Municipal Bond News 7/6/26

The Case For Buying Individual Munis…Rate Hike Odds Pared…PREPA Revised Offer…World Cup Muni Bonds…Brightline’s Rival Bondholders…Fed Will Fight Inflation…Revenue Outperformance Boosts California Budget…Fiscal 27 Kicks Off…

The Case For Buying Individual Munis…Wealthy investors can often do better by investing in individual muni bonds, rather than buying bond funds. “Just as an increasing number of wealthy people are opting for so- called concierge medical services, well-heeled investors can often do better with a specialist who assembles and manages a bespoke package of munis for them,” Barron’s wrote over the weekend. Buying individual muni bonds offers unique opportunities for active management. Unlike bond funds, purchasing individual muni bonds allows investors harvest tax losses through targeted tax swaps, upgrade credit quality, and customize tax-free income portfolios. “Notably, tax swaps – exchanges of one bond whose price has declined for a similar issue-can meaningfully add to returns,” Barron’s highlighted, adding, “Longer maturities do provide a significant advantage.”

Rate Hike Odds Pared…An unexpected slowdown in hiring last month has lowered expectations of a rate hike later this year. In June, payroll growth was only about half of consensus estimates, and down sharply from May. Bond markets now see less than one-in-five odds of a July rate hike down from 33% odds earlier. Currently, there is about a 60% chance of a September rate hike.

PREPA Revised Offer…Puerto Rico’s oversight board has boosted its recovery offer to Puerto Rico electric utility bondholders. During June mediations with bondholders and bond insurers, the board has offered a roughly 35% recovery on $8.5 billion in PREPA bondholder claims, up from about 19% under the earlier offer. This includes $3 million in cash and/or new bonds, and potentially, contingent value instruments. This is $1.4 billion more than previously offered. Board chairman stated “Puerto Rico must be able to close this last chapter of its fiscal crisis and move forward.” Uninsured PREPA bonds are currently trading in the mid-70s price range, highlighting the disconnect between the board’s latest offer and market expectations.

World Cup Muni Bonds…Across eleven host cities, a range of muni bonds, from general obligation to hotel occupancy and sales tax secured bonds, helped develop infrastructure ahead of the 2026 FIFA World Cup. Transit, airports, convention centers, broadband, and community infrastructure are major beneficiaries of the spending. Examples include $777 million sales tax bonds for Boston’s Gillette Stadium, $700 million Houston airport bonds, $1 billion New Jersey transportation bonds and Kansas City general obligation bonds. While these new muni bonds prepped these cities for the big game, they have boosted infrastructure assets and local economies.

Brightline’s Rival Bondholders…At least three groups of bondholders are vying to lead Brightline East’s anticipated restructuring by providing crucial bankruptcy financing. Assured controls 51% of the $2.2 million of senior debt that sits at the top of the $5.5 billion capital structure. Other municipal bondholders include Nuveen LLC, Invesco Ltd. and First Eagle Investments. Meanwhile hedge funds Redwood Capital, Aristeia Capital and Nut Tree Capital Management own the majority of the corporate securities that are subordinate to the municipal bonds. Assured also recently provided a bridge loan to the train operator and has a large role in the negotiations. Assured Guaranty insured Brightline bonds traded between 97.15 cents and 99.98 cents on the dollar last week.

Fed Will Fight Inflation… “I’m not going to make a judgement now,” Fed Chair Kevin Warsh declined to provide his opinion on whether post-war inflation was temporary. However, Warsh was emphatic that the Fed would not tolerate high inflation, noting, “If people thought this central bank was going to be comfortable with an inflation objective above 2% they would be disappointed. Separately, San Francisco Fed president Mary Daly noted that current monetary policy is slightly restrictive, which should cool inflation, however, there are large uncertainties and that the Fed might need to respond more aggressively to persistent inflation.

Revenue Outperformance Boosts California Budget…Governor Newsom signed a $352 billion Golden State budget last week. Outperforming tax collections helped balance the budget through Fiscal 2028, and there is no projected deficit for the next two fiscal years. The budget preserves nearly $30 billion in state reserves. The state has countered federal funding cuts by avoiding any new long term spending commitments. Close to a billion dollars of new revenue comes from extending sales tax on software downloads. The budget marks Newsom’s final spending plan as governor and comes as the Artificial Intelligence developments have boosted Golden State coffers.

Fiscal 27 Kicks Off…On July 1, 46 U.S. states and one U.S. territory began Fiscal 27. California, Puerto Rico and New York City finalized their budgets last week. There was a wave of budget enactments last month, with at least 27 U.S. states finalizing their budget by mid-June. However, legislatures in four U.S. states continue to negotiate finer details. In a challenging environment, U.S. states are keeping a close watch on slower revenue growth and restraining spending.

Compare 30-Year taxable U.S. Treasury yield 4.97% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.15%; “AA” 4.39%; “A” 4.66%. For investors in the 35% tax bracket, a 4.15% tax-exempt yield is equivalent to a 6.38% taxable yield. Top-rated long-term tax-free bonds yield 84% of comparable taxable U.S. Treasuries.