Municipal Bond News 9/22/25

Bonds Are Getting Pricey. Munis Still Look Cheap and Could Rally…High Yield Muni Bonds Gain…New Jersey Earns Rating Upgrade…Fed Cuts Policy Rates…Muni Bond Rating Upgrades Outpace…Chicago Weighs Task Force Proposal…Chicago Board of Education Rating Outlook Lower…Rate Cut Odds…

Bonds Are Getting Pricey. Munis Still Look Cheap and Could Rally… “In many corners of the bond market, it can be difficult for investors to find attractive yields. In contrast, municipal bonds still look like a bargain,” Barron’s reported this weekend. While payouts on corporate bonds are historically stingy relative to government bonds, those of another portfolio staple, long-term municipal bonds, are historically generous. “Munis are the most undervalued fixed income asset class,” a Bank of America strategist stated. Investors have been jumping on the muni trade in the past month. That has driven up muni bond prices somewhat. Attractive muni bond yields may not last.

High Yield Muni Bonds Gain…Lower-rated muni bonds are staging a recovery amid prospects of lower policy rates. After five straight months of losses, high-yield muni bonds are poised to show gains in September. An index of high-yield muni bonds has returned almost 3% in September, the highest since June 2024. The gains come amid a bond rally that started in August and accelerated sharply this month. As bellwether yields dropped, investor interest in higher-yielding tax-free bonds has grown. Notably, long-term high-yield tobacco and Puerto Rico bonds have posted the highest gains this month.

New Jersey Earns Rating Upgrade…Moody’s upgraded the credit rating of State of New Jersey to ‘Aa3’ from ‘A1’ and revised its outlook to stable from positive. Surplus finances, consistent pension payments, and reduced debt burden led to the Moody’s upgrade. Governor Phil Murphy stated “We have made difficult decisions that prioritized a strong, reliable surplus and delivered five consecutive full pension payments. The latest upgrade follows a S&P rating upgrade in August and marks the Garden State’s ninth rating upgrade since 2018.

Fed Cuts Policy Rates…For the first time this year, the Fed cut policy rates. Eleven out of twelve Fed officials voted in favor of a 25-basis point rate cut, bringing the Fed-funds target rate to 4%-4.25%. One central banker sought a larger 50 basis point rate cut. Most Fed officials expect economic growth to slow to 1.6% this year, from 2.5% in 2024. The Fed expects inflation to be 3% this year, and fall to 2.1% by 2027. For the remainder of 2025, nine Fed officials penciled in two additional rate cuts this year; six members forecast no cut, and two are predicting a single quarter point cut. Fed officials anticipate the federal funds policy rate to drop to 3.4% next year.

Rating Upgrades Outpace…This year, S&P rating upgrades have outpaced downgrades. However, unfavorable outlook revisions have exceeded favorable outlook changes. U.S. states, housing, local governments, education, and transportation sectors. The majority of downgrades were in the public power, charter schools, health care, and utilities sectors. This years’ largest S&P upgrades include bonds issued by MTA and State of New Jersey, while Los Angeles and City of Chicago are among issuers that were downgraded.

Chicago Weighs Task Force Proposal…A 24-member Chicago Financial Future Task Force recommends 89 options to cut city costs by $455 million and raise revenue by up to $1.65 billion. These include expanding congestion surcharges, resuming inflation-indexed property taxes, reinstating a corporate head tax, hiring freezes and other reforms. Chicago faces a $1.15 billion budget gap in the upcoming fiscal year. Mayor Johnson said he is not in favor of property tax hikes but is interested in utilizing surplus dollars from the city’s tax-increment financing districts and lowering government costs.

Chicago Board of Education Rating Outlook Lower…Last week, Fitch affirmed its ‘BB+’ rating on Chicago Board of Education bonds, while lowering its outlook to negative from stable. Challenges of maintaining structurally balanced finances are reflected in the outlook change. The school faces a growing expense base amid revenue pressures, including the depletion of federal pandemic aid and inadequate state funding. In contrast, the junk-rated school district bonds have a positive outlook ‘Ba1’ rating from Moody’s and a stable outlook ‘BB+’ rating from S&P.

Rate Cut Odds…Bond markets assign 80% odds of quarter point cuts in October and December. In total, 120 basis points of easing are anticipated by the end of 2026, significantly more than the three cuts indicated by the Fed’s latest dot plot. U.S. Treasury bonds have posted their biggest annual gains since the pandemic. Some experts reckon that the rate cuts might not be as aggressive as bond markets anticipate.

Compare 30-Year taxable U.S. Treasury yield 4.74% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.23%; “AA” 4.47%; “A” 4.80%. For investors in the 35% tax bracket, a 4.2% tax-exempt yield is equivalent to a 6.4% taxable yield. Top-rated long-term tax-free bonds yield 89% of comparable taxable U.S.

Treasuries.