Municipal Bond News 6/2/25

Attractive Entry-Point For Long-Term Tax-Free Income… New Muni Bonds…Illinois Budget Approved…Fed Braces For Stagflation…Rate Cut Odds…Higher Demand For Insured Muni Bonds…MTA Congestion Toll Revenue Outperforms…Reserves Brighten State Revenue Outlook…

Attractive Entry-Point For Long-Term Tax-Free Income…Credit stability, attractive yields and tax advantages make state and local government bonds appealing investments. For wealthy income-oriented investors, muni bonds are particularly attractive. Muni bond yields have risen over 70 basis points since January, influenced by changes in U.S. Treasury yields. After peaking at 4.86% in early April, top-rated tax-free yields have declined to about 4.5% currently. Muni bonds’ credit quality is most comparable to United States Treasury bonds. Investment-rated general obligation bonds and essential-service revenue bonds showing a five-year cumulative historical default rate of less than 0.05% since the 1970s. Current municipal bond yields offer high tax-bracket investors with long investment horizons an attractive entry point.

Strong Demand For New Muni Bonds…Billion-dollar plus bond offerings from New York and New Jersey are front and center in the primary market. New Jersey Turnpike Authority sold $2 billion bonds at a top tax-free yield of 4.97%. Dormitory Authority of State of New York sold $2 billion bonds for refinancing New York University’s debt at a top tax-free yield of 4.81%. Amid ongoing political developments, ‘AAA’-rated Harvard University bonds offer about 25 basis points of additional yield relative to top-rated muni bond benchmarks in the secondary market.

Illinois Budget Approved…Lawmakers approved a $55 billion Fiscal 2026 budget for Illinois, just minutes before the weekend budget deadline. The spending plan brings about $800 million in tax hikes and cuts spending by roughly $380 million. Higher taxes on tobacco and online gaming are in the budget. Although Governor Pritzker proposed a $350 million increase as required under a 2017 school funding overhaul, the final plan boosts funding by only $307 million over the current year, pausing $43 million for a grant program designed to help school districts with high property tax rates and low real estate values. Additionally, the overall plan also suspends monthly contributions to the state’s “rainy day” fund for a year. Instead, about $45 million would be held in the general fund. The budget contributes $5 billion less than actuarial pension funding requirements. Lawmakers pointed to the uncertain federal funding picture. The Fiscal 26 budget is $2 billion higher than prior year. Overall, lawmakers assert that the spending and tax package would result in a small surplus. The governor’s office said the spending plan as Pritzker’s “seventh consecutive balanced budget that continues to get the state’s finances back on track.”

Fed Braces For Stagflation…Federal Reserve officials may face difficult trade-offs if inflation proves to be more persistent while the outlooks for growth and employment weaken, minutes of the recent Fed meeting suggested. Fed officials agreed that “uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach.” The Federal Reserve’s preferred inflation gauge climbed 2.5% in April, down from 2.7% in March, a sign of progress in the Fed’s fight against inflation.

Rate Cut Odds…Bond markets are now predicting fewer chances of rate cuts this year. Now, there are one-in-three odds of a quarter point rate cut by year end. A month ago, the odds were most likely for a full percentage point of rate cuts in 2025. Meanwhile, Federal Reserve Governor Christopher Waller expects rate cuts later this year. “I support looking through any tariff effects on near term-inflation when setting the policy rate,” Waller noted today.

Higher Demand For Insured Muni Bonds…Demand for insured bonds has grown in 2025. “Demand for insured bonds accelerated starting in March, driven by rising market volatility, shifting economic and trade policies, and growing awareness of climate-related risks, such as wildfires,” Build America Mutual said. Assured Guaranty stated that the growth “reflects institutions’ heightened appreciation of the relative price stability and increased market liquidity our insurance can provide, along with the reduced borrowing cost issuers receive.” The volume of insured muni bonds increased 2.6% in the first quarter of 2025, from a year ago. Assured Guaranty’s market share has grown to near 64% in the first quarter, from 53% a year ago.

MTA Congestion Toll Revenue Outperforms…The nation’s first-ever congestion toll has raised $215 million in the first four months since inception, handily ahead of $500 million annual revenue expectations. However, the controversial toll is mired in litigation. On Tuesday, U.S. District Judge Lewis Liman temporarily prohibited the federal government from terminating the new toll until June 9. MTA’s $68.4 billion 2025—2029 capital program is counting on $14 billion of federal funding. The MTA anticipates borrowing against congestion toll revenue to finance $15 billions of capital upgrades.

Rainy Day Funds Brighten State Revenue Outlook…Slower economic growth and uncertain federal spending cloud the revenue outlook for U.S. states. Historically, state general fund revenues decreased 8.1% between 2008-2009 during the Great Recession and fell about 6% from 2019-2020 because of the COVID-19 pandemic. Notably, most U.S. states are in a strong position to withstand lower revenue, thanks to robust rainy-day funds. Aggregate state rainy day funds will equal approximately 13% of fiscal 2026 revenue estimates, a small one percentage point decrease from estimated fiscal 2025, per S&P projections. Nonetheless, this reserve level remains near historical highs. The projected reserves for fiscal year 2026 are sufficient to cover budget shortfalls resulting from a 5% revenue decline for 47 states, while 34 states could manage a 10% drop in revenue.

Compare 30-Year taxable U.S. Treasury yield 4.97% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.54%; “AA” 4.87%; “A” 5.10%. 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 91% of comparable taxable U.S. Treasuries.