Thoughts from the Municipal Bond Desk

Here’s our insight and perspective on what’s happening in the muni market, including supply and demand, credit trends, and a quick look at key muni data points, in our November 6 update.

Tim: The Federal Reserve (Fed) continued to ease monetary policy, reducing interest rates by 25-basis points at its October policy meeting.¹

Mark: Yes, the Fed reduced its target rate for the second time this year. You’ll recall that in our January 2, 2025 edition, I had anticipated at least two rate cuts in 2025. The year was a bit rocky, but I’m pleased the monetary easing cycle has resumed. Interestingly, there was some dissent, with one member of the Federal Open Market Committee (FOMC) voting to keep rates unchanged and another voting for a larger rate cut.¹ Fed Chairman Jerome Powell described “strongly differing views” in this month’s meeting and hinted that monetary easing could pause through year-end.¹ This prompted some jitters in the Treasury market, but munis were relatively unscathed. Despite Powell’s comments, the futures market has priced in another 25-basis point reduction by January of next year,² with some market participants calling for a reduction in December.³ Although inflation has remained higher than the Fed’s 2% target, it has been stable overall. The US Consumer Price Index (CPI) rose 3.0%, compared to 2.9% in the prior year-over-year period, while core CPI dipped to 3.0% from 3.1% in the September 30 report.⁴ With inflation showing some restraint, I believe the Fed is in a good condition to continue monetary easing.

Tim: As expected, Zohran Mamdani won the New York City mayoral election, which is still spurring questions about the potential effects on local credits.

Mark: Yes, it seems that many of his campaign promises have unnerved investors, but there are a few things to keep in mind here. First is that New York City debt has solid credit ratings, which illustrate a strong institutional framework and history of fiscal responsibility. Secondly, city mayors generally don’t have the authority to implement any program they want, and that’s the case with New York. Most of Mamdani’s major proposals are constrained by New York State’s constitution and legislative body. Although the promises of a mayoral candidate may resonate with voters, state laws and bond indenture agreements remain in force and must be honored. Finally, urban decline is the result of decades of mismanagement, not a shift in political leadership. New York City has a history of making its bond payments in every political cycle, even during the 1975 fiscal crisis. We have faith in the guardrails in place and don’t anticipate any risk of missed bond payments.

Tim: October has historically been a tough month for muni valuations, but this year was different. What happened?

Mark: That’s right, muni bonds posted their strongest October performance in 30 years, with the Bloomberg Municipal Index returning 1.24% for the month.⁵ The gain was remarkable when you consider that munis often weaken during October due to unfavorable market technicals. October is typically the last big supply month of a calendar year, which was the case again this year. At $49.5 billion, tax-exempt supply was the second-highest October issuance ever — behind last year’s $57.6 billion — and the fifth-highest issuance on record for any month.⁶ I believe this illustrates our view that higher supply is the new normal, but it’s moderating to more digestible levels. So, what was different this month? Muni valuations continued to be supported by falling Treasury yields and higher inflows, with $18 billion flowing into municipal funds since August.⁷ As we close out the year, I’m cautiously optimistic that continued Fed easing and supportive market technicals will continue to provide tailwinds for the muni bond market. 

Read the complete article, including munis by the numbers.