Longer-dated muni bonds offer an attractive yield advantage, with 30-year top rated tax- free index yield 142 basis points higher than 10-year benchmarks. This gap is at a multi-year high. By comparison, the gap between 10-year U.S. Treasury yield and longer-dated U.S. Treasuries remains far lower, reinforcing the relative value of muni bonds. Investors looking for tax-free income and a defensive investment strategy are finding plenty of bargains across the state and local government market.

Hospital Bonds Gain Steam…Hospital bonds are currently delivering strong returns, even as hospitals are borrowing at the fastest pace in over a decade. This year, hospitals have issued more than $17 billion in bonds, roughly double the amount issued in 2022. Investors are eagerly purchasing hospital bonds, which typically offer higher yields compared to top-rated peers. Even lower-rated hospital bonds are popular. Recently, the junk-rated bonds from Children’s Hospital of Los Angeles were over two times oversubscribed. This year’s largest hospital muni bond offerings include RJW Barnabas Health, Vanderbilt Medical Center and Houston United Methodist.

Munis Outshine Treasuries…Volatile market conditions persisted last week, with state and local government bonds continuing their outperformance relative to U.S. Treasury bonds, amid a global bond sell- off. Higher oil prices led the 30-year U.S. Treasury yields hit 5.18%, the highest since 2007, and the bellwether 10-year UST crossed 4.68% for the first time since 2025. However, yields retreated later in the week upon progress on U.S.-Iran talks. Muni bond yields also moved higher, rising 9 to 12 basis points last week, but the selloff remained notably more contained, highlighting the tax-free market’s resilience.

Higher-For-Longer’ Rate Expectations…Bond markets are anticipating an interest rate hike by end of 2026. The likelihood of a rate hike has been strengthened by indications that Federal Reserve officials are committed to addressing inflation promptly. Fed Governor Christopher Waller noted that the Fed’s next move is just as likely to be an increase as a cut. This is a turnaround from earlier this year, when rate cuts were expected. Higher oil prices and higher inflation expectations have pushed Fed officials away from rate cuts. New Fed Chair Kevin Warsh now oversees a Fed that currently leans towards maintaining higher rates for longer.

Muni Rating Upgrades Surpass…Muni bond rating upgrades outpaced downgrades by a large margin in the first quarter of 2026 per Moody’s. A strong economy, ongoing tax base stability, and conservation financial management led to positive rating actions. Housing issuers, state sector and local governments saw the most favorable rating changes. Coping with a depletion of federal funding and rising labor costs, K-12 schools saw more rating downgrades than upgrades. Notably, the vast majority of muni bond issuers carry a positive or stable outlook.

State and Local Governments Borrow Large…Undeterred by the spike in borrowing costs, state and local governments have boosted borrowing in 2026. Moreover, transaction sizes have trended higher driven by a higher volume of mega muni bonds, or offerings greater than $1 billion. The average muni bond transaction is about $76 million this year, up from $39 million a decade ago. About 41 muni bond offerings in 2026 were larger than $1 billion. A handful of deals in New York and California were greater than $2 billion.

U.S. States Brace For Slower Sales Tax…High gas prices, coupled with low consumer sentiment, pose a credit risk for state and local government sales tax collections. As U.S. states prepare for potential federal funding cuts, they also face prospects of weaker sales tax collections. Any pullback in consumer spending is likely to pressure government revenue at a time when operating expenses continue to be elevated after several years of wage and price growth. U.S. states derive about 36% of their revenue from federal dollars, and sales taxes account for about 30% of state revenue.

Lower Federal Disaster Aid…Private insurers are likely to fund the bulk of disaster insurance in future years. White House final recommendations on disaster aid, released May 7, tighten eligibility, reduce federal share, and replace reimbursement-based funding with capped payments. States and local government budget priorities and liquidity could be impacted in the aftermath of a natural disaster, resulting in greater credit variations among governments. However, changes to federal disaster aid could take years to take effect. Financial reserves and governance will mitigate risks for states and cities frequently hit by weather events.

Compare 30-Year taxable U.S. Treasury yield 5.07% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.54%; “AA” 4.65%; “A” 4.89%. 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 90% of comparable taxable U.S. Treasuries.