Municipal Bond News 6/30/25

Why You Should Buy Muni Bonds Now…July Muni Bond Calendar Shrinks…Longer-Dated, Higher-Rated Muni Bonds Favored…Rate Cut Odds…U.S. States Kick-Off Fiscal 2026… California Budget…Chicago Public School Deficit Grows… Fed Officials On Rate Cuts…Election Races…

Why You Should Buy Muni Bonds Now… “Tax-exempt bonds ranked near the bottom of returns in the fixed-income market during the first half of the year—but that offers a solid setup for the rest of 2025. Weighing on the muni market lately has been a heavy supply of new issues in the first half of June, but longer term, the outlook looks better. Single-A and double-A bonds now yield from 4.5% to 4.75%, just a touch below those on 30-year Treasury bonds at 4.85%. The tax-equivalent yield on those munis is over 7%,” Barron’s wrote this weekend. Many individuals prefer to buy individual municipal bonds and clip coupons. For residents of high-tax states like New York and California, consider long-term debt from the Los Angeles Department of Water and Power or Triborough Bridge and Tunnel Authority, which now yield about 4.75%, Barron’s suggested. Overall, muni bonds are attractively priced.

July Muni Bond Calendar Shrinks…In July, about $6 billion new muni bonds are expected to be issued. That is less than half of the one-year average monthly issuance of $13.7 billion. States and local governments tend to issue fewer bonds in the summer months. However, muni bond supply has trended higher for two straight years. Higher infrastructure costs have led to larger borrowings. The largest municipal bond offerings in the second quarter of 2025 include Brightline West’s $2.5 billion bonds and New York University’s $2.18 billion bond sale.

Longer-Dated, Higher-Rated Muni Bonds Favored…Higher-rated and longer-dated muni bonds have attracted the most investor attention this year. In the secondary trading market, 57% of trading volume has been for longer-dated muni bonds, an expert told Bond Buyer. Investors have also favored higher- credit quality muni bonds. The percentage of high-grade muni bonds rated ‘AA’/’Aa’ or more is the highest in nearly two decades. Credit upgrades have outpaced downgrades for the last seventeen quarters. J.P. Morgan Chase predicts that longer dated muni bonds are “well positioned for outperformance.”

Rate Cut Odds…Bond markets currently assign near 70% odds of a September rate cut. Just a week ago, the odds were about 56%. Fed Chair Powell told lawmakers that the central bank would lower borrowing costs “sooner rather than later” if inflation remains contained. The Fed’s preferred inflation gauge rose 0.1% last month, to a 2.3% annual pace. However, some Wall Street banks, including Morgan Stanley, predict that the Fed will not cut rates in July or September. They believe that the Fed will take a ‘wait-and-see’ approach.

U.S. States Kick-Off Fiscal 2026…Majority of U.S. states have enacted Fiscal 26 budgets that go into effect on July 1. A few U.S. state budgets are awaiting the governor’s signature. Nine U.S. state are still in various stages of legislative talks. Ahead of the June 30 deadline, the states without a Fiscal 2026 budget are addressing tax and spending policy differences during budget negotiations, rather than grappling with structural budget shortfalls. Some states also face a split in political control between the legislature and the governor, which could extend bipartisan talks beyond June 30. Many states have procedures in place, such as continuing resolutions or appropriations, piecemeal budgeting, or authorizing provisions in statute, that allow the treasurer to prioritize debt service payments in the absence of a budget.

California Budget…California lawmakers reached an eleventh-hour tentative agreement on the California state budget. The $321 billion state budget relies on borrowing, tapping into state reserves, and reallocating funds to close a $12 billion shortfall. Lawmakers rejected Governor Newsom’s call to scale back on expansion of subsidized health care. While the budget postpones any spending cuts, the state is facing a slow economy and the possibility of reduced federal funding. Lawmakers caution that additional budget cuts may be necessary in the fall or early next year. State officials project that future deficit estimates could range from $17 to $24 billion annually.

Fed Officials On Rate Cuts…A flurry of Fed officials has signaled they need a few more months to gauge the impact of tariffs on inflation. Officials including Fed Chair Powell, John Williams, Mary Daly, Susan Collins, Tom Barkin, Austan Goolsbee and Neel Kashkari have shown caution about cutting rates in July. However, Fed Governors Christopher Waller and Michelle Bowman signaled they’d be open to a July rate cut. When asked about the possibility of a July rate cut, Fed Chair Powell said he did not want to point towards a particular meeting and is not in any rush to cut rates because the economy remains strong.

Chicago Public School Deficit Grows…The nation’s third largest school district is facing a $734 million deficit, about $200 million higher than earlier anticipated. Over the past several months, Chicago Public Schools (‘CPS’) has been “identifying ways to be more efficient and find cost savings across our central offices and administrative functions,” school officials stated last week, as it laid off 161 employees amid union opposition. CPS also has a new interim CEO, who is likely to revisit the possibility of additional borrowing to balance the budget. Such a move was strongly opposed by the former CEO. Meanwhile, seven elected members of the Chicago Board of Education continue to oppose new borrowing and are advocating for more funding from the city’s tax-increment financing districts. The Chicago Teacher’s Union is urging the district to seek an additional $1.2 billion annually from the state’s education funding formula. Traditionally, Chicago Public School releases its Fiscal 26 budget in June, but this year it has been postponed until at least late July or August.

Election Races…New Jersey and Virginia will elect new governors in November 2025. In Illinois, Governor J.D. Pritzker is eyeing a third term. In New Jersey’s gubernatorial election, Mikie Sherrill, a four-term Democratic congresswoman, and former Republican state Rep. Jack Ciattarelli will face off. Early polls indicate significant numbers of voters remain undecided. Meanwhile, Zohran Mamdani, who won the City’s democratic primary last week, and incumbent Eric Adams are top contenders for next New York City Mayor. This mayoral race has sparked prospects of higher taxes in the Big Apple.

Compare 30-Year taxable U.S. Treasury yield 4.81% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.53%; “AA” 4.89%; “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 94% of comparable taxable U.S. Treasuries.