Municipal Bond News 8/30/26

Higher Yields Are A Boon For Municipal Bond Investors…August Muni Issuance Soars…Inflation Center Stage At Jackson Hole…Rate Policy Odds…Illinois Earns Rating Upgrade…Brightline Secures Assured Guaranty Funding…PREPA Contracts Face Uncertainty…

Higher Yields Are A Boon For Municipal Bond Investors… “The rise in bond yields has been a good news/bad news story. For the U.S. Treasury, the increase has been disquieting. But it is also creating attractive opportunities for investors as municipal bond yields rise to some of the most compelling levels seen in history,” Barron’s wrote over the weekend. Unlike in the Treasury market, muni investors are rewarded with higher yields on longer-term investments. Also popular are muni bonds with 5% coupon interest rates that have final maturities of 20 years or more but are callable in 10 years or less. These high- coupon callable bonds trade at premium prices above their par value, based on a presumption that the issuer will redeem them at the earliest opportunity. Muni investors get a higher current income, although at a premium price. On the other hand, these premium bonds tend to be more defensive in a rising yield environment. The muni market’s higher yields look attractive for taxable investors.

August Muni Issuance Soars…In August, $59 billion new muni bonds were issued, one of the largest monthly bond sales by states and local governments. Recent notable transactions include Sutter Health in the San Francisco Bay Area, which sold $1.4 billion bonds rated ‘A1’/ ‘A+’ / ‘AA-’ sold at a top tax-free 4.8% yield. Nearly $400 billion new muni bonds have been issued so far in 2026, offering investors a varied mix of GOs, hospital, airport, convention center and prepaid energy bonds at attractive tax-free yields.

Inflation Center Stage At Jackson Hole…At last week’s annual Fed Jackson Hole meeting, central bankers made clear that stubborn inflation remains their primary concern. Fed Chair Kevin Warsh said the Fed has “work to do” unless inflation moves towards its 2% goal, noting that “while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved”. Cleveland Fed President Beth Hammack, who voted for a July rate hike, stressed, “now is the time to act.” Meanwhile, Chicago Fed President Austan Goolsbee remained cautious, noting that the recent three-month trend has looked somewhat better, although persistent price pressures remain his biggest near-term concern. Meanwhile, the Fed’s preferred inflation gauge showed headline prices rose at 3.7% pace in July, the same pace as June.

Rate Policy Odds…Odds of a September rate hike rose to near 60% from about one-in-three a week earlier. Bond markets saw the Jackson Hole speech as a signal that the Fed may raise interest rates in September to curb price growth. The Fed Chair stressed “The Fed’s price- stability objective of 2%, as measured by the personal consumption expenditures [PCE] price index, is a firm, fixed target.” Two-year Treasury yields, a proxy for policy rate expectations, moved sharply higher in response to Warsh’s comments, while long term Treasury yields remained about the same.

Illinois Earns Rating Upgrade…Moody’s upgraded State of Illinois to ‘A1’ from ‘A2’, its highest rating in nearly 15 years and the second Moody’s upgrade in the last year. “The upgrade is driven by realized and expected continued improvement in the state’s financial metrics. Governance is a key driver of the upgrade, as eight consecutive on-time balanced budgets and consistently conservative fiscal management have led to solid reserves and increased our confidence in the state’s ability to navigate future budget pressures while preserving financial flexibility,” Moody’s stated. Since June 2021, Illinois has received 11 upgrades across the three major credit rating agencies.

Brightline Secures Assured Guaranty Funding…Brightline has secured a $350 million loan from Assured Guaranty, pursuant to a restructuring support agreement, typically a precursor to a Chapter 11 bankruptcy. Brightline still has an option to secure funding from other creditors. It could file for bankruptcy protection within the next few weeks per Bloomberg sources. Bankruptcy financing typically ranks senior to all existing debt and gives creditors a measure of control over the court restructuring process. While uninsured Brightline bonds are trading at steep discounts, Assured Guaranty insured Brightline bonds recently traded between 101.2 cents and 96.7 cents on the dollar.

PREPA Contracts Face Uncertainty…Puerto Rico electric utility faces mounting operational and legal uncertainty surrounding its power generation contracts. Recently, the federal oversight board revoked its approval of a $5.9 billion ten-year power generation contract with three private companies. At the same time, the Puerto Rico Energy Bureau ordered PREPA to pay $100 million to LUMA Energy and Genera, but PREPA says it lacks the cash to do so. The Puerto Rico Supreme Court has agreed to hear lawsuits seeking to annul PREPA’s contract with LUMA. Together, these financial, legal and operational pressures further complicate PREPA’s already challenging debt restructuring process.

Compare 30-Year taxable U.S. Treasury yield 5.25% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.58%; “AA” 4.79%; “A” 5.05%. For investors in the 35% federal tax bracket, a 4.58% tax-exempt yield is equivalent to a 7.05% taxable yield. Top-rated long-term tax-free bonds yield 87% of comparable taxable U.S. Treasuries.