Municipal Bond News 6/16/25

Longer-Dated Muni Bonds Are A Bargain…Munis Are Still Cheap, Barron’s…Strong Demand For High Yield Muni Bonds… Rate Cut Odds Grow…Could 2025 Bring Record High Muni Supply…Muni Bonds Underperform…Bondholders Fight For PREPA Net Revenue…Constructive Outlook on Muni Bonds…

Longer-Dated Muni Bonds Are A Bargain…The yield gap between longer -dated and shorter maturities of muni bonds are the highest in at least five years. Muni bonds maturing in 30 years offer about 180 basis points extra yield relative to 2-year muni bonds. A year ago, this yield difference was just 60 basis points. Tax-free bonds due in 22 years or more have dropped about 4% this year. Compare that to a 1% loss for an overall muni bond index, and a 1.5% gain for shorter-dated muni bonds. Worries over rising federal deficits pushed yields on bellwether 30-year U.S Treasuries as high as 5.15% earlier this month, before it retreated to just below 5% recently. However, inflation, currently 2.4% year-over-over, is at a four-year low. The steep yield gap between shorter and longer-dated state and local governments presents a yield opportunity for long-term investors willing to overlook day- to-day volatility.

Munis Are Still Cheap, Barron’s… “For investors, the good news is there are plenty of opportunities to buy attractive, newly minted munis. Long-term munis are especially attractive at an average yield of 4.65% for triple-A tax- free issues, compared with a 30-year Treasury yielding 4.86%. High-income investors in high-tax states can earn income in their state’s munis that is equivalent to 8% on a corporate bond after taxes are taken into account,” Barron’s wrote this weekend. Since early April, muni bonds have stabilized, but at a cheaper overall yield. Muni Land has seen a flood of new issues this year. For example, a Louisiana charter school new issue offered a 6.5% tax- free yield, which is a 10.6% taxable equivalent yield for top earners. Chicago general obligation bonds were recently issued at a 5.51% tax-free yield, and a California affordable housing program offered a 4.97% tax-free yield.

Rate Cut Odds Grow…Odds of two or more rate cuts by December have grown to 78%, up from 70% previously. There are two-in-three odds of a September rate cut. Lower-than-expected inflation has boosted the case for rate cuts. In May, inflation rose 2.4% from a year ago. Economists reckon that it may take some time for tariff effects to show up in inflation. This week, the Fed will release new forecasts on the economy and rates.

Strong Demand For High Yield Muni Bonds…Less than 7% of newly issued muni bonds this year are rated below investment grade or unrated. Such bonds, termed ‘High Yield’ muni bonds carry higher risk-reward. This year less than $14 billion of high yield muni bonds have been issued. The largest high yield muni issuance so far in 2025 is $2.5 billion Brightline West high-speed rail, a muni bond issue that attracted strong demand by offering nearly double-digit yields. There is strong demand for high yield muni bonds. Over 70% of new muni investments reported by LSEG Lipper for the week ending June 4, were directed towards high yield muni bonds. A $234 million limited offering for a BB-plus rated student housing project was 9 to 12 times oversubscribed and a speculative-grade ‘B1’ rated $400 million aluminum producer saw double digit subscriptions.

Could 2025 Bring Record High Muni Supply…JP Morgan Chase expects about $560 billion new muni bonds to be issued in 2025. The forecast is 14% higher than the previous of $490 billion. As the third-largest underwriter of state and local government bonds, JP Morgan Chase expects over 90% of the new muni bond supply to be tax-exempt. The supply forecast is about 30% higher than the average from the past five years. In 2025, states and local governments have issued 20% more bonds than a year ago. Boosted supply has brought attractive tax-free yields and provided an array of tax-free investment choices spanning varied bond sectors such as housing, airports, colleges, hospitals and general obligation credits.

Muni Bonds Underperform…U.S. Treasury bonds have rallied for two straight weeks. Demand for safe-haven bonds rose amid rising geopolitical risks and signs of cooling inflation. Yields on 10- and 30-year U.S. Treasury bonds saw their biggest weekly drop since April to trade around 4.35% and 4.84% respectively. In early June, longer-dated Treasury yields rose as high as 5.15%. In contrast, muni bonds yields have been stable throughout June. A surge of state and local government borrowing has kept muni bond yields elevated relative to comparable U.S. Treasury bonds. The underperformance has led to attractive relative valuations for municipal bonds. Top- rated muni bonds currently yield 94% of U.S. Treasury yields, which is historically high.

Bondholders Fight For PREPA Net Revenue…PREPA bondholders are fighting to recover a $3.7 billion administrative expense fee, in addition to the principal and pre-bankruptcy interest they are due. From 2017 to 2023, PREPA has reported $3.7 billion of net revenues, which are bond collateral per the First Circuit Court of Appeals ruling and termed as an ‘administrative fees. However, the oversight board has asked the Title III Court to block bondholders from claiming this $3.7 billion administrative fee. Bondholders including Assured Guaranty, National Public Finance Guarantee and the Ad Hoc group of PREPA bondholders assert that their administrative expense claim should be fully paid, and they are advocating for the confirmation of a plan of adjustment. They have stated that if this claim is not paid, the bankruptcy should be dismissed, and a receiver should be appointed if a negotiated settlement cannot be reached.

Constructive Outlook on Muni Bonds…Strategists reckon that it’s it’s time to buy municipal bonds as supply is ample and prices are favorable ahead of the summer. Municipal bonds have weathered volatile market conditions fueled by high interest rates, tariff uncertainty, US deficit concerns, and a hawkish Federal Reserve this year. “Municipals displayed relative strength, continuing to recover from April’s selloff, as improved valuations spurred consistent demand,” a strategist told Bloomberg last week. Attractive tax-free yields and strong issuance by state and local governments have created a favorable entry point for long term investors.

Compare 30-Year taxable U.S. Treasury yield 4.92% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.55%; “AA” 4.88%; “A” 5.11%. For investors in the 35% tax bracket, a 4.6% tax-exempt yield is equivalent to a 7.08% taxable yield. Top-rated long-term tax-free bonds yield 92% of comparable taxable U.S. Treasuries.