Municipal Bond News 9/2/25

Long Term Bond Yield Advantage Rises…New Illinois Bonds Oversubscribed…Muni Bond Returns Turn Positive…PREPA Update…Chicago Public School Budget Approved…Wall Street Eyes September Rate Cut…Recession Risks…August Muni Issuance Drops…

Long Term Muni Bond Yield Advantage Rises…Longer-dated state and local government bonds yield 240 basis points more than two-year muni bond yield. Meanwhile, the yield gap between two-year and 30-year U.S. Treasury bonds rose to 125 basis points last week. The gap between long-term and short-term bond yields climbed to the widest in three years. Two-year U.S. Treasury yields fell 4 basis points to 3.69%, while 30-year U.S. Treasury yields rose to 4.97%. The shift points to expectations that the Fed will soon resume rate cuts amid uncertainty. Long term muni bond yields are higher relative to comparable U.S. Treasury bond yields amid a surge in state and local government borrowing.

New Illinois Bonds Oversubscribed…$1.8 billion new Illinois general obligation bonds drew strong bids and investor demand exceeded expectations. This drove down borrowing costs for the lowest-rated U.S. state, and it reflects the growing confidence in Illinois’ fiscal stability. “By coming to market during a relatively calm period leading into Labor Day, Illinois was able to capture the full attention of investors and underwriters without the added noise that market volatility can create.” Illinois Director of Capital Markets added, “The issuance is a concrete example of how we are prioritizing pension funding while taking advantage of favorable market conditions.” Long term tax-free bonds rated Moody’s ‘A3’ S&P/Fitch ‘A-’ Illinois GO bonds fetched a top yield of 5.2%

Muni Bond Returns Turn Positive…In August, overall muni bond indices posted positive year-to-date returns, after five straight months of year-to-date losses. However, most high yield muni bond sectors are still showing losses in 2025. Taxable state and local government bonds achieved positive returns of 5.3%, and U.S. Treasury bonds’ year-to-date return is 4.3%. Tax-free bonds’ significant yield advantage, higher issuance by state and local governments, and strong credit quality have made the $4.2 trillion muni bond market an active corner of financial markets. Investors seeking prudent tax-free investments can benefit from the guidance of a Municipal Bond Specialist.

PREPA Update… Bondholders representing 27% of the outstanding PREPA bonds, who had agreed to a settlement for a 12.5% recovery in August 2023, informed the Title III court that they will withdraw their support of the board’s proposed restructuring unless the court confirms the deal by October 1. If this group withdraws their support and joins the bondholders opposing the board’s debt plan, it could result in 90% of PREPA bondholders uniting against the plan. Meanwhile, opposing bondholders, including Assured Guaranty, along with the one-member oversight board, have requested a pause in litigation until new board members are appointed. Last year’s U.S. Court of Appeals ruling, which upheld bondholders’ lien on PREPA revenue, along with the recent removal of oversight board members, is favorable for the bondholders.

Chicago Public School Budget Approved…Chicago Board of Education approved a $10.25 billion 2025- 26 budget without taking a $200 million high-interest loan. The school also did not commit to making a pension payment to the city, making it contingent upon receiving funds from the city. These two issues were central to the budget debate between the school board and the city administration. For months, school officials argued against unnecessary borrowing for the district, which has a junk credit rating. The board voted 12-7 in favor of the proposed budget, despite the Mayor’s efforts to include borrowing provisions. The spending plan aims to address a $734 million deficit for the fiscal year that began on July 1. Additionally, the board, currently a mix of elected and Mayor-appointed officials, will transition to a fully elected board in 2027.

Wall Street Eyes September Rate Cut…Several Wall Street banks including Barclays, J.P. Morgan, Deutsche Bank, and BNP Paribas expect a quarter point rate cut in September. Deutsche Bank, which expects the Fed to cut rates in September, December and March said, “While a sequential path is possible if upcoming data reinforces worries around the labor market, we think Powell signaled a more cautious approach.” Several Wall Street banks echoed that Chair Powell opened the door to rate cuts at Jackson Hole, and decisive policy action will depend on upcoming economic data such as labor market conditions.

Recession Risks…U.S. states accounting for nearly of national GDP are already in a recession or at a high risk of one. Meanwhile, another third is treading water, while the last third is still expanding. “States experiencing recessions are spread across the country, but the broader DC area stands out due to government job cuts,” Moody’s Analytics added “Southern states are generally the strongest, but their growth is slowing. California and New York, which together account for over a fifth of U.S. GDP, are holding their own, and their stability is crucial for the national economy to avoid a downturn.” In the second half of 2025, economic growth is likely to slow to a 1.1% pace, down from 1.4% growth in the first half.

August Muni Issuance Drops…In August, $47 billion on new muni bonds were issued, down 8% from a year ago. States and local governments issued $11 billion fewer bonds in August than they did in July. “Lighter issuance should keep Muni-Treasury yield ratios stable in September despite lighter redemptions,” Bank of America strategists added “Investors can use the month of September to accumulate longer-duration bonds in anticipation of a year-end rally.”

Compare 30-Year taxable U.S. Treasury yield 4.98% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.64%; “AA” 4.91%; “A” 5.06%. 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 93% of comparable taxable U.S. Treasuries.