Municipal Bond News 5/4/26

High Yield Muni Bonds Lead Rally…Attractive Tax-Free Coupons…Rate Policy Expectations…Bond Insurance Grows…Bellwether New Muni Bonds…Fed Faces Divisions…Vacant Offices Dim City Tax Base…Brightline Explores Capital Pathways…Florida Governor Race…

High Yield Muni Bonds Lead Rally…Lower-rated muni bonds are currently the best performers in the bond market, generating a 2.13% year-to-date index return. In comparison, the overall municipal market has seen a near 1% index return, while corporate and Treasury bonds have experienced losses. The rally is fueled by a supply-demand imbalance. Many investors are reaching for incremental yield offered by lower-rated tax-free bonds, yet only about 10% of newly issue muni bonds are lower-rated. The scarcity has compressed the yield gap between ‘BBB’-rated tax-free bonds and top-rated peers. The largest issuers of lower-rated municipal bonds include hospitals, schools, and airports.

Attractive Tax-Free Coupons…Several new issues with 5.5% tax-free coupons are currently being seen in the current primary market. Last week, Dana Farber Cancer Institute in Massachusetts sold $1.3 billion long term tax- free bonds rated ‘A2’/‘A’at a 4.86% top yield. Additionally, Burbank Glendale Pasadena airport in California sold tax-free bonds insured by Assured Guaranty.

Rate Policy Expectations…Bond markets currently assign four-in-five odds that the Fed will keep policy rates on hold in 2026, and roughly 55% odds of rate hike by April 2027. Earlier this year, two interest rate cuts were broadly expected. However, policymakers have grown more cautious about inflation risks due to the U.S.-Iran war. Higher energy prices are likely to hurt consumer spending, although business investments could grow driven by energy and Artificial Intelligence sectors. However, Fed Chair Powell said that the U.S. economy has been “quite resilient’ in the face of the Iran war energy shock and is likely to continue growing at more than 2% this year because of solid consumer spending and business investment.

Bond Insurance Grows…Insured muni bond volumes continue to climb higher. In the first quarter of 2026, primary market volume of insured munis grew nearly 5% from a year ago. The two active bond insurers provided financial guarantees on $7.7 billion state and local government bonds, even as the number of transactions declined, suggesting primary market transactions are getting larger. The largest insured muni bond issuances in the recent primary market include Houston Convention Center bonds, Hartford Health in Connecticut and Brown University Health bonds.

Bellwether New Muni Bonds…In April, states and local governments issued almost 13% fewer tax- free bonds relative to a year ago. There were three primary market transactions that exceeded $1 billion. This included two hospitals, ‘A’-rated Vanderbilt University Medical center bonds in Tennessee, and RJW Barnabas Health in New Jersey. Strong oversubscription across the market highlights persistent demand.

Fed Faces Divisions…A divided Fed voted to hold policy rates steady. Eight officials voted to hold rates as-is, while four dissented, the most dissenting votes since 1992. Three dissenting Fed officials sought to remove an ‘easing bias’ from the Fed’s statement and want to signal more directly that interest rates may need to eventually rise due to resurgent inflation stemming from the war in the Middle East. One Fed official sought a rate cut. Incoming Fed Chair Kevin Warsh has stated that he favors a dynamic and openly debated approach to rate policy, suggesting that more rigorous internal disagreement could ultimately lead to stronger economic outcomes.

Vacant Offices Dim City Tax Base…The assessed value of large U.S. cities continues to grow but at a slower pace than before the pandemic. Offices in large cities are over 20% vacant, and vacancies are likely to persist through 2028. Although many cities are looking to hike property taxes, there is political resistance. Many cities are leveraging access to transit and educated workers to attract high growth industries such as Artificial Intelligence.

Brightline Explores Capital Pathways…Brightline has revived efforts to secure third party investors, that could be strategic buyers of the private train, or financial sponsors. Hedge funds such as Redwood Capital, Aristeia Capital and Nut Tree Capital Management are positioned to potentially lend fresh cash in a court process, which could be a step toward taking control of the company. Brightline is expected to wait for potential investors to make bids before exploring a Chapter 11 filing that could allow its lenders to extend bankruptcy financing. Assured Guaranty, insurer of about $1 billion Brightline is participating in debt talks. Holders of insured bonds have peace of mind and the comfort of full and timely debt service payments from Assured Guaranty.

Florida Governor Race…Florida’s 2026 governor’s race is shaping up as a major open-seat race. Governor Ron DeSantis is not running due to term limits. Funding raising and early polls suggest top contenders are Byron Donalds (R) and Jerry Demings (D) although large numbers of voters are undecided. The race for the August 18 primary election also includes Paul Renner (R), Jay Collins, (R), James Fishback (R), David Jolly (D), Dayna Marie Foster (D). This would be the Sunshine State’s first open race in eight years.

Compare 30-Year taxable U.S. Treasury yield 4.97% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.35%; “AA” 4.50%; “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.