Municipal Bond News 7/13/26

Tax-Free Bond Demand Endures Market Volatility…When Tax-Free Beats Taxable…Bellwether Yields Near 2026 Highs…Rate Policy Expectations…July Reinvestments…Puerto Rico Oversight Board… Record New Issue Volume…Big Apple Budget Gets Mixed Reviews…

Tax-Free Bond Demand Endures Market Volatility…Municipal bonds are among the strongest-performing fixed-income sectors during the first half of 2026. Amid heightened volatility driven by geopolitical events, changing Federal Reserve expectations, and uncertain policy expectations, retail investors have plowed cash to buy tax-free bonds. Over the last few years, High Net Worths have gravitated towards buying individual muni bonds, opting for customized tax-free portfolios that offer credit selection and tax-loss swaps for higher returns. Driving muni bond returns higher, investors have poured $53 billion into muni funds in the first half of 2026, already exceeding the level reached in all of last year. Long term investors have taken advantage of any market yield spikes as opportunities to lock in favorable tax-free income.

When Tax-Free Beats Taxable…For investors in high tax brackets, today’s taxable-equivalent yields on long term state and local government bonds rival the long-run expected returns from equities, while offering substantially lower volatility and fixed tax-free income. A 4.24% yield on a top-grade 30-year muni bond would be equivalent to over 7% taxable yield for a top tax bracket investor. In comparison, the 30-year U.S. Treasury yielded 5.05% taxable this past week. For a Golden State resident in the top bracket, a 4.24% yield from a California credit would be equivalent to over 9% on an after-tax basis.

Bellwether Yields Near 2026 Highs…Last week, the 30-year U.S. Treasury yield crossed 5% for the first time in a month and is currently near the highest since 2007. U.S. Treasury yields rose for a second straight week amid Middle East tensions and a rise in oil prices. The selloff marks a shift from June-end, when oil prices retreated to pre-war levels. Muni bond yields have risen about 12 basis points in July, a smaller increase relative to the surge in Treasury yields.

Rate Policy Expectations…Bond markets assign high odds to rate hike later this year. A few Federal Reserve officials said there was a case for raising rates at the June Fed meeting, although they ultimately supported the decision to leave rates unchanged. Wall Street forecasts are mixed: Bank of America, Deutsche Bank, and BNP Paribas expect rate hikes this year, while Citigroup predicts two rate cuts of 25 basis points each in 2026. In contrast, Barclays projects an indefinite hold on rates. Last week, Fed Reserve Governor Christopher Waller noted that incoming data will guide the Fed’s policy decision.

July Reinvestments…In July, bondholders will receive over $60 billion in principal and interest payments from states and local governments. July marks the highest monthly cash flow received by muni bondholders during the year. The summer months are the peak redemption season, and reinvestment demand soars. Historically, July has been a strong month for muni bond returns. New York and California have the most bonds coming due this month.

Puerto Rico Oversight Board…Two recent Supreme Court rulings on presidential powers could shape Puerto Rico’s federal oversight board and ultimately have implications for Puerto Rico electric utility debt resolution. The decisions may influence whether the President has authority to remove and replace oversight board members. In August 2025, President Trump removed six of seven oversight board members. However, the U.S. District Court of Puerto Rico ruled to reinstate three board members in October 2025. In December 2025, the White House appealed the District Court ruling, sending the case to the First Circuit Court of Appeals. However, litigation was paused in late December pending guidance from Supreme Court ruling on the removal of Federal Reserve board member Lisa Cook and another case. Resolution of litigation on presidential powers could shape the board’s leadership and the Island’s fiscal oversight.

Record New Issue Volume…A record $70 billion new muni bonds were issued in June, the strongest June issuance on record, and the largest monthly issuance volume since 2020. Prepaid energy bonds dominated the June primary market calendar, with eleven such bond offerings, across the credit spectrum, issued in California, Georgia, Alabama, and Kentucky. Resilient demand absorbed a robust primary market calendar.

Big Apple Budget Gets Mixed Reviews…New York City’s enacted $126 billion Fiscal 27 budget closed a $5.4 billion deficit with one-time measures and state aid. The plan includes a new property tax levy on second homes valued over $5 million, while higher-than-expected tax revenue reduced the city’s use of reserves by $350 million. However, the budget defers pension debt payments to support current year spending. Future budget gaps loom on New York City. A Fitch analyst stated that the enacted budget is an improvement because additional state aid averted a proposed property tax increase and drawdown on reserves but cautioned “The city continues to project sizable out- year gaps that will require additional ongoing solutions.”

Compare 30-Year taxable U.S. Treasury yield 5.08% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.24%; “AA” 4.43%; “A” 4.77%. For investors in the 35% tax bracket, a 4.24% tax-exempt yield is equivalent to a 6.52% taxable yield. Top-rated long-term tax-free bonds yield 83% of comparable taxable U.S. Treasuries.