Municipal Bond News 10/16/23

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MTA Bonds Ten Times Oversubscribed…Retail Muni Bond Purchases Surge…Higher Muni Yields a Fleeting Opportunity…Muni Bond Outlook Favorable…Are Rate Hikes Over?…Chicago Budget Plan Hinges on Revenue Boost…Opposition to PREPA Debt Plan Grows…State HFA Bonds’ Solid Credit…

MTA Bonds Ten Times Oversubscribed…A $1.1 billion Triborough Bridge and Tunnel Authority muni bond for MTA bridges and tunnels issued last week was ten times oversubscribed. The high-grade bonds are secured by a senior lien on a payroll mobility tax. 5% tax-free coupon bonds rated ‘AA+’ fetched a 4.5% yield.

Retail Muni Bond Purchases Surge…“Demand from individual investors has been good and steady for a period of time, but it really picked up to a new level last week,” MSRB chief market structure officer said, “A 50 to 60 basis point increase in benchmark rates got individuals’ attention.” Direct purchases of municipal bonds by individuals are surging to a record-setting pace. The reset in yields has allowed many investors to book tax losses and reposition for equity- like tax-free returns from state and local government bonds which enjoy strong credit conditions.

Higher Muni Yields A Fleeting Opportunity...Betting that the worst of the bond selloff may be over, higher bond yields could be a fleeting opportunity. Volatile market conditions persist. Last week saw muni bond yields decline after climbing higher for almost ten weeks. Haven demand and fewer odds of additional rate hikes caused the muni yield drop. Muni bonds are considered a safe haven. A ‘flight to quality’ following the Israel-Hamas war crisis led bellwether U.S. Treasury bond yields to slide more than 18 basis points mid- week, only to climb up again by the week’s end. Tax-free bond yields dropped about 8 basis points from a week ago, while taxable U.S. Treasury bond yields rose by 8 basis points. In October, tax-free yields surged to the highest since 2007, followed by muni bond benchmark price gains of 0.5% month-to-date, underscoring volatile market conditions.

Muni Bond Outlook Favorable…The outlook for municipal bonds is bright, particularly for high-quality bonds. “We believe growth and inflation have peaked, and we see greater recession risk than markets are pricing in, which supports a positive outlook for fixed income returns,” an institutional investor told Bloomberg last week “After their recent rise, starting yield levels, which are historically strongly correlated with returns, are extremely attractive.” Current yield levels offer downside protection in the event of recession, and ‘look very attractive versus equity returns.”

Are Rate Hikes Over?…“I don’t think we need to raise rates anymore, “Atlanta Fed president Raphael Bostic said last week. “I will remain cognizant of the tightening of financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Fed Vice Chair Philip Jefferson said last week Dallas Fed President Lorie Logan said the same day that higher bond yields may lessen the need for further rate hikes. Governor Christopher Waller said the Fed can watch and see what happens before taking further action with interest rates as financial markets tighten. Central bankers expect to keep policy rates higher for longer. Markets are pricing in fewer than one-in-three odds of another rate hike this year, drawing investors buy and hold muni bonds at attractive tax-free yields.

Chicago Budget Plan Hinges on Revenue Boost…Revenue improvements and cost savings will help close Chicago’s $538 million projected budget deficit in Fiscal 24. Rising tourism and recreation including hotels, boating, liquor and cannabis are expected to fuel higher city revenue. “A lot of economic data has come in since that time that gives us a lot of confidence in those particular key taxes,” Chicago’s budget director added “There’s a lot of stuff that’s going to be happening next year, so we have a lot of large events coming.” Chicago’s convention center will host the Democratic National Convention, and various large-scale trade shows next year, such as NASCAR and other cultural events with a positive economic impact. Revenue improvements will bring in $321 million, and cost savings will contribute $243 million. The largest revenue boost will come from levies on hotels, which will jump by about 21%, and recreation-related tax revenue will increase 8%. Chicago’s hotels have staged a strong recovery from COVID-19, with hotel occupancy at about 90% of pre- COVID-19 levels. Reaching Chicago’s revenue projections could be a challenge in light of additional spending or economic pressures that could develop over the year,” a Fitch analyst stated. Rising property valuations allow the city to tap higher surpluses from tax increment districts. The budget includes supplemental pension contributions. Underfunded pension and soaring costs of migrant care have weighed Mayor Brandon Johnson’s inaugural budget plan. The city’s $16.6 billion budget plan is 1.4% higher from prior year.

Opposition to PREPA Debt Plan Grows…It is believed that more than 50% of bondholders oppose PREPA’s debt plan. Assured Guaranty, Syncora Guarantee, GoldenTree Asset Management and 13 large Wall Street asset managers have hired top notch lawyers with Supreme Court experience to fight the oversight board’s proposed debt plan. Five institutional holders including BlackRock and Nuveen have agreed to support the debt plan in exchange for roughly 12.5% recovery. National Public Finance Guarantee have agreed to support the latest debt plan in exchange for close to 20% of their original par. A recent invitation that offers higher payouts to those who accept the board’s latest debt plan has led bondholders to raise concerns in the Title III court. Bondholders complain that such an invitation is misplaced and should not have been sent out before the Title III court approves the disclosure statement for the latest debt offer. Last month, GoldenTree Asset Management and bond insurer Syncora Guarantee sought the First Circuit Court of Appeals to lift a bankruptcy stay and allow bondholders to appoint a receiver at the Island’s electric utility. Puerto Rico Resident Commissioner Jennifer González, a candidate for Puerto Rico’s 2024 governor election, has proposed that the Island pay off its restructured debt from the central government cash pile to avoid electric rate hikes. Puerto Rico’s tax collections have outperformed, and its cash vault exceeds $20 billion.

State HFA Bonds’ Solid Credit…State housing finance agencies (HFAs) will continue to benefit from solid loan portfolio performance. Deep home equity, strong underwriting and proactive loss mitigation will continue to minimize single-family delinquencies. On the multifamily front, extraordinary demand for affordable housing has led to almost 100% of projects being current on repayments, a trend set to continue through next year. In an expensive housing market, strong revenue boosts the finances of multifamily housing projects, although development costs have risen. Historically, HFA loan portfolios have performed well even during adverse market conditions. HFAs have stepped up their issuance of tax-exempt bonds to boost lending volumes.

Compare 30-Year taxable U.S. Treasury yield 4.83% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.37%; “AA” 4.64%; %; “A” 5.01%. For investors in the 35% tax bracket, a 5% tax-exempt yield is equivalent to a 7.69% taxable yield.