Weekly Municipal Monitor—NY Budget Battles

Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Macros, Markets and Munis

Munis posted positive returns and outperformed taxable fixed-income last week as markets digested favorable economic data. 4Q25 GDP growth showed a 3.6% decline from the prior quarter but was significantly above expectations, while core inflation trended lower to 3.0% year-over-year (YoY), modestly above expectations. The Treasury curve sold off 3-7 basis points (bps) across the curve, while municipals outperformed, with high-grade muni yields moving 1-3 bps higher across the curve. Municipal demand remained robust, underscored by a 13th consecutive week of inflows. This week we touch on budget headlines in New York that garnered attention last week.

Muni Outperformance Was Supported by Strong Fund Flows

Fund Flows ($1.3 billion of net inflows): During the week ending February 18, weekly reporting municipal mutual funds recorded $2.4 billion of net inflows, according to Lipper. Long-term, intermediate and short-term categories recorded $527 million, $550 million and $132 million of inflows, respectively. Last week’s inflows marked the 13th consecutive week of net inflows and led year-to-date (YTD) inflows higher to $17 billion.

Supply (YTD supply of $69 billion; up 16% YoY): The muni market recorded $9 billion of new-issue supply last week, down 36% from the prior week. YTD new-issue supply of $69 billion is 16% higher than the prior year, with tax-exempt issuance up 17% YoY and taxable issuance up 4%, respectively. This week’s calendar is expected to jump to $16 billion. The largest deals include $2.0 billion University of California and $1.1 billion Black Belt Energy transactions.

This Week in Munis: NY Budget Battles

With municipal budget season underway, key policy developments are emerging among large issuers, particularly within the state of New York. Last week, New York City Mayor Mamdani released his preliminary fiscal 2027 budget, presenting two paths to fund his initiatives and close a projected $5 billion gap. His preferred approach involves increasing revenue from imposing higher personal income taxes on those earning over $1 million annually along with increased corporate taxes, each of which require state approval. Should the state not support a tax increase, the mayor proposed a 9.5% across-the-board property tax rate increase alongside drawing from reserves. This has heightened credit concerns associated with potential outmigration and pressured local economic activity, stemming from increased costs for residents and businesses operating in the city.

Despite the headlines, the mayor cannot impose these tax increases unilaterally. City income tax rate increases require state legislature approval, and Governor Hochul already denounced the proposition to increase tax rates. It is unlikely her stance would change in an election year. Meanwhile any property tax increase requires City Council approval, and council leaders have already called the property tax measure a “non-starter,” highlighting risks to affordability and small businesses.

Western Asset anticipates that current political brinksmanship will eventually give way to moderate compromises such as limited tax adjustments, spending restraints or increased state aid. These outcomes, typical of hard-fought budget cycles, should help ease market skepticism regarding the mayor’s agenda. We continue to find New York municipal securities attractive for in-state taxpayers. Historically, New York muni yields traded below national benchmarks due to elevated demand driven by the state's higher tax rates. However, since the pandemic, New York muni yields have generally exceeded national levels. This shift, combined with the potential for even higher future tax rates, strengthens the after-tax value proposition for local investors seeking tax-exempt income within the state of New York.

NY Muni Index YTW—Muni Bond Index YTW (%)

Municipal Credit Curves and Relative Value

Western Asset Key Themes for Muni Investors

Theme 1: Municipal taxable-equivalent yields moved lower in 2025, but remain above historical averages.

Muni and Taxable-Equivalent Muni Yield-to-Worst

Theme 2: Munis offer attractive after-tax yield pickup vs. taxable alternatives

Theme 3: Tight municipal credit spreads warrant disciplined credit selection.

Municipal vs. Taxable Fixed-Income Yields by Quality

© Western Asset Management Company, LLC 2026. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").

Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.

For the Franklin Templeton global-non product disclosures, please click here.

These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.

Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.

Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.

Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.

These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.

Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Ltda. is regulated by Comissão de Valores Mobiliários; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.