Municipal Bond News 6/23/25

Vibrant Mix of New Muni Sales…Muni Bond Yield Opportunity…Fed Calls Rate Cuts…Central Bankers Divided… MTA Earns Rating Upgrade… Individuals Boost Muni Bond Investments…Pensions Introduce Cryptocurrency…New York City Faces Budget Gaps…SALT in Limbo…

Vibrant Mix of New Muni Sales…An array of airports, hospitals, and universities issued tax-free bonds last week. Recent primary market bond sales have seen oversubscriptions, reflecting strong demand. Notably, San Diego airport, Duke University Health System and Emory University sold high grade bonds ranging from 4.96% to 4.58%. Additionally, West Virginia United Health system sold $400 million tax-free bonds rated Moody’s ‘A2’ S&P ‘A’ at a top yield of 5.04%. Earlier this month, Chicago’s recent general obligation bond offering was nearly ten times oversubscribed, attracting orders totaling $6.5 billion from over 90 institutional investors for a $700 million bond offering.

Muni Bond Yield Opportunity…Over the last six months, long-term muni bond index yields have climbed 70 basis points higher. In comparison, comparable U.S. Treasury yields have risen by only 8 basis points. Higher bond issuance by states and local governments have led muni bonds to underperform their taxable counterparts. For top earners, top-rated muni bonds offer yields of over 7% taxable equivalent, about 200 basis points of additional yield relative to taxable U.S. Treasury yield. A robust new issue calendar, substantial additional yield, and solid credit quality boost the case for investing in muni bonds.

MTA Earns Rating Upgrade…Last week, Moody’s upgraded the credit rating of MTA’s $17 billion transportation revenue bonds to ‘A2’ from ‘A3’, and revised the outlook to stable from positive. Increased political and financial support from New York City and New York State has contributed to the credit upgrade. A new hike in the payroll mobility tax hike is expected to generate $1.4 billion annually, which will enable MTA to borrow $23 billion. Additionally, about $10 billion of capital upgrades are supported by the operating budget. MTA faces only moderate growth in leverage metrics and fixed costs. The recent payroll mobility tax hike has significantly closed funding gap in MTA’s $68.4 billion 2025-2029 capital program.

Individuals Boost Muni Bond Investments…Household investments in muni bonds grew about 3.7% from a year ago. With nearly $3 trillion invested in muni bonds, households are the largest holders of state and local governments bonds. Currently, there are $4.2 trillion muni bonds outstanding, up 3.1% higher from a year ago. The appeal of attractive tax-free yields has driven households to invest more in municipal bonds.

Fed’s Rate Cut Call…Most Fed officials forecast two quarter point rate cuts this year. However, seven of the 19 Federal Reserve officials forecast no rate cuts this year, two predict just one rate cut in 2025, and one penciled in three quarter-point rate cuts in 2025. Despite the differing forecasts, policymakers voted unanimously to keep rates unchanged at last week’s Fed meeting. Federal Reserve Chair Jerome Powell said, “We are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance” and warned “our job is to make sure that a one-time increase in inflation doesn’t turn into an inflation problem.” The Fed raised inflation forecast to 3.1%, up from 2.8% earlier, and cut its outlook for 2025 GDP growth to 1.4% from 1.7%, signaling potential risks of stagflation.

Central Bankers Divided…Fed officials are divided on whether to lower rates this year. “I think we’re in that position and that we could do this as early as July,” Fed Reserve Governor Christopher Waller noted last week, adding, “We’ve been on pause for six months thinking that there was going to be a big tariff shock to inflation. We haven’t seen it…We should be basing policy . . . on the data.” In contrast, Richmond Fed President Thomas Barkin said, “I don’t think the data gives us any rush to cut…I am very conscious that we’ve not been at our inflation target for four years.” Tariff fears and cooling economic growth have fueled uncertainty.

Pensions Introduce Cryptocurrency…U.S. public pensions have more than $6 trillion invested in broadly diversified investment portfolios. High investment return targets have led some pension plans towards cryptocurrency investments. Last year, Michigan and Wisconsin allocated small amounts to cryptocurrency-linked ETFs within their pension assets. Additionally, six U.S. states, including Florida, are considering proposals to invest as much as 10% of their pension funds in cryptocurrency. Currently, Arizona is the only U.S. state that has authorized cryptocurrency as a state reserve asset. Based on the amount of exposure, public pension funds’ volatility stands to rise with cryptocurrency investments.

New York City Expects Slower Tax Collections…Although New York City tax collections are currently outperforming, the New York State comptroller has urged New York City to brace for budget gaps in the near future. The state comptroller warned that the U.S. economy may be weakening, which would curb revenue growth. Additionally, fiscal pressures on New York City could also intensify because of federal budget cuts. The third largest U.S. city could face a potential budget gap of $10.6 billion in Fiscal 2027, which begins a year from now, per the New York State comptroller. In contrast, city administration forecasts smaller gaps, of around $4.6 billion for the same time period. Tax revenue in New York City is currently up by 8.6% in Fiscal Year 2025. However, the city expects tax collection growth to slow to just 1% in Fiscal Year 2026, which begins next week.

SALT in Limbo…Senate lawmakers have proposed changes to the tax reform bills put forth by the House of Representatives. The Senate’s proposal includes a cap of $10,000 on the State and Local Tax (SALT) deduction, which is significantly lower than the $40,000 cap included in the House- approved tax reform package. The Republicans hold a 53-47 majority in the Senate, and none of the Senate Republicans represent states with high taxes, where the SALT issue is particularly critical. House Republicans from New York have immediately labeled the $10,000 cap as unacceptable. The SALT cap is currently a focal point of intense negotiations.

Compare 30-Year taxable U.S. Treasury yield 4.88% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.54%; “AA” 4.86%; “A” 5.08%. 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 93% of comparable taxable U.S. Treasuries.