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Muni Week Review / Preview1/3/2018

Wednesday, Jan 03, 2018

Municipal Bonds Expected To Rally In January…Tax  Changes Set To Boost Muni Bond Demand in High Tax States… Municipal Bond Supply Poised To Tumble As Investors Loaded With Cash… Chicago Planning To Sell $795 Million Sales Tax Bonds… Public Activity Bond Threat Subsides… Puerto Rico General Fund Revenue Down 3%… Fed Minutes Reveal Tax Cut Uncertainty…

Muni Bonds Expected To Rally In January…The municipal bond market should see a “significant rally” in January as new sales of state and local government debt slow after a record setting rush to market last month, Citigroup analysts said in a market note. Last month’s issuance will reduce supply during the first quarter, so Citigroup expects “supply/demand imbalance to result in a significant rally this month”. Citi expects the ratio of muni yields to Treasuries to drop by 5-7 percentage points by end of January. “We are bullish on tax-exempts over the next month, with an eye on supportive technicals,” Citigroup analysts say.

Tax Changes Set To Boost Muni Bond Demand In High Tax States… The new federal tax law-overhaul may encourage investors in areas with the highest tax burdens to focus more on purchasing bonds sold within their states. The new law limits the amount of state and local taxes that households may deduct, capping it at $10,000 per year. New York, New Jersey and California residents pay some of the highest state and local levies in the U.S. and may increase their appetite for their states’ tax-exempt municipal bonds. The most sweeping federal tax law in more than 30 years will bring some changes to the $3.8 trillion municipal bond market. Along with the limit on state and local tax deductions, the overhaul eliminates certain types of municipal refunding bonds, a change which may depress overall tax-exempt issuance. New York, New Jersey and California residents face some of the highest local tax burdens in the U.S., according to the Tax Foundation, a nonprofit that analyzes tax policy. The state and local deduction cap in high tax states means high wealth individuals will be paying more taxes and the tax benefits from munis will become more valuable. The potential increase in demand and an anticipated slowdown in issuance may help debt sold in high tax states gain in value.

Muni Bond Sales Poised To Tumble As Muni Investors Receive Cash… Every January, new sales of municipal bonds dry up just as investors receive a wall of cash from debt payments that they need to reinvest, a mismatch that’s helped deliver gains for the month every year since 2012. The phenomenon may be particularly strong this year. Debt sales are poised to tumble after state and local governments rushed to issue a record $60 billion in December moving up deals that would have come this year to beat a tax law change that pulled federal subsidies from a big chunk of the market. While bondholders are set to receive more than $19 billion from interest payments and maturing securities, there are just $5.6 billion of sales scheduled for the next 30 days, putting the market on pace for the slowest January in five years. Expect a more pronounced January effect this year, say most muni bond analysts who expect state and local debt to outperform Treasuries because of the anticipated decline in new issue sales.

Chicago Is Planning To Sell $795 Million More Sales Tax Bonds As Puerto Rico Sales Tax Bond Dispute Expected To Be Resolved in First Quarter… Chicago is kicking off 2018 by selling $795 million of bonds through its new Sales Tax Securitization Corp., the agency set up last year to sell highly rated debt backed by a first claim on revenue the city receives from Illinois. Proceeds will refinance Chicago’s general obligation debt, according to bond documents. The deal is expected to price this month. An online presentation to investors is set for January 18 as possible pricing dates and timing may change. The offering follows the corporation’s sale of $743.7 million of the same bonds last month. Maturities on the new securities will range from 2031 to 2048. The bonds are rated “AAA” by Fitch and rated “AA” by S&P. The negotiated deal, listed as day-to-day on the calendar, is the biggest municipal bond offering so far this year. As revenue securitization bonds become more commonplace, the Puerto Rico government vs COFINA sales tax bondholders dispute is expected to be resolved by either a consensual settlement or court ruling within the first quarter of 2018.

Private Activity Bond Threat Subsides... U.S. hospitals sprang into the market as Congress prepared to enact the first overhaul of the tax code in over three decades, ramping up bond sales almost 800% in December compared to the same month a year ago. The deluge in issuance came amid threats to end hospitals ability to tap the tax-exempt municipal market, which would have raised their borrowing costs. Hospitals sold $8.8 billion in muni bonds during December, which was the largest month for long-term muni bond sales in history at $57.5 billion. Colleges and universities, also common issuers of Private Activity Bonds (PABS), sold $4.8 billion of bonds last month, up from about $930 million in December 2016. State and local single and multifamily housing providers, which also faced a curb on tax-exempt bond sales, sold $3 billion in bonds in December, compared to $1.5 billion in the same month in 2016. While the legislation passed by our Congress ultimately preserved tax-exempt PABS, it ends the tax break on a debt refinancing tool known as “advance refundings”, which accounted for about a third of bond sales in 2016. Losing PABS would have credit implications for hospitals, according to Moody’s, who hanged its outlook on not-for-profit hospitals to negative from stable last month. Without PABS an increase in borrowing costs for capital projects would be particularly credit negative for small hospitals and rural healthcare systems that lack the scale and margins to afford higher interest rates from taxable financings, Moody’s wrote in a report last month.

Puerto Rico General Fund Revenue Down 3% For First Five Months Of Fiscal Year... According to PR Department of Treasury spokesman Raul Maldonado prior to Hurricane Irma and Maria General Fund net income surpassed the net income of the previous years. In July and August revenues exceeded projections by $48.6 million and $77.4 million respectively for a total of $126 million above their projections. Revenues collapsed in September and October due to two hurricanes. Hurricane Maria was the greatest natural disaster in the history of Puerto Rico. However, in November net income to the General Fund exceeded the previous year and the current monthly projection. Total revenue was $570.7 million, $36.8 more than the previous November and $45.6 million more than projections. The Commonwealth finance minister stated revenue for the first five months of Fiscal 2017- 2018, which began July 1, 2017, was $2,925,000,000.00 or 3% less than projections.

Fed Minutes Reveal Uncertainties Over Tax Cuts… Federal Reserve officials debated whether new tax cuts approved by Congress would require them to raise short-term interest rates faster this year. Officials expressed growing confidence in the strength of the labor market and the economy according to the minutes of the Fed’s December policy meeting released on January 3rd. After holding its benchmark short-term rate near zero for seven years, the Fed has raised it five times since late 2015, most recently in December, to a range between 1.25% and 1.5%. Officials also penciled in three more quarter percentage point rate increases in 2018 and two in 2019. The Fed isn’t expected to take any action at its next meeting, January 3031. Before the minutes were released, the market for federal funds futures contracts, where traders bet on the path of interest rates, showed a 62% probability of a rate increase at the  Fed’s second meeting of the year, in March. At the meeting, officials highlighted the risk that interest rates would rise slower than anticipated if inflation continued to undershoot the central bank’s forecast.

Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.