The Week in Muniland

The muni market shrugged off a $22 billion new issue calendar and posted positive returns for a second consecutive week. Two-, 10- and 30-year yields fell 4, 3 and 4 basis points (bps), respectively. The Bloomberg Municipal Bond Index (Index) returned 0.39% last week, bringing year-to-date returns to 1.74%.

• Why it matters: Demand remains insatiable, and despite a large new issue calendar and US Treasury (UST) volatility, munis continue to power through. Last week, flows reached $1.4 billion and now total $46 billion year to date. Long bonds continue to benefit with $1.3 billion flowing last week into long strategies. As seen in Display 1, long bonds continue to meaningfully outperform other maturities. Given the steepness of the muni yield curve as seen in Display 3, we continue to recommend a barbell maturity structure with yield plus roll nearly reaching 5% in longer maturities. With demand for munis generally strong and USTs increasingly volatile, munis are once again becoming expensive in the shorter end of the yield curve. As shown in Display 2, the two-year after-tax spread is negative, which means investors can earn 9 bps more on a UST versus a comparable muni, while even the fiveyear spread is far below average. In our opinion, these spreads indicate that owning short USTs will either provide more income in the near term and likely better returns over time as munis move back toward fair value.
  
  

New York State lawmakers approved a budget package that provides several forms of support for New York City.

• Why it matters: New York City’s credit profile remains supported following the state budget agreement, which provided meaningful near-term fiscal relief through a new pied-à-terre tax expected to generate approximately $500 million annually, pension re-amortization estimated to deliver about $2.3 billion of budget relief and flexibility on class-size mandates that may reduce spending pressure. While the city continues to face structural budget challenges and is relying in part on transitional measures, its credit fundamentals remain anchored by a large and diversified economic base, resilient tax revenues and roughly $7.4 billion in reserves, without currently drawing down cash reserves for budget balance. We view the pension action as manageable on its own, though repeated reliance on similar measures would be less favorable over time. Concerns around taxpayer migration and population trends warrant monitoring, but they are moderated by the scale and diversity of the city’s tax base, relatively strong pension funding and institutional credit guardrails, including debt limits, City Council oversight and ongoing state engagement. Overall, we remain constructive on NYC’s long-term credit outlook and view it as consistent with a high-grade AA-rated municipal issuer.
  
  

May payroll data far exceeded expectations.

• Why it matters: The May payroll report showed a gain of 172,000 jobs, along with upward revisions of 93,000 to the prior two months, reinforcing the view that any near-term rate cut is effectively off the table. While we still do not view a rate hike as the base case, the Federal Reserve will likely need to acknowledge that possibility more directly in the weeks and months ahead, as the labor market has clearly regained momentum this year. Hiring was particularly strong in leisure and hospitality, while government employment also contributed meaningfully with an increase of 52,000 jobs. The unemployment rate held steady at 4.3%, though on a more precise basis it edged down from 4.337% to 4.296%. Over the past three months, job gains of 172,000, 179,000 and 214,000 have remained well above most estimates of the breakeven pace. Market pricing now reflects 22 bps of hikes by the end of 2026, or roughly an 88% probability of a 25 bp increase, which is 7 bps higher following the US payrolls release.