Municipal Bond News 9/29/25

September Mega Muni Bonds…Muni Bonds Outperform…Slower New Muni Bond Issuance…Tax- Free Collateralized Bond Obligations…Public Schools On A Muni Bond Spree…Illinois Aims For Higher Reserves…Chicago’s Higher Yield Penalty…More Public-Private Partnerships…Central Bankers Divided…

September Mega Muni Bonds…Nine muni bond offerings have exceeded the $1 billion mark in September. The largest transaction of the month, a $2 billion high-grade muni bond offering by the Dormitory Authority of State of New York, received orders aggregating to five times the amount of bonds offered. Additionally, New York’s MTA sold $1.4 billion bonds rated Moody’s ‘A2’ S&P ‘A’ Fitch ‘AA’ currently trading around 4.4% for tax-free bonds maturing in 18 years. California and Connecticut also issued billion-dollar plus general obligation bonds.

Muni Bonds Outperform…In September, state and local government bonds posted 2.2% index gains in September, outperforming U.S. Treasuries’ 0.62% monthly gain. The outperformance of municipal bonds can be attributed to a slowdown in new issue offerings coupled with an increase in demand. In mid-September, a gauge for investor demand, inflows to muni bond funds, shot up to a 137-week high. Although yields have declined 35 basis points in September, longer-dated muni bonds offer a notable yield advantage over comparable U.S. Treasury bonds.

Slower New Muni Bond Issuance…About $45 billion new muni bonds were sold in September, down 27% from August. The volume of new muni bonds issued in the primary market market has shrunk recently. States and local governments issued $11 billion fewer bonds in August than they did in July, partly reflecting a seasonal slowdown. However, muni bond issuance is poised to reach a new record high in 2025

Tax-Free Collateralized Bond Obligations… Municipal bond collateralized bond obligations (Muni CBOs) are expanding the buyer base for high-yield municipal bonds. In these structures, individual high-yield municipal bonds are pooled together into Muni CBOs, and various securities with differing risk-return profiles are offered to investors. While the rated senior tranches benefit from structural protections, most of the credit risk is carried by the unrated subordinate tranches. Muni CBOs enhance market access, increase liquidity, and lower borrowing costs for lower-rated issuers such as charter schools, student housing projects, and special assessment districts. Since 2023, Moody’s has rated five Muni CBO transactions, totaling $1.2 billion in outstanding par value. A Municipal Bond Specialist can assist investors in identifying Muni CBOs and evaluating the investment opportunities within this niche of the tax-free bond market.

Public Schools On A Muni Bond Spree…School districts’ muni bond issuance has soared to its level highest since 2020. This year, school districts have issued $67 billion tax-free bonds, up 51% from last year, outpacing the 16% annual growth in overall muni bond issuance. The finances of K- 12 schools have dwindled amid lower state aid and cost pressures. “In a weakening economy we do start to see more structural imbalances,” a S&P analyst added that retaining teachers is getting more expensive.

Illinois Seeks To Shore Up Reserves… Governor Pritzker aims to strengthen reserves in anticipation of potential federal funding cuts. He has requested that all state agencies identify budget cuts of 4% to set aside as a reserve. The uncertainty surrounding tariffs and proposed federal Medicaid cuts, combined with an economic slowdown, pose significant challenges for the nation’s fifth-largest economy. Illinois’ current fiscal year budget of $55 billion is the largest spending plan in the state’s history.

Chicago’s Higher Yield Penalty…Chicago general obligation bonds were among most actively traded muni bonds last week. The yield penalty on Chicago general obligation bonds has widened amid the city’s budget battles. Investors demand about 150 basis points of additional yield relative to top-rated muni bonds. The yield penalty was about 117 basis points a year ago. The Chicago metro area has a $906 billion economy, and the Windy City faces a $1.15 billion budget gap. Investors are closely watching budget developments in the third-largest U.S. city.

More Public-Private Partnerships…Transportation sector advocates are urging lawmakers to expand the role of public private partnerships (‘P3s’) in infrastructure development. Typically, P3s finance public infrastructure using tax-exempt private activity municipal bonds. For example, $3.5 billion muni bonds financed Georgia highway managed express lanes, the largest muni bond offering this year. Industry groups are seeking more flexibility in issuing private activity bonds, which are currently subject to a $30 billion annual cap. The pipeline of P3 projects is growing, with projects slated in Tennessee, North Carolina, Louisiana, Virginia and Illinois.

Central Bankers Divided…Central bankers have differing views on the pace of interest rate cuts. Fed Vice Chair for Supervision Michelle Bowman advocates for a commitment to steady rate reductions to support the job market. In contrast, Chicago Fed President Austan Goolsbee cautions against being overly aggressive with rate cuts, given that inflation has exceeded the target for the past four and a half years. St. Louis Fed President states that current interest rates are “between modestly restrictive and neutral,” suggesting there is little room for further easing without making policy too accommodative. Fed Chair Powell emphasized that policy is “not on a preset course” and that decisions will be based on data.

Compare 30-Year taxable U.S. Treasury yield 4.72% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.30%; “AA” 4.53%; “A” 4.84%. For investors in the 35% tax bracket, a 4.3% tax-exempt yield is equivalent to a 6.6% taxable yield. Top-rated long-term tax-free bonds yield 91% of comparable taxable U.S. Treasuries.