Municipal Bond News 9/8/26

Selloff Opens Muni Bond Buying Window…Rewards of Active Muni Management…Muni Trading Nears Record High…New Muni Bonds…Rate Policy Odds…Securitized Affordable Housing Muni Bonds…Another Illinois Rating Upgrade…Lifetime Tax Burden Mounts…

Selloff Opens Muni Bond Buying Window…The case for buying individual muni bonds has rarely been stronger. A bond selloff has driven top-rated tax-free index yields to 4.71%, the highest in over fourteen months. Current long-term tax-free yields offer about 90% of taxable Treasury yields, up from 82% in July. Geopolitical tensions and policy rate uncertainty have reset market yields higher. Elevated bond issuance by states and local governments has added to the opportunity, bringing a robust supply of muni bonds to the market at historically high yields. For top earners, top-rated long-term high-grade munis currently offer taxable equivalent yields around 7.25%, providing attractive tax- efficient income from high-quality bonds.

Rewards of Active Muni Management…Given the rise in yields and abundant muni issuance, actively managing your municipal bond portfolio could be valuable. Utilizing tax-loss harvesting is a timely investment strategy right now, allowing investors to realize tax losses to offset capital gains, while reinvesting in higher yielding, high-grade credits. In today’s favorable ‘buyer’s market’, a GMS Municipal Bond Specialist can guide investors in selecting attractive coupons, maturities and credits to capture higher tax-free yields and enhance after-tax returns.

Muni Trading Nears Record High…Buying and selling of muni bonds surged last week, with the daily trades at the second-highest total since 2006. The highest volume of daily trades was recorded in April 2025, during the tariff-related market meltdown. Investor demand for muni bonds has doubled from last year’s levels and is the highest since 2021. Rather than sitting on the sidelines, individual investors are actively investing cash to buy muni bonds and harvesting losses amid volatile market conditions.

New Muni Bonds…Chicago O’Hare airport’s $1.6 billion bond sale is centerstage. The ‘A+’ rated (AMT) 5.75% coupon bonds traded at a 5.2% long term tax-free yield, while Assured Guaranty insured 5% tax-free coupon bonds offered a 5.1% tax-free yield. Dormitory Authority of State of New York bonds saw robust demand, and last week’s California general obligation bond sale was upsized on strong investor demand.

Rate Policy Odds…Bond markets are evenly split between a September rate hold and rate hike, putting an upcoming August inflation report squarely in focus. Current labor market conditions are stronger than expected. However, central bankers’ current debate is increasingly centered on inflation. Last week, Federal Reserve governor Christopher Waller noted that inflation is “meaningfully above” the Fed’s 2% target, although recent trends “suggest we are finally seeing some signs of disinflation.” If that progress continues, Waller said he would be inclined to support a rate hold.

Securitized Affordable Housing Muni Bonds…The nation’s affordable housing shortage is driving growth in securitized multifamily mortgages, a niche segment of the municipal bond market. Lenders, including Citigroup, are packaging portfolios of affordable housing mortgages into tax-free bonds sold to investors. Issuance of such muni bonds has already crossed $4.5 billion across 37 transactions so far this year. Last year, over $3.4 billion of securitized multifamily mortgage muni bonds were sold. Many of these bonds are rated mid-investment grade tier but offer yields comparable to lower-rated bonds. Higher yields, bond ratings, and benefits of diversified project risks have led to strong investor demand for this niche tax-free investment.

Another Illinois Rating Upgrade…Illinois earned its second credit rating upgrade in less than a week. S&P upgraded the Illinois general obligation bonds to ‘A’ from ‘A-’. S&P cited Illinois’ maturing track record of disciplined fiscal management, governance credibility, the state’s eighth consecutive balanced budget with the fiscal 2027 budget; state-source revenue outperformance despite lower federal funding; and ongoing legislative efforts to address pension liabilities as reasons for the upgrade. S&P’s upgrade comes on the heels of a Moody’s rating upgrade, bringing the highest ratings in fifteen years to the lowest rated U.S. state. “Achieving two back-to-back credit upgrades is a powerful confirmation that Illinois is building financial progress to last,” Governor Pritzker noted. This is Illinois’ 12th rating upgrade in five years.

Lifetime Tax Burden Mounts…New Jersey residents face the highest estimated lifetime tax burden in the United States. Massachusetts, Connecticut, New Hampshire, New York and California follow in a state ranking of highest lifetime tax burden per a Visual Capitalist study. A typical New Jersey resident can expect to pay about $1.36 million over a lifetime for state, sales, property and vehicle taxes, whereas an Illinoisan can expect to pay about $1.03 million. Florida has the lowest lifetime tax burden of $508,000.

Compare 30-Year taxable U.S. Treasury yield 5.25% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.71%; “AA” 5.01%; “A” 5.08%. For investors in the 35% federal tax bracket, a 4.71% tax-exempt yield is equivalent to a 7.25% taxable yield. Top-rated long-term tax-free bonds yield 90% of comparable taxable U.S. Treasuries.