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Municipal Bond News 10/24/22
Pace of Future Rate Hikes Divides Fed Officials… Chicago Earns Rating Upgrade…Atlantic City Earns Upgrade…Record Retail Orders For Connecticut Tax- Free Bonds…New Jersey Yield Penalty Narrows… Inaugural Opioid Settlement Bonds…Voters To Decide… Municipal Bonds Offer ‘Oasis’ Says Bank of America…
Pace of Future Rate Hikes Divides Fed Officials…Set for “a very thoughtful discussion” about the pace of tightening, Fed officials are likely to raise rates by 75 basis points for the fifth time this year at next week’s Fed meeting. “The time is now to start planning for stepping down,” San Francisco Fed President Mary Daly said last week. Fed Vice Chair Lael Brainard has laid out a cause for pausing rate hikes at some point. “I worry that if the way you judge it is, ‘Oh, another bad inflation report—it must be that we need more [rate hikes],’… that puts us at somewhat greater risk of responding overly aggressive,” Chicago Fed President Charles Evans stated in mid-October. Kansas City Fed President Esther George has echoed that she favored “steadier and slower rate hikes” as she worries that a “series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points.” Meanwhile, Minneapolis Fed President Neel Kashkari is opposed to a “pause” in rate hikes, and so is Philadelphia Fed President Patrick Harker as there has not been enough progress on lowering inflation. Cleveland Fed President Loretta Mester favors a 75 basis point rate hike at each of the two remaining Fed meetings this year.
Chicago Earns Rating Upgrade…For the first time in over a decade, Fitch raised its rating on Chicago general obligation bonds to ‘BBB’ from ‘BBB-‘, and assigned a positive outlook last week. The upgrade “reflects Chicago’s improving pension funding practices, its commitment to maintaining a sound reserve position, and ability to institute structural budget measures that improve its capacity to respond to future cyclical challenges” per Fitch. Separately, S&P has praised Chicago’s latest budget plan as it brings additional pension contributions. “After a one-year delay due to the pandemic, the 2023 budget is balanced without one-time revenue sources,” S&P discussed last week. Welcoming the upgrade, Mayor Lightfoot said “we have a structurally balanced budget proposal to close one of the lowest budget gaps in the City’s history and have put the City on a path to financial stability.” Chicago estimates the rating upgrades could result in savings of about $100 million per $1 billion of debt. Chicago’s Chief Financial Officer added, “Fitch’s rating upgrade is independent recognition of what we have been saying — the Chicago financial turnaround is now.”
Atlantic City Earns Upgrade…S&P raised its rating on Atlantic City general obligation bonds to ‘BB’ from ‘BB- ‘, with a positive outlook. Atlantic city’s stronger finances are reflected in a sizeable operation surplus in 2021 and another projected in fiscal 2022. Atlantic City weathered COVID-19 without any financial deterioration. Its reserves are at their highest. The enactment of the Casino Property and Tax Stabilization Act, which is in its sixth year, has proven to be an important revenue stabilizer. “Atlantic City appears poised to continue its current trend and produce structurally balanced operating results over our two-year outlook period,” S&P report said, despite what S&P Global Economics calls “the likelihood for a shallow economic recession in 2023.” S&P’s favorable rating action comes on the heels of a Moody’s upgrade last month.
Record Retail Orders For Connecticut Tax-Free Bonds…A record amount of retail orders worth $1.4 billion for $1.1 billion Connecticut transportation bonds were received during a one-day retail priority period last week. This is second only to the $1.8 billion of retail orders for General Obligation Bonds issued earlier this year. Connecticut State Treasurer stated “The success of this bond sale is a direct result of Connecticut’s improving financial strength, as evidenced by three credit rating upgrades of Connecticut STO bonds last year, which helped generate strong demand from investors. In addition, rising interest rates increased the attractiveness of the bonds as a long-term investment option for a variety of investors.”
New Jersey Yield Penalty Narrows…Extra yield sought by investors for investing in bonds issued by the second lowest-rated U.S. state is the least in over a year. A spate of rating upgrades and positive outlooks from rating agencies has a lot to do with it. The state’s improved reserves position it to better withstand potentially less favorable economic and revenue trends in the year ahead, Moody’s recently stated. New Jersey Treasury expects fiscal 2023 collection growth to moderate in the coming months. All three rating agencies carry a positive outlook on New Jersey general obligation bonds, which offer about 25 basis points additional yield than top-rated tax-free benchmarks.
Inaugural Opioid Settlement Bonds…Wisconsin local governments could be the first to issue opioid settlement revenue-backed bonds. U.S. states will receive more than $26 billion from pharmaceutical companies over some eighteen years as part of a settlement. By selling bonds secured by a stream of future settlement receipts, over 70 local governments in Wisconsin could secure an upfront lump sum. If issued, the novel securities echo tobacco- settlement bonds, which is a high-yield municipal bond sector.
Voters To Decide…On November 8, voters in 37 states will decide on 132 statewide ballot measures. Nationwide, over $750 million has been spent on ballot measure campaigns, of which more than half is on ballot measures for legalizing sports betting in California. Five U.S. states are seeking voter approval for legalizing marijuana. A ‘millionaire’s tax’ that could double the state income tax on those earning more than $1 million is on the ballot in Massachusetts. Arizona is asking voters to decide if a 60% super-majority should approve a tax change. Illinois is asking voters to weigh on labor union matters. Voting policies for constitutional amendments feature among ballot measures. In Texas, more than 150 local governments are seeking voter approval to issue general obligation bonds for varied capital projects. New York voters will decide on a $4.2 billion general obligation bond issue for environment, natural resources, water infrastructure and climate-related issues. Along with new leaders, a spate of new laws that shape state and local government finances are an outcome of the upcoming mid-term election.
Municipal Bonds Offer ‘Oasis’, BofA…“If history repeats itself again this cycle (which we have every reason to believe it will), then the period after the Fed‘s 14 December meeting should again prove a strong period for muni returns,” Bank of America strategists noted that municipal bonds perform well during the latter stages of Fed policy tightening, particularly between the second-to-last and the final rate hike of a cycle. Steep rate hikes have caused a rout in bond markets, but municipal bonds have outperformed taxable Treasuries and corporate bonds in 2022. Growing retail interest has led to municipal bond outperformance. “2023 should be a much friendlier year as the Fed is expected to wrap up its intensive tightening program in the first few months, and eventually begin an easing cycle later in the year during a prolonged recession,” BofA strategists added “Investor demand should rejuvenate as such high yields were rarely available in the past decade.”
Compare 30-Year taxable U.S. Treasury yield 4.28% to 30-Year tax-exempt muni bond yield “AAA” 3.90%; “AA” 4.52%; “A” 5.3%. For investors in the 35% tax-bracket, a 5% tax-exempt yield is equivalent to a 7.69% taxable yield. Top