Municipal Bond News 7/27/26

Bond Selloff Creates Tax-Free Income Opportunity…Treasuries Tumble…New Muni Bonds…Build America Mutual Chips Away At Assured Lead…Hospitals on the Mend…Inaugural Budget Boosts Garden State Finances…Unions Oppose Chicago Public School Budget…Rate Policy Odds…

Bond Selloff Creates Tax-Free Income Opportunity…Elevated tax-free yields and an abundant primary market calendar continue to offer opportunities to add tax-free income, harvest tax-losses and diversify portfolios. Last week, muni yields climbed to their highest levels this year, driven by geopolitical uncertainty and volatile market conditions. Muni bond yields have risen 40 basis points in July, as U.S. Treasury yields hit their highest levels in almost two decades. Top-rated long-term munis currently yield over 7% taxable equivalent yields for top earners in high tax states, a buying opportunity for diversified long-term investors.

Treasuries Tumble…Treasury yields jumped eight basis points to 5.19% last week, as oil prices surged to $100 per barrel-. Sensitive to interest policy changes, yields on two-year Treasury notes rose to 5.37%, the highest since early 2025. So far this year, the 30-year U.S. Treasury has yielded over 5% for 27 days, the most since 2007. Long-term state and local government tax-free bonds yield about 88% of comparable U.S. Treasury yield.

New Muni Bonds…Over $10 billion in weekly aggregate new issue volume spanning varied tax-free bond sectors and ratings fueled investor demand for tax-free income. San Antonio airport sold $866 million ‘A2/A+’ rated tax-free bonds at a top tax-free yield of 5.05%. New York City Transitional Finance Authority sold $1.5 billion high grade tax-free bonds at a top yield of 4.8%. Additionally, Boston University sold high grade callable bonds yielding 4.16% for twenty years. This year’s new issuance is about 5% higher than last year. Many large bond offerings are flying off the shelves, with thirty-fold demand for a recent Connecticut water utility.

Build America Mutual Chips Away At Assured Lead…Assured Guaranty is the market leader in providing financial guarantees on muni bonds. However, the gap in market share between the two bond insurers who write new bond insurance has narrowed. Assured’s new insurance wrap volume has fallen nearly 12% from a year ago. Meanwhile, Build America has seen insurance volume grow 34% year-over-year. Assured Guaranty has a 52.4% market share in 2026, while Build America Mutual has insured 47.6% of new muni bonds.

Hospitals on the Mend…About 100 hospitals nationwide have issued new muni bonds so far this year. Hospitals are on solid footing in 2026, amid growing patient volumes, moderating expense growth, and increasing capital expense. Operating margins have improved but remain below pre- pandemic levels and uneven. The 2025 expiration of enhanced Affordable Care Act subsidies is an emerging headwind, particularly for safety-net, rural and low-income markets. Larger, well- positioned systems are capturing volume growth and securing stronger commercial rate increases.

Inaugural Budget Boosts Garden State Finances…Governor Mikie Sherrill’s inaugural state budget projects a $6 billion surplus, delivers a sixth consecutive full pension payment, and cuts the Garden State structural deficit by roughly $1.35 billion. The enacted budget makes a $6.1 billion annual pension contribution, spends over $2 billion for transportation infrastructure and commits nearly $1.1 billion in operating support for NJ Transit. The $60 billion budget is 1.2% higher than prior year and boosts spending on preschool and K-12 education to record levels. The Governor stated “It is the most fiscally responsible budget in years. It cuts our structural deficit in half and puts us in a stronger position for the future without raising taxes on individual New Jerseyans.”

Unions Oppose Chicago Public School Budget…Chicago Public Schools (‘CPS’) has proposed a $9.8 billion budget for Fiscal 2027 last week. The plan closes a $732 million budget shortfall and calls for layoffs and furloughs. Opposed to the furloughs, Chicago Teachers Union has called the budget ‘dead on arrival.’ The teacher’s union wants a special state legislative session to raise revenue for schools and wants CPS to sue Cook County for repeatedly late tax bills. Chicago Board of Education will vote on the budget next week, and public hearings are ongoing.

Rate Policy Odds…Bond market expectations of rate hikes grew last week. Currently, there are one-in-three chances of a rate hike next week, up from just ten percent odds a week ago. Higher oil prices and uncertainty over the duration of the U.S.-Iran conflict led to the change. Looking out further, bond markets anticipate at least one rate hike by September.

Compare 30-Year taxable U.S. Treasury yield 5.12% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.52%; “AA” 4.71%; “A” 4.93%. For investors in the 35% tax bracket, a 4.52% tax-exempt yield is equivalent to a 6.95% taxable yield. Top-rated long-term tax-free bonds yield 88% of comparable taxable U.S. Treasuries.