April 2026 – Munis Got Gas

One of MainLine’s themes for 2026 has been the growing importance of municipal finance in the USA. Well, that story is far from over. The conflict in Iran has intensified concerns around electric energy cost and supply, and once again the municipal bond market is positioned to play a meaningful role in addressing those challenges. This month, MainLine looks at a growing sector that is now providing an essential service and what this means for electric energy and for our investors. Munis have gas and are willing to share it

After a strong April, municipal bonds are back on track to be the top performing fixed income investment of 2026. Market volatility is stabilizing, new bond supply remains manageable, and demand is healthy with more reasons to grow over the next 60 to 90 days. Geopolitical uncertainty around Iran warrants close attention, but municipals are well positioned to outperform taxable bonds even as absolute value remains somewhat limited.

Muni Market Review

Munis are back from a rough March to get back on track for a solid 2026. For the month they were up 1.15% versus US Treasuries, up .05%, and US Corporates up .22%. Supply remains manageable, demand good and the Muni fear index is on the decline. Technicals are starting to go positive with the summer months coming, but the Iran war uncertainty and Munis sitting at slightly rich levels will challenge the technicals.

Additional April highlights:

Muni yields fell 8 to 14 bps in April with the 10 to 20 year area leading at 20 bps lower, flattening the curve roughly 30 bps over the last two months.
Taxable yields rose 5 to 8 bps on renewed inflation concerns driven by higher oil prices.
Housing and hospital bonds outperformed while electric power and airports lagged.
Supply is 1.7% above 2025 levels led by new money, with refunding down 21%, keeping Munis on pace for record issuance.
The fear index is declining after a March spike, with no specific Muni credit concerns providing a stabilizing offset to Iran war risk.

The fundamentals remain in place for Munis to get back on track in the next 30 to 90 days and catch the fixed income pack and possibly take the lead.

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Market News & Credit Update:

Munis rallied from a rough March to get back on track for a solid 2026. For the month they were up 1.15% versus US Treasuries, up .05%, and US Corporates up .22%. Supply remains manageable, demand good and the Muni fear index is on the decline. Technicals are starting to go positive with the summer months coming, but the Iran war uncertainty and Munis sitting at slightly rich levels will challenge the technicals.

Additional April highlights:

Muni yields were 8 to 14 bps lower with the 10 to 20 year maturities the top performing area of the curve at 20 bps lower. Muni curve continues to flatten and is roughly 30 bps lower over the last two months. Investors have finally realized the value of the curve.
Taxable yields were up on the month 8 to 5 bps as inflation concerns are once again getting stoked by higher oil prices.
Housing and hospital bonds were top performers with electric power and airports underperformers.
Supply remains above 2025 by 1.7% led by new money with refunding actually down 21%. Munis remain on track for another year of record issuance.
After jumping up in March, the fear index has slowed and contributed to the yield decline. The Iran war remains a big risk to this, but there are no Muni concerns which should provide some stability in Muni performance.

The fundamentals remain in place for Munis to get back on track in the next 30 to 90 days and catch the fixed income pack and possibly take the lead for the year.

MainLine’s Dynamic Fund is approved and ready to make its first investments in the coming weeks. If you are interested in participating, please reach out for a subscription agreement.

Munis Got Gas:

Introduction:

Electric power demand is surging, prices increasing and what was once a sleepy sector, is now becoming a political hot topic. Since 2020, energy prices have gone up between 20% to 50% depending on where you live. Why the increase?

Tight supply, especially in times of power surges.
Increased demand from data centers
Increased costs to diversify power sources and to meet infrastructure needs

America’s growing demand for public power, the pressure to control energy costs, and the need to meet future growth are challenges the municipal bond market is uniquely positioned to help solve, particularly through the gas prepay sector. Ten years ago gas prepay was a small niche corner of the muni market with just $2 billion in annual issuance. By 2025 that number surged to over $30 billion, and with $130 billion outstanding today the sector is on pace to reach $200 billion within the next few years.

Background:

Municipal gas prepayment bonds are tax-exempt municipal securities issued by public entities to prepay a long-term reliable supply of natural gas for electricity at a discounted price, providing energy at a lower cost to utilities. They are backed by a guarantor (banks, insurance companies, or other financial institutions) and not a municipality, giving them the credit ratings of a corporate entity.

How are they helping the energy crisis?

Supply guaranteed – Provides contracted sources of energy for demand going forward which is growing due to demand from data centers, AI and infrastructure growth.
Certainty of power – Offsets any uncertainty going forward on where the municipal utility will be getting energy. Iran Crisis and other risks to energy supply
Cost savings – Allow purchase of energy at a discounted rate and financed with tax-exempt debt.

Analysis Of Gas Prepay Bonds:

How they work:

A municipality issues tax-exempt bonds to pay a commodity supplier upfront for natural gas to be delivered over the next 5 to 10 years.
A commodity supplier receives the bond proceeds and pledges to deliver gas over the time period of the contract.
It is a pay as it goes contract for the supplier and the municipal utility receives a discount on natural gas, which is passed on to consumers.
Muni investors get tax-exempt income, often with higher yields than standard municipal bonds.
The bonds are generally backed by the creditworthiness of a corporate guarantor, rather than the municipality itself.

Who are the Biggest Issuers to Date?

Black Belt Energy Gas District (Alabama): One of the most prolific and active conduit issuers of prepay bonds in the country.
Southeast Energy Authority (SEA): Known for executing massive, multi-billion- dollar scale transactions.
Main Street Natural Gas (Georgia): A historically dominant non-profit issuer heavily utilized by major Wall Street banks.
California Community Choice Financing Authority (CCCFA): The leading player in expanding the prepay bond structure from natural gas into renewable electricity.

What are the Risks & Concerns?

The financing creates several risks and is a complicated road map with commodity swaps, various counterparties, early termination triggers, and delivery specifications. All of it gets backed by a guarantee from one third party financial institution.
Credit rating is based on the ability of repayment from the financial institution that is backing the deal. If the contract is terminated early, due to inability to supply the gas for whatever reason the bonds will be paid off by the guarantor. This is a corporate entity, bank, insurance company, or other financial institution with underlying rating from AA+ to below. The quality of the underlying rating and company is what determines the yield. Some of the biggest guarantors to date are:
Goldman Sachs
J.P. Morgan
Morgan Stanley
Bank of America (Merrill Lynch Commodities)
Insurance Companies (New York Life, Pacific Life)

Corporate credit ratings are lower, more volatile and sustain higher defaults than municipal bonds. On average, rated municipal bonds have a default rate of .03% with corporates at 1.95%

These bonds are not without some rough history. Lehman (2008) and Enron (2000) were both involved with gas prepay bonds and after their collapse all contracts were terminated and restructured. No principal was lost in the process, but it could have been under different circumstances.

Why Invest in Gas Prepay Bonds?

Prepay bonds provide additional income for investors investing for ten years and shorter in maturity. This is the perfect type of bond for SMA machines. On average, investors pick up 100 to 150 bps of yield depending on the term and the underlying contract supporter.

What does this mean for MainLine Investors?

MainLine has historically been apprehensive to invest in gas prepay bonds given that they are not directly backed by a municipality, and the long-term prepayment structure did not feel essential in the past. That view has changed. The evolving demand and supply dynamics reshaping public power today have made gas prepay bonds a sector worth taking seriously.
MainLine will look to add some exposure to our clients’ accounts that are investing 10 years and less. We will be very tight on only using the top tier in credit quality providers (counterparties) in the contract.

Conclusions:

Once again, just like affordable housing, munis are providing assistance in helping with the energy supply crisis. More reliable (and cheaper) power has become an essential service to many in the USA.
Gas prepay bonds give municipalities certainty of long-term supply, deliver cost savings through discounted pricing and tax-exempt borrowing, and offer investors a high income investment option backed by essential public infrastructure.
Growing issuance, improving liquidity, attractive income, and an expanding roster of providers and guarantors are bringing gas prepay bonds into the mainstream. MainLine plans to participate in this sector actively but with a disciplined and conservative approach.