Municipal Bond News 9/14/26

Highest Muni Yields Since 2011…A Timely Tax-Free Income Strategy…Bellwether Yields Surge…Rate Policy Expectations…New Muni Bonds…Chicago Budget Gap Narrows…Illinois Earns Another Positive Rating Action…Rating Downgrades Surpass…

Highest Muni Yields Since 2011…For investors who have been waiting for a more attractive entry point into tax-free income, the recent spike in yields is worth paying attention to. Current long-term muni bond yields are the highest in over two decades, with top-rated longer- dated munis currently offering 4.94% tax-free or near 8% taxable equivalent yield for top earners in high tax states. Rather than viewing the rise in yields as a source of volatility, sophisticated long-term investors are increasingly focused on opportunities to boost tax-free income, harvesting tax losses, and long-term return potential.

A Timely Tax-Free Income Strategy…For a bond buyer, it is not always easy to time the market or call the exact peak in yields. But recognizing value when it emerges-and putting money to work gradually can be a timely investment strategy. With long term muni bond yields at the highest in over two decades, buying attractive tax-free 5% or higher coupon structures gives investors a larger income cushion to offset potential price declines should rates move modestly higher. A MarketWatch headline last week stated, “Now is your chance to make money during the best bond market for yields in decades-if you can get over Treasury jitters.”

Bellwether Yields Surge…Muni bond yields jumped 22 basis points last week. In comparison, U.S. Treasury yields surged about 10 basis points. 30-year U.S. Treasury yields increased to 5.35%, the highest since 2004. Bellwether 10-year U.S. Treasury yield ended at 4.97%, the highest since 2023, and approaching 2007 highs. State and local government bonds yield about 92% of U.S. Treasury yields, the highest Muni-Treasury yield ratio in a year. Current muni bond yields are historically high at an absolute level and attractive relative to comparable U.S. Treasury yields.

Rate Policy Expectations…Wall Street is gradually shifting its outlook from a rate hold to rate hikes. Barclays, UBS and TD Securities forecast two quarter-point rate hikes in 2026. Bond markets assign over 87% odds of a rate hike at the Fed’s meeting this week. Higher-than- expected August inflation, driven by oil surging to $104 per barrel last week, has led to expectations of higher rates. Last week, the U.S. Treasury launched a $6 billion bond-buying program, an intervention aimed to lower bond yields.

New Muni Bonds…Over $13 billion muni bonds were issued last week. The largest transactions include $2.5 billion Alabama tollway bonds, New York City general obligation bonds were oversubscribed, and offered a 4.52% yield for 15-year bonds. Triborough Bridge and Tunnel Authority issued tax-free bonds for MTA at a top tax-free yield of 5.05%

Chicago Budget Gap Narrows…Chicago forecasts a $839 million budget gap in Fiscal 27, lower than $1.2 billion anticipated a year ago. Revenue outperformance in Fiscal 26, led by new cloud taxes and social media taxes proposed by Mayor Johnson, led to the fiscal progress. The Windy City plans to close an $85 million deficit in the current fiscal year by refinancing sales tax securitization bonds. A University of Chicago researcher believes that higher-than-expected tax increment financing surplus and digital tax growth could narrow the Fiscal 27 budget gap further to between $500 million and $600 million.

Illinois Earns Another Positive Rating Action…Last week, Fitch raised its outlook on Illinois general obligation bonds to positive from stable, while affirming its ‘A-’ rating. The positive outlook reflects a trend of normalized operating performance, continued progress toward sustainable budgeting practices, slowly declining long-term liabilities and contributions to dedicated reserves, per Fitch. Governor Pritzker noted. “It comes on the heels of two back-to- back credit upgrades — the latest signs of momentum for our state’s fiscal progress.” All three major credit rating agencies have delivered favorable rating actions for the lowest-rated U.S. state over the last month.

Rating Downgrades Surpass…In the second quarter of 2026, rating downgrades surpassed upgrades, and unfavorable outlook changes outpaces favorable ones. Over the last three years, there have been only two quarters, when downgrades outnumbered upgrades. Over half of the downgrades were in the K-12 school sector. The higher education and healthcare sector had the highest unfavorable outlook changes. San Diego Water utility’s $2 billion bonds, and $1.3 billion Drexel University in Philadelphia saw downgrades. Notable recent upgrades include the City of Detroit and the Massachusetts Housing Finance Agency, whose issuer rating was upgraded to Aa2 stable, had the largest total debt outstanding at $5.1 billion.

Compare 30-Year taxable U.S. Treasury yield 5.35% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.94%; “AA” 5.06%; “A” 5.20%. For investors in the 35% federal tax bracket, a 4.71% tax-exempt yield is equivalent to a 7.60% taxable yield. Top-rated long-term tax-free bonds yield 92% of comparable taxable U.S. Treasuries.