Municipal Bond News 8/18/25

Rising Supply Creates A Muni-Bond Moment…MTA Earns  Rating Upgrade…New Jersey Earns Rating Upgrade…New Muni Bonds Oversubscribed…Rate Cut Odds…Chicago Public School  Budget Stand-off…Top Muni Bond Issuers…Ratings  Downgrades Surpass…U.S. States Seek To ‘Tax-the-Rich’…

Rising Supply Creates A Muni-Bond Moment…At the start of the year, 30- year Muni-Treasury ratios were around 80%, but now this gauge of relative value is around 95%. Additionally, longer-dated muni bonds’ yield advantage over shorter-dated bonds has risen sharply this year. These notable shifts reflect that the $4 trillion muni bond market is currently attractive for long- term investors from a valuation perspective. Muni bonds’ underperformance relative to U.S. Treasuries is driven by record high supply of state and local government bonds. “They want to have these things priced to sell and to sell very quickly and easily,” an expert told Bond Buyer, explaining that, after two years of record supply, underwriters of state and local government bonds are pricing new muni bond offerings a little cheaper.

MTA Earns Rating Upgrade…The Metropolitan Transportation Authority’s $17 billion of debt was upgraded one notch to A from A- by S&P last week. “The rating reflects a highly essential and extensive transit system that serves the congested, populous New York metropolitan statistical area and receives significant ongoing tax-supported subsidies for operations and debt service,” S&P added that the MTA “also has a high debt burden from significant ongoing capital requirements.” In June, Moody’s raised its rating on the credit by one level to ‘A’. Fitch grades the debt AA. MTA CFO stated, “S&P’s upgrade demonstrates continued growth in confidence in the MTA’s financial stability while recognizing the early success of the congestion relief tolling program, ongoing ridership recovery and dedicated state support to maintain a strong financial position.”

New Jersey Earns Rating Upgrade…S&P upgraded the Garden State general obligation bonds to ‘A+’ from ‘A’ and assigned a stable outlook. “The upgrade reflects our view of the meaningful improvement in the state’s balance sheet reflecting management’s commitment to rein in its comparatively large debt and pension liabilities while striving to achieve a structural budget balance longer-term,” S&P stated. Governor Murphy stated “From making five consecutive full pension payments to narrowing our structural deficit to building a strong, reliable surplus to help weather economic volatility, we have made enormous strides to turn New Jersey’s fiscal ship around after decades of mismanagement from both sides of the aisle.” The latest upgrade is the Garden State’s eighth rating upgrade in three years, and only the 10th since the 1960s.

New Muni Bonds Oversubscribed…New York City received orders totaling 2.5x times the amount of general obligation bonds offered last week. The $1.8 billion high grade tax-free bond sale offered a top yield of 4.95% tax-free, which is equivalent to near 8% for top-earners in the Empire State.

Rate Cut Odds…Bond markets currently assign 85% odds of a September rate cut. Short-term Treasury bond yields, the most-sensitive to interest-rate changes, are trading at the lowest levels in nearly three years in anticipation of a September reduction. Fed officials have signaled they are weighing mixed signals from the economy ahead of their Sept. 16-17 policy meeting.

Chicago Public School Budget Stand-off…Cost-cuts, new revenue, repurposing grant dollars, using reserve funds and bond refunding are part of Chicago Public Schools’ plan to close a $736 million budget deficit. CPS is willing to pay for a controversial $175 million municipal pension payment, only if the district gets more money from the city’s tax-increment financing districts, and potentially the state. However, school administration’s refusal for short-term borrowing has drawn ire from eleven board members who were recently appointed by Mayor Johnson. “Borrowing for operating expenses would send the district into a downward spiral of credit downgrades, higher interest rates and deeper cuts to staff,” CPS Chief Budget Officer said. A majority of the 21-member is mayor-appointed, meaning they have significant sway over budget approval.

Ratings Downgrades Surpass…For the first time in five years, Moody’s public finance downgrades surpassed upgrades in the second quarter of 2025. However, favorable outlook changes outpaced unfavorable ones by a slim margin. Moody’s downgraded 126 muni bond issuers, relative to 75 upgrades. Of the downgrades, majority were linked to the downgrade of the U.S. sovereign rating to ‘Aa1’ stable from ‘Aaa’ negative. MTA, $54 billion outstanding bonds upgraded to Moody’s ‘A2’ stable, is the largest issuer to receive a rating change in the second quarter. State and local government ratings are predominantly investment grade.

U.S. States Seek To ‘Tax-the-Rich’…More ‘Tax-the-Rich’ policies might be coming. State lawmakers are crafting progressive tax policies, or specific taxes targeted at wealthy, to drum up additional revenue. Most of the 19 U.S. states that assess their budgets at least three years out are projecting deficits. State expenses could grow if states opt to shore up food assistance and Medicaid to make up for federal budget cuts. Since it began levying a millionaire tax in 2023, Massachusetts has added billions of tax dollars to its coffers. Connecticut and Maryland are among U.S. states where lawmakers propose to hike taxes on top earners to offset expected federal funding cuts. New York City mayoral candidate Zohran Mamdani has proposed a 2% tax on New Yorkers earning more than $1 million a year.

Compare 30-Year taxable U.S. Treasury yield 4.89% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.62%; “AA” 4.93%; “A” 5.14%. 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.