Municipal Bond News 8/4/25

July Supply Boosts Tax-Free Yields…New Muni Bonds Oversubscribed…Muni Bond Rally Underperforms…Rate Cut Odds…Fed Stands Pat…Airports’ Bond Spree…Value in Insured Brightline Bonds…Chicago Seeks Revenue Fix…August Reinvestments…

July Supply Boosts Tax-Free Yields…For the fourth straight month, monthly muni bond issuance has surpassed $50 billion. Issued last week, $3.6 billion tax- free bonds for a Georgia public private partnership is poised to be the largest muni bond transaction of this year. These ‘Baa3’-rated toll revenue bonds offer a tax-free yield of 6.1% for long term investors. In July, five municipal bond offerings crossed the one-billion-dollar mark. States and local governments sold 29% more bonds in July compared to a year ago. General obligation bond issuance rose 87%. Historically high tax-free yields and attractive relative valuations of muni bonds have fueled investor demand, reflected in significant oversubscriptions for key transactions. Amid volatile markets, currently high muni bond yields may not last.

New Muni Bonds Oversubscribed…Over $5 billion worth of orders poured in to buy $1.5 billion New York City Transitional Finance Authority bonds sold last week. Strong demand led to lower than anticipated yields. The New York City Transitional Finance Authority bonds offered a top yield of 5% for ‘AAA’-rated tax-free bonds. A top-tax bracket investor would need to buy a taxable bond at a yield over 8% to achieve an after-tax yield equivalent offered on a ‘AAA’-rated tax-free bonds sold by the New York City Transitional Finance Authority. Additionally, the yields on top-rated New York municipal bonds currently exceed the yield of the high-yield corporate bond index, which stands at about 7%.

Bellwether Yields Drop…Last week, muni bonds rallied with yields dropping 6 basis points compared to prior week. Higher odds of a rate cut as early as next month boosted bond prices. U.S. Treasury bonds rallied last week, with short- term yields posting their biggest drop since late 2023. Most sensitive to interest rate changes, two-year U.S. Treasury yields tumbled 29 basis points, the lowest in three months, and long-term Treasury bond yields fell 15 basis points. Higher state and local government borrowing has led the muni bond rally to underperform U.S. Treasury bond price gains. Tax-free yields currently offer 97% of taxable U.S. Treasury yields, suggesting a significant yield advantage from muni bond investments for top earners.

Rate Cut Odds…Odds of a September rate cut rose to near 70%, after falling to 37% earlier last week. Softer-than-expected employment data strengthened the possibility of 2025 rate cuts. Earlier last week, Fed Chair Powell reiterated that the process of rate cuts could be slower than expected, dashing investor hopes for a September rate cut. Bond markets are currently pricing in two rate cuts for 2025.

Fed Stands Pat…For the fifth consecutive meeting, the Federal Reserve left policy rates unchanged. Nine Fed officials voted to hold rates steady, while two governors, Christopher Waller and Michelle Bowman, voted to cut rates. Powell highlighted that inflation is still above the Fed’s target of 2%, while the job market is still mostly healthy. “We think we have a long way to go to really understand exactly how” the tariffs will affect inflation and the economy, Powell added “We’ve learned that the process will probably be slower than expected.”

Airports’ Bond Spree…Airports have sold more than $10 billion in new muni bonds in the first half of 2025. The surge is 51% higher than last years’ airport sector bond issuance, outpacing the 20% year-over- year increase in overall muni bond volume. 2025 airport bond issuance is the highest since at least 1990. To meet high travel demand, which exceeds pre-pandemic levels, airports have boosted capital programs. However, the new construction comes at a higher cost, fueling larger bond issuances. Seeking attractive tax- free investments, investors have bought airport bonds. Last week, Salt Lake City airport sold $600 million tax-free bonds rated Moody’s ‘A1’ S&P ‘A+’ at a top yield of 5.25%.

Value in Insured Brightline Bonds…Barclays strategists see value in certain municipal bonds issued by Brightline Trains Florida. Low ridership has led to downgrades of Brightline’s senior municipal bonds by S&P and Fitch. Brightline’s senior municipal bonds borrowed by a subsidiary operating company, or “opco,” are worth a look at current levels, Barclays said. “We see value in the opco bonds at current levels, as there is solid asset coverage in case of a credit event,” the strategists wrote. “The safest way to express this” is to buy Brightline’s bonds wrapped by bond insurer Assured Guaranty, that are trading in the mid-90s and provide good yield and protection of principal and interest, Barclay’s stated last week. Roughly $1.1 billion of Brightline’s municipal bonds are covered by Assured Guaranty insurance.

Chicago Seeks Revenue Fix…To address an annual shortfall of $1 billion, a budget working group in Chicago is exploring various revenue options. One of the proposals is to reinstate a “corporate head tax,” which was previously imposed on corporations in the city over a decade ago but faced significant opposition and was ultimately repealed. Additionally, the group is reviewing payments in lieu of taxes (PILOT) for certain institutions. A recent ballot measure aimed at increasing the tax on home sales over $1 million did not pass, and last year, city council members rejected a proposal for a $300 million property tax increase. In February, the city council approved an $830 million borrowing plan. This year, Chicago’s revenues have risen by approximately 5% due to stronger-than-expected tax collections, while the city is also making significant budget cuts.

August Reinvestments…In August, holders of muni bonds are poised to receive $59 billion from state and local government debt repayments. Of this amount, principal repayments will total $43 billion in August. California has the most bonds due in July, followed by Texas and New York. Over the past two months, about $90 billion of outstanding muni bonds have been repaid, and $109 billion new muni bonds have been issued.

Compare 30-Year taxable U.S. Treasury yield 4.83% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.69%; “AA” 4.93%; “A” 5.11%. For investors in the 35% tax bracket, a 5% tax- exempt yield is equivalent to a 7.7% taxable yield. Top-rated long-term tax-free bonds yield 97% of comparable taxable U.S. Treasuries.