Municipal Bond News 1/27/25

Muni Bonds’ Attractive Yields, National Diversification… Muni Trading Soars…Trump Seeks Rate Cuts…Puerto Rico Electric Rates Centerstage…New Political Leaders to Shape Puerto Rico…NY Millionaire’s Tax…Fact-Finding on Chicago Teachers’ Contract…Top 10 Muni Bond Issuers…

Muni Bonds’ Attractive Yields, National Diversification…Muni bond yields fell 5 basis points last week, catching up to a Treasury rally. Most U.S. state muni bonds show positive index returns this year. However, California bond returns are lagging with negative 0.38% index return. A number of California municipal bond issuers present buying opportunities as certain funds trim exposure to Los Angeles and related credits and spreads widen, per Barclays. The yield penalty on Los Angeles Power utility bonds has widened by 50 basis points, while spreads on City of Los Angeles and school bonds have risen 20 to 30 basis points. A Bloomberg panel of muni bond experts said last week that they had muted concerns over revocation of muni bonds’ tax-exemption, as it is unlikely. This tax exemption is part of a broader list of possible revenue raisers considered by the House Ways and Means Committee. “Munis are pretty attractive no matter how you look at it,” an expert said at a New York panel last week. Another echoed, “On an absolute yield basis after-tax, munis are more attractive than every other fixed income asset class.” Additionally, muni investors are tuning into climate-related risks. Residents of high tax states are seeking benefits of national diversification

Muni Trading Soars…Trading volumes in the $4 trillion muni bond market have soared. “In 2022 was the first time that MSRB received more than 12 million trades in a year,” MSRB’s chief noted “In 2023 that number went over 13 million. In 2024 that number was up to 14 and a half million trades.” Another year of $500 billion plus of muni bond issuance is likely in 2025. MSRB’s chief added, “I think the financing needs out there are large. I think the appetite to buy that stuff is there. So, it’s a good environment for issuers to come into. I would expect that we see potentially another record, or certainly one of the top four years we’ve ever seen in new issue value.” Higher primary market supply has created an opportunity for to investors to sell lower-yielding bonds or underperforming credits.

Trump Seeks Rate Cuts… “I’d like to see oil prices come down,” President Trump added, “That’s going to automatically bring the interest rates down.” Trump said he would like to see rates “come down a lot.” Although the Fed began cutting rates last year, bond yields have surged higher. High market interest rates are inflaming divisions among congressional Republicans over paying for the sweeping tax cuts promised by President Trump. “The bond vigilantes are coming,” a lawmaker warned a group of House Republicans. The term ‘bond vigilantes’ refers to concerns from the 1980s and 1990s, when high interest rates set by the bond market prompted Washington to take difficult measures to reduce budget deficits. Meanwhile, President Trump said at Davos last week, “I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world.”

Puerto Rico Electric Rates Centerstage…Parties mediating Puerto Rico electric debt settlement are currently discussing how Puerto Rico electric rates should be set. Bondholders argue that electric rates should bring $926 million annually for annual debt service. However, the oversight board said the Puerto Rico Energy Bureau has authority to set rates as it sees fit. The oversight board’s executive director said that bondholders’ allowable secured claim is limited to net revenues and that the amount will be “quite moderate”. On the other hand, bondholders contend that it would be illegal for the energy bureau to discount PREPA’s debt by setting rates that aren’t high enough to cover debt service.

New Political Leaders to Shape Puerto Rico…2025 brings substantial turnover in Puerto Rico’s political leadership. The New Progressive Party has taken control from the Popular Democratic Party in the Puerto Rico Senate and House of Representatives and retained the Island’s top office. Governor Jennifer González Colón (New Progressive Party) leads a unified government, indicating that the legislature is likely to follow her stance on the PREPA debt restructuring. “I think the governor will follow the board’s lead,” a Puerto Rico bond expert noted. The new governor is likely to propose using central government funds to pay off a portion of PREPA’s legacy debt, an energy consultant at the Institute for Energy Economics and Financial Analysis told Bond Buyer. A new energy policy and electric utility reform are high on the new governor’s agenda. New Puerto Rico leaders are likely to play a crucial role in shaping the Island’s economic future.

New York Millionaire’s Tax…Governor Kathy Hochul’s $252 billion New York State budget plan seeks to extend a higher tax rate on New York millionaires for five years. New York State expects to end the current fiscal year on April 1 with a $3.5 billion surplus, largely due to a surge in personal income tax receipts. Additionally, New York Senate Democrats are pushing to revive a tax on stock trades to raise $13 billion annually to help fill a $33 billion deficit in the Metropolitan Transportation Authority’s capital plan.

Fact-Finding On Chicago Teachers’ Contract…A third-party arbiter will begin a fact-finding process to help Chicago Public Schools and Chicago Teachers Union reach a pact on a teachers’ contract. The fact finder will non-binding recommendations. The district is offering a 4% salary increase for the contract’s first two years, then a 5% ceiling for the following two years. The union is seeking 5% raises for the first two years. A fact-finding process has been used three times since 2010. In two cases, teachers ultimately went on strike. Contract talks have dragged on for more than six months since the last contract expired.

Top Ten Muni Bond Issuers…New York City Transitional Finance Authority, which issued several mega muni bonds last year, ranked first in bond sales volume in 2024. New York State Dormitory Authority placed second, followed by California Community Choice Financing Authority in third. New York boasts four of the nation’s top 10 muni bond issuers, while California has two. Florida Development Finance Corporation, State of Washington, New Jersey Transportation Trust Fund Authority and State of Massachusetts also featured 2024’s Top Ten.

Compare 30-Year taxable U.S. Treasury yield 4.75% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.01% “AA” 4.26%; “A” 4.53%. For investors in the 35% tax bracket, a 4% tax-exempt yield is equivalent to a 6.15% taxable yield. Top-rated long- term tax-free bonds yield 84% of comparable taxable U.S. Treasuries.