Municipal Bond News 6/22/26

Muni Bonds Catch A Tailwind…Bond Markets Roar; Inflations Fears Retreat…Fed Officials Eye 2026 Rate Hike…What’s The Fed’s Next Move…Prepaid Energy Bonds Gain Steam…Brightline Gets Working Capital, Debt Extension…Muni Bonds Supersized…FIFA World Cup Windfall…

Muni Bonds Catch A Tailwind…A favorable backdrop for muni bonds is emerging in the wake of lower oil prices and peak reinvestment demand. Oil prices hit a three-month low last week, and bond yields fell as a four- month long escalation of war tensions eased last week. Investors remain focused on developments in the Middle East and the policy outlook under new Fed Chair Kevin Warsh. Alongside, the muni bond market has entered peak reinvestment season. Lower inflation expectations and peak seasonal demand are a tailwind for state and local government bonds.

Bond Markets Roar; Inflation Fears Retreat…Bond prices were boosted last week. Investors expect inflation to return to pre-war levels and average out at 2.3% over the next five years. Inflation expectations are currently the lowest since January. Oil prices fell to the lowest since March after the U.S. and Iran signed a memorandum of understanding to reopen the Strait of Hormuz, through which one-fifth of global oil traffic traversed before the conflict began.

Fed Officials Eye 2026 Rate Hike…The Federal Reserve unanimously left policy rates unchanged at last week’s meeting. However, policymakers’ latest projections indicate the possibility of future rate hikes. Nine Fed officials expect at least one rate hike this year, five anticipate two hikes and one predicts three hikes. Only a single policymaker expects rates to move lower. When the Fed last released its dot-plot, none had penciled in a rate hike this year. While Fed Chair Kevin Warsh declined to provide forward guidance on the Fed’s next move, eighteen central bankers shared their economic and policy forecasts. They expect inflation to rise to 3.6% this year, before falling to 2.3% next year, and U.S. economy to grow 2.2% in 2026.

What’s The Fed’s Next Move…The bond market indicates a 75% probability of an interest rate hike at the September meeting, with expectations of approximately 41 basis points of rate hikes this year. Meanwhile, trading on Kalshi, a prediction market, shows a 57% likelihood of a rate hike in 2026, up from 35% the previous week. Major Wall Street firms have adjusted their outlook on interest rates. Nomura, Bank of America, and Deutsche Bank do not anticipate any rate cuts and foresee an increased risk of rate hikes. In contrast, Citibank now predicts 25 basis point cuts in October and December 2026, followed by another cut in January. It had previously expected rate cuts to begin in September. Additionally, Barclays, which initially forecast a 25-basis point cut in March 2027, now expects the Federal Reserve to maintain steady rates throughout 2027.

Prepaid Energy Bonds Gain Steam…Prepaid energy bonds, a rapidly growing niche of the muni bond market, have grown to $120 billion outstanding bonds, an average growth rate of 25% since 2018. Soaring demand for energy and high energy prices have driven the issuance of these bonds, which enable participants to lock in prices for gas and electricity. Prepaid deals can provide attractive yields and additional spread tax-exempt. Last week’s largest primary market offering was a prepaid energy bond issued by Black Belt Energy Gas District and guaranteed by Goldman Sachs.

Brightline Gets Working Capital, Debt Extension…Assured Guaranty, guarantor of $1.1 billion Brightline senior bonds, has provided a $22 million working capital loan to the rail operator. Assured’s loan is likely a bridge to a more comprehensive solution to restructuring Brightline debt. In addition, bondholders offered a two-week reprieve by extending the repayment of certain uninsured bonds to the end of the month. Recent revenue and ridership are about 19% higher than a year ago, and Brightline is evaluating financing proposals from major creditors after efforts to sell the company stalled. Assured Guaranty insured Brightline bonds have been trading between 97.7 cents to 100.4 cents during this month.

Muni Bonds Supersized…Muni bond offerings are getting larger, as infrastructure costs have risen, and investor demand for tax-sheltered investments has accelerated. The prepaid energy sector, several large hospitals, an Atlanta utility and New York issuers have issued the most ‘mega’ muni bonds. So far this year, over 28 bond offerings have crossed the $1 billion mark. Last year, 41 muni bond transactions, or 0.5% of annual muni bond sales, crossed the $1 billion mark. ‘Super Mega Deals’ or muni bond offerings larger than $2 billion, issued this year include three transactions in New York and California.

FIFA World Cup Windfall…The 2026 FIFA World Cup is estimated to bring billions of dollars in economic impact. New York and New Jersey alone project $432 million in state and local tax revenue from hosting eight tournament matches, including the championship finals. Texas is also poised to win big, with Dallas and Houston projected to generate significant visitor spending. Beyond the eleven host cities themselves, U.S. states are poised to receive between $1 billion and $3 billion in incremental tax collections from the championship.

Compare 30-Year taxable U.S. Treasury yield 4.91% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.24%; “AA” 4.44%; “A” 4.64%. For investors in the 35% tax bracket, a 4.25% tax-exempt yield is equivalent to a 6.5% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.