Municipal Bond News 1/16/24

Jefferson County, Alabama New Bonds Oversubscribed… Long-Term Investors Navigate Market Volatility…Lower Rates in 2024…Chicago Board of Education Earns Rating Upgrade…California Deficit Lower-Than-Expected…PREPA Update…Are Climate Risks An Investment Factor…

Jefferson County, Alabama New Bonds Oversubscribed…Eleven times worth of orders flooded to buy Jefferson County, Alabama’s $2.2 billion sewer refunding bonds. Poised to be one of the largest tax-free bond issuances in 2024, the successful bond sale is a testament to Jefferson County’s turnaround from a beleaguered past. The county entered bankruptcy protection in 2011 stemming from its failure to raise sewer rates. Since its 2013 bankruptcy exit, Jefferson County continues to impose rate increases. “We have worked to improve our credit rating, implemented enhanced accounting controls, and upgraded the performance and infrastructure of our sewer system,” a county official said. Long term bonds rated Baa1/BBB+/BBB fetched a top yield of 4.5% or 100 basis points above top-rated muni index. Another large bond sale, State of Massachusetts’s $1.8 billion high grade bonds were sold at a top yield of 3.8%, the sale was upsized due to heavy volume of orders.

Long-Term Investors Navigate Market Volatility…Although policy rates are heading down, 2024 is set to be marked by high volatility amid recession fears and growing federal debt. Tax-free yields ended 17 to 37 basis points lower at year-end than 2022. However, just comparing rates at the beginning and end of the year misses the investment story. Significant swings in bellwether yields were driven by inflation fears and uncertainty about when the Fed would stop hiking rates. Yields dropped over 40 basis points between last January and early February, before rising about 50 basis points through early March, and bottoming out in mid-April. Muni yield climbed more than 150 basis points from mid- April to the end of October, before falling about 80 basis points from November to year-end. The yield rollercoaster did not deter individual investors with a long-time horizon. Direct purchases of municipal bonds by individuals grew in 2023, and mutual funds saw redemptions. “Why Now Is A Great Time To Invest In Municipal Bonds,” a GMS newsletter dated September 18, 2023, along with continued weekly updates helps investors stay current with municipal bond market developments. Volatility is inevitable, and timing the market is nearly impossible. A Municipal Bond Specialist can help investors make the most of tax-free investing amid volatility.

Lower Rates in 2024…The Federal Reserve is unlikely to allow high real interest rates to continue, bond expert Jeffrey Gundlach said last week. The federal government’s interest expense is already $1 trillion or 15% of tax revenue and could rise to 20%. “When there is a recession, which is likely this year, there will be an exploding problem with this debt,” Gundlach added “It will prompt extraordinary measures, like quantitative easing (QE).” Bellwether U.S. Treasury yield could hit 3.3% by year-end down from 4% currently.

Chicago Board of Education Earns Rating Upgrade…The nation’s third largest school district is one step away from Moody’s investment-grade status. Chicago Public School’s upgrade to Moody’s ‘Ba1’ from ‘Ba2’ with a positive outlook comes from improved finances. Higher cash balances and lower fixed costs have been supported by higher state aid and property tax receipts. However, the district has a high leverage ratio. “The district’s leverage ratio will remain high relative to peers because adjusted net pension liabilities comprise the greatest share and liabilities will not be reduced for many years,” Moody’s cited historically weak pension contributions. As federal aid tapers off, Chicago Public Schools “will begin to face difficult budget choices in coming years.” The latest rating upgrade comes after an S&P upgrade last year.

PREPA Update…Majority of uninsured PREPA bondholders have not accepted a settlement offer proposed by the oversight board in November. So far, only 43% of uninsured bondholders have accepted the board’s second settlement offer. Bond insurers are challenging the Title III court’s ruling that limits the revenue lien granted to bondholders in the U.S. Court of Appeals for the First Circuit. The Court of Appeals will hear arguments on January 29, 2024, and objections to the proposed debt plan are due before January 28, 2024. Meanwhile, the Oversight Board has commenced solicitation for voting on the PREPA debt Plan. The PREPA Bond Trustee, Assured Guaranty, Syncora, Golden Tree Asset Management and the Ad Hoc of PREPA Bondholders plan to file oppositions in the Court. Court hearings on the contested debt plan are set for early March. It is not clear whether the U.S. Court of Appeals will rule on revenue lien before hearings on confirmation of the Plan.

Are Climate Risks An Investment Factor…“Safeguarding Municipal Bonds from Climate Risk”, a Senate Committee hearing last week saw lawmakers and experts take differing positions on climate risks. Pension obligations and suburban flight are larger than climate risks for states and local governments, a professor said. A lawmaker said he was more concerned about federal funding for disaster relief. Growing climate risks suggest that states and locals should take steps to address climate-related challenges, such as issuing more bond- financed infrastructure, a municipal bond expert testified. More debt is generally frowned upon by credit agencies. However, infrastructure-related debt could better position the issuer for the future. So far, investors have not sought higher yields for investing in states and locals most vulnerable to climate risks. Historically, the federal government has provided ample disaster relief to rebuild.

Compare 30-Year taxable U.S. Treasury yield 4.24% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.49%; “AA” 3.84%%; “A” 4.13%%. For investors in the 35% tax bracket, a 3.5% tax-exempt yield is equivalent to a 5.4% taxable yield. Top-rated long- term tax-free bonds yield 82% of comparable taxable U.S. Treasuries.