Municipal Bond News 8/03/26

‘Equity-Like’ Tax-Free Income Opportunity…Long Term Munis’ Higher Payout…High Yields, Haven Demand Underpin Muni Investments…Bellwether Yields Surge…Divisions Mark Fed Hold…PREPA Appeal Calls For Central Government Scrutiny…Chicago Public School Bets on State Aid…Public Pension Funding Hits 17-Year High…

‘Equity-Like’ Tax-Free Income Opportunity…Long-term top-rated state and local government bonds currently yield 4.52% tax-free, about 30 basis points higher than a month ago. Muni yields have reached such high levels only on three occasions this year: March-end, mid-May and currently, when skyrocketing oil prices fueled volatile market conditions. In April and May/June, yields plunged rapidly upon progress of peace talks. Geopolitical uncertainty has led to volatile market conditions. While the recent selloff led to worst July showing for muni bonds in over two decades, taxable equivalent yields exceeding 7% are a silver lining for top tax-bracket investors in high tax states.

Long Term Munis’ Higher Payout…The yield gap between long-term and shorter-dated muni bonds is the highest since at least 2009. The gap between 10-year and 30-year muni bond yields is currently 120 basis points. Meanwhile, 30-year U.S. Treasury bonds yield about 50 basis points more than 10-year Treasuries. State and local government bonds offer a significantly higher term premium, or compensation for long time horizon investments, to long term investors.

High Yields, Haven Demand Underpin Muni Investments…Despite the market turbulence, investor demand for tax-free income has remained resilient. Buyers have consistently stepped in to lock in higher tax-free income, helping muni bonds post a 0.56% year-to-date index gains, even after a 1.7% July decline. Historically high tax-free yields and investor demand for ‘haven’ government bonds reinforce the appeal of muni bonds during times of uncertainty.

Bellwether Yields Surge…Comparable U.S. Treasury bond yields jumped 11 basis points last week to 5.28%, climbing to the highest since 2007. Amid geopolitical conflict, oil prices surged 24% in July, the highest one-month gain since March. In July, bonds recorded their biggest monthly increase in yields during this year.

Divisions Mark Fed Hold…The Fed voted 9-3 to hold policy rates steady last week. Three Fed officials dissented in favor of an immediate rate hike due to ongoing high inflation concerns. Fed Chair Kevin Warsh stressed the central bank’s commitment to price stability, declaring, “This Fed will not waver” on delivering its responsibilities, adding, “And where necessary and appropriate, we will not hesitate to act.” The three dissenters had previously pushed to remove rate cut language from the Fed’s statement, a change adopted at the June Fed meeting. It marks the first time in a decade that three Fed officials dissented in the same direction over a rate policy change, highlighting growing pressure on the Fed to hike rates.

PREPA Appeal Calls For Central Government Scrutiny…PREPA bondholders told the U.S. Court of Appeals that the Puerto Rico central government hindered the utility’s operations, harming bondholder recoveries. They claim that the Island’s central government barred PREPA from independently setting electric rates and collecting sufficient revenues to repay bondholders. In the bond indenture, Puerto Rico has pledged to not limit such powers. Bondholders want the circuit court to overrule the U.S. District Court, and to allow them to press their case against Puerto Rico’s central government for interfering with PREPA.

Chicago Public School Bets on State Aid…Chicago Board of Education voted 11-7 to approve a $10 billion budget for the nation’s third largest school district. The budget avoids layoffs that were suggested earlier by school leadership, and instead, and relies on $150 million state funding that has yet to be approved. Reliance on uncertain aid raises the prospect of mid-year budget shortfall. Chicago Teachers Union, along with several board members, have countered that this approach pressures state leaders to address years of underfunding rather than forcing classroom cuts.

Public Pension Funding Hits 17-Year High…Public pensions are at their best funded status since the 2008 financial crisis. The national funded ratio for public pensions is currently at 85%, per Equable Institute. However, pensions depend heavily on investment returns and valuation accuracy. Over the past twenty-five years, states and local governments have tripled their annual contributions, and current contributions are at a historic high.

Compare 30-Year taxable U.S. Treasury yield 5.22% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.52%; “AA” 4.71%; “A” 4.86%. For investors in the 35% federal tax bracket, a 4.52% tax-exempt yield is equivalent to a 6.95% taxable yield. Top-rated long-term tax-free bonds yield 87% of comparable taxable U.S. Treasuries.