Municipal Bond News 9/21/26

Muni Bonds In Vogue…Muni Bonds Are Yielding 5%. They Rival Stocks Now, Barron’s…Investors Buy The Dip…Fed Delivers Expected Hike…Midterms Put Policy in Play…Chicago Board of Education Faces Credit Pressures…Moderate U.S. State Revenue Growth…

Muni Bonds In Vogue…After years of being hard-pressed for discounts on muni bond prices, investors are finding near 5% tax-free yields in the vibrant $4.5 trillion muni bond market. Tax-free yields at such elevated levels are rarely seen and come after nearly two decades. The opportunity to buy ‘AA’ rated 5% plus tax-free coupons at discount prices is hard to ignore. Muni bonds are relatively underpriced compared to U.S. Treasuries, and currently offer ‘equity-like’ returns, despite state and local governments’ strong credit quality. This makes muni bonds’ appealing to not only Americans, but also to foreigners eyeing high reward-low risk investments. For top tax-bracket investors, the investment opportunity is even more striking, as higher tax rates enhance the appeal of tax-free investments.

Muni Bonds Are Yielding 5%. They Rival Stocks Now, Barron’s… “For many investors who’ve favored equities over bonds, now may be the time to consider munis because a tax-advantaged 5% rate could stack up well versus stocks in the coming years,” Barron’s wrote last week adding that Wall Street trading desks were active last week. “Tax-equivalent yields on long-term munis with 30-year maturities are 8% to 10%, depending on the tax rates in states where investors reside. The higher the state and local tax rate, the greater the appeal of munis.” The bull case for long munis is that yields are high-and comfortably above the 3% inflation rate-and that several bullish scenarios could unfold, including a weaker economy and lower inflation.

Investors Buy The Dip…Bellwether 10-year U.S. Treasury yields hit 5% for the first time in almost three years, hitting the highest since 2007. The uptrend in yields took a breather later last week, with some Treasury yields retreating by at least five basis points after the Federal Reserve hiked rates for the first time in three years. Investors ‘buying-the-dip’ in bonds led to historically strong demand for last week’s 30-year Treasury bond auctions, which fetched lower-than-anticipated yields. Last week’s largest muni new issue, $1.7 billion New Jersey Transportation Trust Fund Authority bonds, offered 5.14% tax-free yield for 5.5% coupon ‘A1’/‘A’ rated tax-free bonds.

Fed Delivers Expected Hike…No one was surprised that the Fed hiked rates by 25 basis points last week. Notably, it was a unanimous decision, and central bankers’ forecast one additional rate hike in 2026, while largely holding rates at elevated levels through 2027 before rate cuts projected in 2028. Policymakers penciled in moderate economic growth, of 2.3% in 2026 and 2.4% next year, and expect inflation to fall to 2.3% next year, after peaking at 3.7% this year. The decision, along with Fed comments, made clear that the Fed’s predominant goal is returning inflation to 2%. With the hike mostly priced in, bond markets took the decision largely in stride.

Midterms Put Policy in Play…The upcoming midterm elections, state and local government elections, and November ballot measures could shape 2027 policy, funding, and borrowing agenda. Control of the U.S. Congress rests on a narrow margin, with 218 Republican House seats and 214 Democrat House seats on the ballot. In the Senate, 20 Republican seats and 13 Democrat seats are up for election. Renewed attention on the direction of taxation and spending comes amid a decline in federal dollars for healthcare, FEMA and state and local governments. State government elections are equally, if not more influential, for state and local government policy.

Chicago Board of Education Faces Credit Pressures…Both S&P and Fitch have highlighted growing credit pressures on Chicago Public Schools (Chicago Board of Education), arising from expense growth and liquidity concerns. Last week, both rating agencies affirmed their ‘BB+’ ratings on Chicago Board of Education bonds and revised their outlooks to negative from stable. S&P cited weakening reserves, and a lack of structural balance stemming from reliance on yet-to-be-approved state aid increases to balance the Fiscal 2027 budget. Additionally, there are governance concerns, including uncertainty around transition to a fully elected school board next year.

Moderate U.S. State Revenue Growth…Fiscal 26 marked the fourth consecutive year of moderate general fund revenue growth for U.S. states. Revenue in most U.S. states exceeded budget expectations by 2 to 3%, although overall performance varied and a few U.S. states saw small declines. Notably, California revenues were 11% higher than prior year, while Illinois logged in 4% higher revenue in Fiscal 26. New York State’s Jun-27 quarter ended with $4 billion more in tax collections than a year ago. Personal income tax collections grew the most, followed by sales tax, although corporate tax collections were volatile. Looking forward, National Association of State Budget Officers estimates aggregate state tax revenue to grow 2.5% in Fiscal 27.

Compare 30-Year taxable U.S. Treasury yield 5.28% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.90%; “AA” 5.06%; “A” 5.34%. For investors in the 35% federal tax bracket, a 4.90% tax-exempt yield is equivalent to a 7.54% taxable yield. Top-rated long-term tax-free bonds yield 93% of comparable taxable U.S. Treasuries.