Municipal Bond News 8/24/26

High Tax-Free Yields Meet Strong Demand…U.S. Treasury Debt Buy-Back Seeks Lower Borrowing Costs…New Muni Bonds…Investors Tune Into Higher Yields…Fed at Crossroads…Brightline Receives Cash…Chicago Investor Conference Highlights…MTA Seeks State Help…Top Muni Bond Issuers…Reinvestment Demand Soars…

High Tax-Free Yields Meet Strong Demand…Tax-free yields at the highest levels this year, a historic wave of new issuance, and resilient investor demand define the municipal bond market as summer draws to a close. Despite the surge in new bond issuance, new muni bonds have been met with strong order books, underscoring investor appetite for meaningful tax-free income. Continued volatility in U.S. Treasury yields is creating opportunities, keeping muni yields elevated and valuations attractive relative to taxable counterparts. Notably, long-term tax-exempt yields offer over 7% taxable equivalent yields to top tax bracket investors in high tax states. Currently, investment-grade and long-term muni bonds are most sought by investors.

U.S. Treasury Debt Buy-Back Seeks Lower Borrowing Costs…U.S. Treasury Secretary is planning an aggressive buyback of longer-dated Treasury bonds, aiming for lowering borrowing costs. The U.S. Treasury said it would “at least double” its purchases of U.S. Treasuries maturing in 10 to 30 years, increasing its buyback from $2 billion to “at least” $4 billion. The move is a signal to investors that the Treasury is concerned about high borrowing costs and is focused on keeping longer-term government borrowing costs low.

New Muni Bonds…Los Angeles airport’s $2.7 billion bond sale is front and center, offering up to 4.97% tax-free (AMT) yields for high grade muni bonds. New York City Transitional Finance Authority’s $1.9 billion bond sale fetched four times as many orders. Yields fell up to 9 basis points during the order period to 4.87% for high-grade long-term bonds. Over $17 billion in new muni bonds were sold last week.

Investors Tune Into Higher Yields…State and local government bond yields have risen eight basis points over the last two weeks, echoing a similar rise in U.S. Treasury yields. U.S. Treasury yields rose last week, as oil prices ticked higher, the U.S. dollar weakened, and federal debt topped $40 trillion. The 10-year U.S. Treasury finished the week around 4.74%, while the 30-year U.S. Treasury yield ended near 5.28% after briefly touching 5.34%, its highest level since 2007.

Fed at Crossroads…Bond markets anticipate near 70% odds that the Fed will hold rates steady at its September meeting. In July, inflation fell to the lowest since 2021, and retail sales declined. Additionally, the labor market was weaker than expected. However, there is a high level of dissent within the Federal Reserve, and “several” officials were prepared to raise rates, and “many” indicated higher policy rates could likely become necessary if inflation does not move convincingly towards 2%, per minutes of the July Fed meeting. This backdrop puts even greater focus on the Fed’s annual Jackson Hole meeting this week, which could hold clues on the path for interest rates.

Brightline Receives Cash…Brightline received a cash infusion of $14 million to pay its bills as debt restructuring talks with creditors continue. Additionally, the U.S. Department of Transportation announced $57 million funding to build a new Brightline train station at Cocoa Beach, a significant milestone that could improve connectivity and boost ridership. July ridership and revenue are 13% higher than a year ago.

Chicago Investor Conference Highlights…At last week’s investor conference, Chicago Mayor Brandon Johnson highlighted that recent progressive revenue tax measures are exceeding projections, “Our online sports wagering tax and social media amusement taxes are 69% and 25% above projections.” The mayor assured investors that Chicago will make the second half of its advance pension payment this year, despite uncertainty over timing due to property tax delays from Cook County. A Chicago Financial Future Task Force panel member argued that Chicago had “a good story to tell” on tourism, public safety and broader economic conditions, adding “With their economy, they should be double-A.” Chicago is currently rated in the ‘BBB’ range. Additionally, Chicago also has a new CFO, who was formerly at Fitch Ratings.

MTA Seeks State Help…MTA anticipates it will need state help to resolve budget gaps. The MTA is projecting a $295 million deficit next year, about 1.3% of its anticipated $22.8 billion budget, which will increase to $897 million in 2030. Fare box revenue increases have not kept up with rising healthcare and labor expenses. MTA CEO said, “We need a strategy together with the political leadership statewide to deal with the reality that we have to balance between the real cost growth and our revenue situation.”

Reinvestment Demand Soars…States and local governments will return over $65 billion in interest and principal repayments to bondholders in August. Over the last three months, bondholders have received over $180 billion from states and local governments, a boost to reinvestment demand. This is the highest volume of repayments received during the year.

Compare 30-Year taxable U.S. Treasury yield 5.27% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.56%; “AA” 4.73%; “A” 4.99%. For investors in the 35% federal tax bracket, a 4.56% tax-exempt yield is equivalent to a 7.02% taxable yield. Top-rated long-term tax-free bonds yield 87% of comparable taxable U.S. Treasuries.