Municipal Bond News 8/25/25

The New Allure of Muni Bonds…Powell Opens Door To Rate Cuts…Hospitals’ Profitability Improves…Why Puerto Rico’s Oversight Board Was Fired…Central Bankers Divided…Rating Analyst Views on Chicago Public School Budget…Public Pension Returns Outperform…South-East Muni Bond Issuance Drops…

The New Allure of Muni Bonds…“Municipal bonds have underperformed the broader fixed-income market this year amid macroeconomic and fiscal-policy uncertainty, but those weaker prices offer investors a chance to lock in some spicy yields in a traditionally staid market,” Barron’s wrote this weekend. There are many AAA- or AA-rated high-quality munis where top tax bracket investors can generate an 8%-plus tax-equivalent return. Looking at valuations today across asset classes, intermediate to long-term munis are probably one of the most attractive asset classes relative to historical valuations. Last week, investor purchases of muni bonds soared to the highest in two years. Vast majority of the last week’s new muni investments were longer-dated bonds. Increased supply of muni bonds presents a favorable yield opportunity for investors. A Municipal Bond Specialists’ expertise in credit research and bond selection will help investors build diversified tax-free portfolios.

Powell Opens Door To Rate Cuts…Raising odds of a September rate cut, Fed Chair Powell said that the central bank is preparing to soon restart interest rate cuts. “The balance of risks appears to be shifting,” Powell noted that downside risks to employment are rising, although inflation is still high. Powell acknowledged that the Fed is in a “challenging situation” and it would need to “proceed carefully” with its plans to reduce the degree of restraint it is imposing on the economy. Bond markets assign around 80% odds of a quarter-point rate cut in September.

Hospitals’ Profitability Improves…Hospital revenues have rebounded, supporting higher and widespread profitability for the essential sector. Last year, the growth in expenses slowed down as operational improvements took effect. Median operating cash flow margin grew to 6.4% in 2024 from 5.7% in 2023 for the largest Moody’s rated hospitals. Smaller hospitals’ median operating margins also strengthened, building to 5.5% in 2024 from 3.3% in 2023. The gap between larger and smaller hospitals’ financial performance narrowed last year. However, larger hospitals’ capital spending is at a five-year high, while smaller hospitals have decreased their spending below the level of depreciation. Overall, hospitals’ financial performance remains below pre-pandemic levels.

Why Puerto Rico’s Oversight Board Was Fired, WSJ Editorial August 24, 2025…Congress enacted PROMESA in June 2016, giving the local government permission to override existing law and restructure its $70 billion of debt. The centerpiece of the bipartisan legislation is the federal government’s Financial Oversight and Management Board. It was put in place to ensure that San Juan, which had spent its way into crisis, wouldn’t do so again. That hasn’t happened. It’s difficult to know the status of central-government accounts because the last audited financials are from fiscal 2022. The White House noticed that the oversight board has let down both creditors and Puerto Ricans, leading to firing six of seven oversight board members. Rep. Nydia Velázquez (D., N.Y.) suggested that bondholders still tied up in litigation were behind the firing spree. The Title III court has asked the oversight board to report on the impact of the recent removal of board members will have on the board’s participation in the Title III court proceedings.

Central Bankers Divided…Last week, at least three voting Fed officials shared their views on the upcoming Fed meeting. Open to rate cuts, Boston Fed president Susan Collins said that despite price pressures, the Fed couldn’t “wait until we know everything that’s going” to happen, she said. “That’s going to be much too late.” In contrast, Kansas City Federal Reserve President Jeffrey Schmid expressed doubt about lowering interest rates in September, saying policymakers still have more work to do on inflation. Meanwhile, Chicago Fed leader Austan Goolsbee acknowledged the upcoming meeting is “live” and could bring a change in interest rate policy, although he acknowledged mixed economic data. At the Fed’s last meeting, two central bankers voted against the Fed’s decision to hold rates steady, marking the first instance of a double dissent since 1993.

Rating Analyst Views on CPS Budget…Chicago Public School’s (‘CPS’) proposed Fiscal 26 spending plan has drawn remarks from ratings agency analysts. “We’re happy to see that the ($300 million short-term) borrowing was not included in the budget, given the fact that it would have only exacerbated the district’s structural imbalance,” a Fitch analyst noted. A S&P analyst said, “The current budget proposal includes the assumption of substantial TIF surplus revenue from the city and tapping into the reserve fund to balance the budget,” adding “Given a reliance on numerous one-time solutions in the proposal, CPS’ structural stability appears to be on a downward trajectory; as such, any additional one-time solutions — such as short-term loans — would be viewed as temporary fixes that are unlikely to support long-term credit quality.” With $9 billion muni bonds outstanding, CPS is the largest U.S. junk bond issuer in the $4 trillion muni bond market.

Public Pension Returns Outperform…Public pensions are likely to deliver 11%-12% annual returns for the fiscal year ended June 2025 per S&P. This comes after 16%-17% returns in Fiscal 2024. Market gains boost the funding ratios of pension plans and relieve contribution pressures. For example. New York City pensions’ outperforming 10.3% return in the past fiscal year will ease pressure on the city budget and shave off approx. $2.2 billion from city pension contributions over the next five years. However, higher funded ratios may lead to increased demands from unions to boost pension benefits. If such pressures are not managed, pension costs could rise in the long term.

South-East Muni Bond Issuance Drops…The south-east is an outlier among U.S. states in 2025 municipal bond supply. Eleven U.S. states in the south-east have issued $44 billion muni bonds in the first half of 2025. That is 3.6% lower than a year ago. The downtrend is in sharp contrast to national 2025 bond volume, which has grown 19% from last year. Florida is the largest municipal bond issuer in the south-east, and it has issued 18% fewer muni bonds compared to a year ago.

Compare 30-Year taxable U.S. Treasury yield 4.87% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.67%; “AA” 4.91%; “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.