Municipal Bond News 9/8/25

Muni Bonds Rally…Rate Cut Odds…Demand For Muni Bonds Likely To Grow…Back-To-School Deals on University Muni Bonds…Chicago Outlook Change…U.S. State Revenue Growth Uneven…New Chicago Public School Bonds…September Redemptions…

Muni Bonds Rally…Long-term municipal bond yields fell by 16 basis points last week, following a rally in U.S. Treasury bonds. U.S. Treasury yields dropped by 25 basis points after unemployment rose to its highest level since 2021. Top-rated tax-free bonds currently yield about 97% of taxable U.S. Treasury yields, meaning investors are paying very little for tax-exemption benefits offered by muni bonds. This significant yield advantage of municipal bonds has not gone unnoticed, and demand for them has been steadily increasing this year. Since the end of April, 16 out of 18 weeks have seen inflows into municipal bond funds. Anticipated rate cuts are likely to further boost demand for municipal bonds and drive up their prices.

Rate Cut Odds…A quarter-point rate cut on September 17 carries near- certain odds. Bond markets assign over seven-in-ten odds of three rate cuts in 2025. A half-point September rate cut has not been ruled out. The Fed’s last 50 basis point rate cut was a year ago, following a weak jobs report. Larger rate cuts are expected in 2026, with benchmark interest rates likely to fall to around 3% a year from now.

Demand For Muni Bonds Likely To Grow…“A Fed cut is a catalyst for investors because they start getting FOMO and they want to make sure that they lock in the yields,” an expert told WSJ Market Talk last week. Experts from Goldman Sachs’ experts noted, “We expect increased demand across municipal bond investment vehicles as investors seek to put new money and maturities back to work. Additionally, cheaper valuations across the asset class should entice investors to step back into the market as the Fed prepares to resume easing.”

Back-To-School Deals on University Muni Bonds…High Net Worth investors seeking for tax-exempt income should take a look at muni bonds issued by elite universities. “As it turns out, there are some excellent options to be had among higher-ed municipal bonds — as well as some major duds,” Barron’s wrote this weekend. A top-rated education bond yields nearly a half percentage point more than the average triple-A rated muni, up from just over a quarter-point at the start of the year. Negative headlines about college closures, federal funding cuts to colleges, and political risks have depressed prices of tax-free college bonds, which some long-term investors view as a buying opportunity. Through August, an index of education munis is down 0.12%, while the overall muni index is up 0.32%. Investors must do their homework. A Municipal Bond Specialist can help select strong, creditworthy university bonds.

Chicago Outlook Change…Last week, Moody’s revised Chicago’s outlook to stable from positive and affirmed its ‘Baa3’issuer and general obligation unlimited tax rating. “The city is in a more challenging operating environment,” Moody’s stated. A larger than usual budget deficit for 2026, a recently enacted state pension law that could increase the city’s pension liabilities, and pressures from Chicago Public School are factors. The City’s reserves have declined to pre-pandemic levels, and it must raise additional revenue and lower expenses to achieve structurally balanced operations. Despite these challenges, Chicago’s strengths include a vast economic base and strong revenue- raising flexibility.

U.S. State Revenue Growth Uneven…U.S. states are witnessing broadly uneven and generally sluggish growth. Recent tax revenue collections increased in 38 states and declined in 12 states. Aggregate U.S. state tax revenues rose 3.7 percent (inflation-adjusted) in the first three quarters of fiscal 2025 from a year ago per the Tax Policy Center. Several states have recently enacted tax changes, likely to result in $3.9 billion incremental aggregate state revenues in Fiscal 2025. Looking ahead, federal policy actions such as tariffs, tax policy changes, and anticipated federal funding cuts bring fiscal pressures for state and local governments amid uncertainty.

September Redemptions…In September, about $35 billion in principal and interest payments will be made to muni bondholders. Of this, nearly $25 billion is principal redemption. California has the most principal redemptions, followed by New York and Texas. In September, states and local governments are likely to issue $49 billion new muni bonds.

New Chicago Public School Bonds…Chicago Public Schools plans to issue new muni bonds next week. The new bonds are part of $2.4 billion in long-term bond issuance expected through June 30, 2026. The recently approved budget includes new debt to pay for capital projects and to reimburse the district for past infrastructure spending. The yield penalty investors demand for the junk-rated school district has risen this year.

Compare 30-Year taxable U.S. Treasury yield 4.75% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.59%; “AA” 4.76%; “A” 4.96%. 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 97% of comparable taxable U.S. Treasuries.