- Pricing Service
- Municipal Bonds
- Search Offerings
- Market Yields
Municipal Bond News 10/10/22
Wall Street Favors Municipal Bonds…Is the Fed ‘Over- Steering’?…Fed on Track For Steep Rate Hikes…Chicago ‘Stability Budget’ Boosts Pension Contributions… More Transit Riders…Key Governor Races…California Hikes Income Tax…Big Apple Bond Sale…
Wall Street Favors Municipal Bonds…“In the aftermath of this rate and ratio adjustment, we are finally getting a bit more positive about the muni market outlook,” Barclays strategists suggested. “With yields at post-financial crisis highs, we suggest investors lock in yields with certainty rather than waiting for the Fed to stop hiking rates,” Schwab strategists echoed. PIMCO stated last week that the return potential in the bond market is ‘compelling’ after yields hit multi-year highs. Steep fed-funds rate hikes have boosted municipal bond yields as comparable U.S. Treasury yields are at multi-year highs. Faced with steep fed-funds rate hikes, investors may not buy all at once, but growing numbers are considering adding tax-free bonds as and when attractive opportunities present.
Is the Fed ‘Over-Steering’… The “U.S. and other economies cannot stand many more rate increases” veteran bond investor Bill Gross explained that although “inflation is the Fed’s seemingly solitary focus at the moment, economic growth and financial stability may soon gain equal measure.” There is a lag before the effect of Fed actions is felt in the economy, Bond guru Jeffrey Gundlach noted that the Federal Reserve is “oversteering” with its rate hikes. The number of rate hikes announced by central banks worldwide was the highest in July since records began in the 1970s. The most widespread tightening of monetary policy on record could drive the world economy into a harsh economic contraction. The World Trade Organization has lowered its forecast for global economic growth in 2023 to 2.3% from earlier expectations of 3.3%. A strong dollar is bringing down prices of imported goods, but U.S. exports are down 0.3% in August from a month ago, the first such decline in 2022. Most economists accept that inflation in any one country isn’t solely due to forces within that country. So far, federal officials are shrugging off the risk of contagion, noting that their primary focus is on the U.S. economy.
Fed on Track For Steep Rate Hikes…A strong job report and higher oil price indications boosted odds of a 75 basis point rate hike in November, the fourth such rate hike in 2022. Oil supply cuts announced last week by the Organization of Petroleum Exporting Countries could feed high inflation. The Fed could be “headed for 4.5% to 4.75% by sometime next year,” Chicago Federal Reserve Bank President Charles Evans noted. San Francisco Fed President Mary Daly said “I see us raising to a level that we believe is restrictive enough to bring inflation down, and then holding it there until we get inflation truly close to 2%.” The policy-sensitive two-year U.S. Treasuries climbed nearly nine basis points to 4.34% within a basis point of a multiyear high. The five-year yield climbed as much as 10 basis points to 4.17%, anticipating the policy rate will remain elevated for an extended period.
Chicago ‘Stability Budget’ Boosts Pension Contributions…Outperforming revenue will help Chicago make supplemental pension contributions and close a narrow budget gap, without resorting to property tax hikes in 2023. Termed as one of Chicago’s biggest “new investments”, a $242 million supplemental pension payment in 2023 will “prevent the pension funds from having to sell assets in this very difficult market.” Revenue collections are about $200 million ahead of budget in 2022 and the upswing is expected to continue in 2023. Record high property tax collections from Chicago’s tax-increment financing districts boost the city budget and also provide an additional $218 million to Chicago Public Schools. Lightfoot wants to use future revenue outperformance for boosting pension contributions. The mayor’s pension policy has drawn praise from the Civic Federation, a watchdog organization that will review revenue assumptions and raise questions on the city’s plan if revenue forecasts do not deliver. Chicago CFO stated “I think it’s a significantly positive message that we are sending to the market overall that the city’s finances have turned around.”
More Transit Riders…Fall 2022 is witnessing the highest transit ridership post-COVID-19. New Jersey Transit passenger fare revenue hit 70% of pre-pandemic levels last month, the highest since March 2020. Transit providers nationwide received billions of dollars of federal aid to help offset covid-19 related losses. Over 3.8 million New Yorkers rode the subway last month, the highest since early 2020. The nation’s largest mass transit provider, New York’s MTA, may not regain 100% of pre-pandemic ridership until about 2035 per a McKinsey study. Recovering faster from Covid-19 woes compared to other cities, Los Angeles aims to get back to pre-COVID-19 levels by mid- 2023, termed by a Fitch analyst as “a very ambitious goal,” but doable if the conditions are right. “It is possible,” he said. “It will be different for every transit agency.”
Key Governor Races…In less than a month, 36 U.S. states and three U.S. territories will elect a new governor. In Illinois, Governor Pritzker (D) is leading against Republican nominee Darren Bailey per recent polls. California Governor Gavin Newsom (D), who handily won a 2021 recall election, faces state senator Republican Brian Dahle. Connecticut Governor Ned Lamont (D), who claimed the top office with a narrow win, will face opponent Bob Stefanowski for a second time. Florida’s Governor Ron DeSantis (R) will contest former governor Charlie Christ (D). Michigan Governor Gretchen Whitmer (D) will fight against conservative commentator Tudor Dixon. Recently appointed New York Governor Kathy Hochul (D) campaign is said to have outpaced opponent Lee Zeldin (R) in raising election funds. Texas Governor Greg Abbott(R) is leading in recent election polls against former U.S. representative and 2020 presidential candidate Beto O’Rourke (D). The November elections will set the stage for the 2023 White House nominations.
California Hikes Income Tax…Governor Gavin Newsom signed legislation on Friday that raises the top marginal income-tax rate. In 2024, California’s top marginal tax rate will increase to 14.4% from 13.3% for those making more than $1 million. Those making between $61,000 to $312,000, would pay 10.4%. The upper middle class in California, New York, New Jersey and Hawaii pay more in taxes than millionaires in most U.S. states. One of the largest costs that investors pay are taxes. A drag on investment returns, taxes are often seen as a government fee on investments. Not only are municipal bonds tax-efficient investments, from they offer higher tax-free yields relative to comparable taxable Treasury bonds.
Big Apple Bond Sale… Thirteen times worth of orders came for New York City $950 million tax-free general obligation bonds offered last week. Taxable Social bonds received orders worth 4.7x the amount of bonds offered. Investor demand led to yield cuts of around 15 basis points, offering about 4.39% yield for long term high grade tax- free bonds. Taxable bonds fetched 5.26% for 30 years. Affordable housing and capital projects in New York City will get a boost from high-grade bond sale.
Compare 30-Year taxable U.S. Treasury yield 3.84% to 30-Year tax-exempt muni bond yield “AAA” 3.82%; “AA” 4.30%; “A” 4.93%. For investors in the 35% tax-bracket, a 4.9% tax-exempt yield is equivalent to a 7.5% taxable yield. Top rated long-term tax-free bonds yield 99% of comparable taxable U.S. Treasuries.