While the big news this week was the Fed cutting interest rates, municipal bond investors should be mindful of the important signal behind it.

Though the cut directly affects short-term rates, it’s also meaningful for long-term rates – the focus of municipal bond investors – because it reflects weaker economic growth and softening labor markets.

In other words, the conditions that push long-term muni yields lower over time.

Attractive yields in an unusual year

It has been an extraordinary year in the bond market. The tax exemption on interest income came under threat (“Muni Yields Soar as Exemption Threat Looms”), the tariff regime was thrown into chaos (“Through Tariff Turmoil, Muni Yields Shine”) and issuance surged to unprecedented levels (“Record Muni Supply Leads to Juicy Yields”).

The one constant, as happy investors who took advantage during this period will attest, was the abundance and variety of bonds available at exceptionally attractive yields.

Now, the situation has changed.

Economy ebbs

The Fed’s quarter-point cut, its first since December and the first of three expected before the end of the year, underscores a slowing economy. Yields on the benchmark 10-year Treasury bond recently slipped below 4.20%, continuing a decline that began early this year.

Job gains in August came in well below expectations, while unemployment ticked up again last month to 4.3%, compared with 4.2% in July and 4.1% in June.

Additionally, in its latest projections, the central bank expects GDP growth to hit 1.6% this year, up from 1.4% it estimated in June but still broadly regarded as weak.

Compelling value

Even with the recent decline, muni yields remain compelling by historical standards. Recently, the taxable-equivalent yield on 30-year, A-rated bonds was 8.18% for investors paying the 40.8% rate.

Demand has accelerated as muni fund inflows reached $2.2 billion last week, according to Nuveen.

“Despite this strength, municipals continue to offer compelling value,” the firm said, adding that 5.00% yields are still available, “but these opportunities are also growing limited.”

On the supply side, issuance is expected to moderate. Analysts still see a record year overall, but forecast fewer new bonds coming to market.

Relative to Treasuries, munis remain enticing. Thirty-year, quality municipal bonds are still yielding approximately 100% of comparable, taxable Treasuries, extremely appealing by historical standards and an indication of why demand for munis remains robust despite cooling yields.

For muni investors, the story isn’t just that the Fed cut rates, it’s why. And that “why” suggests that today’s generous yields may not last for long.