Municipal Bond News 10/28/24

Volatile Markets Lure Tax-Free Yield Seekers…Muni Bonds’ Worst Week in 2024… Bellwether Yields Soar…Experts Seek Gradual Rate Cuts…Muni Bond Sales Deferred… Hospitals’ Margin Pressures… MTA’s Budget Deficit…College Enrollment Dips…

Volatile Markets Lure Tax-Free Yield Seekers…A window for purchasing municipal bonds has opened up. A sell-off in the bond markets “presents an opportunity, and we would be happy to add at cheaper levels” going into the November elections, Barclays said last week. “We believe investors will be very happy with purchases made in the context of current market levels as we move through 2025,” J.P. Morgan Chase said last week. The Fed is in the early stages of rate cuts, and interest rates are expected to trend lower next year. Current muni yields, 3.85% tax-free for 30 years, are near the highest this year. Investors are likely to find value tax-free yields amid the volatility of the election season. Volatility in financial markets has increased to the highest in several years. As we move closer to the presidential election, which is shaping up to be the largest ‘event day’ in several years, sophisticated long-term investors are looking for opportunities to add tax-free investments.

Muni Bonds’ Worst Week in 2024…Muni bond yields surged dramatically earlier this week, following a larger selloff in U.S. Treasuries. Amid volatile market conditions, muni bonds show losses of 1.4% in October, pushing year -to-date returns to 0.8%. The sell-off comes after muni bonds posted positive returns from June to September. Speculation in betting markets on the upcoming presidential election has sparked volatility in financial markets. Odds favoring a Trump White House have increased in betting markets, while Vice President Harris maintains a slim lead in some public opinion polls. Muni bonds have started pricing in the possible effect of a Republican wave. Concerns on larger future fiscal deficits have raised the odds of yields climbing higher. Polls and betting odds on the closely contested presidential election are fragile and constantly changing.

Bellwether Yields Soar…In October, muni bond yields have climbed 25 basis points higher. Long term U.S. Treasury yields have soared 40 basis points to 4.47% taxable. Top-rated long term muni bond yields rose to 3.95% last week, the highest since June, before sliding lower to 3.85% by the end of the week. State and local government bonds currently yield over 6% taxable equivalent for top earners. That’s 150 basis points of additional yield relative to comparable U.S. Treasury bonds.

Experts Seek Gradual Rate Cuts…The bond market is trimming bets on the pace of rate cuts over the next year. Bank of America CEO has urged Federal Reserve policymakers to be measured in the magnitude of interest rate reductions. A few Fed officials including Dallas Fed President Lorie Logan, Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly have echoed calls for the Fed to lower interest rates at a gradual pace as the economic environment remains uncertain. Signs of a stronger-than-expected U.S. economy caused investors to dial down expectations on the pace of rate cuts.

Muni Bond Sales Deferred…At least two muni bond issuers including a California issuer delayed planned offering last week. A jump in borrowing costs clouded the primary market last week. Muni bonds had their worst day in more than two years on Wednesday. Rising yields impact the primary market. Year to date, issuers have sold over $420 billion of municipal bonds, 42% more than the same period last year.

Hospitals’ Margin Pressures…In 2025, hospitals’ operating margins will likely remain below historical levels, Moody’s said. Nonprofit hospital operating margins are 4.2% on average this year, per Kaufman Hall. Recent operating margins are lower than pre-pandemic levels. Reimbursement increases from payors will not keep up with the higher wages. Hospitals with the highest exposure to government payors will face the biggest challenges. While the rate of hospital wage growth will remain below recent peaks, hospitals’ wage bill will persist at record levels. The steep rise in healthcare wages over the last three years remains a credit risk for this essential- service sector.

MTA’s Budget Deficit…MTA’s principal and interest payments could take up more of its operating budget unless state lawmakers find new funding. MTA, which has $47 billion in outstanding debt, anticipates its $20 billion operating budget next year will direct $2.8 billion to principal and interest payments, taking up about 14% of that spending plan. Issuing new bonds to replace the $15 billion earlier anticipated from congestion pricing would push MTA’s debt service costs to $5 billion in 2037. Such a scenario could strain MTA’s future operating budgets. The MTA faces a $650 million budget shortfall in 2028, per the New York State comptroller. That’s about 200 million larger than MTA’s own projections for its budget gap in 2028. “A year ago, the MTA was looking forward to a period of solid fiscal health, but its financial condition has quickly turned from stable back to uncertain,” the state comptroller noted. Governor Kathy Hochul said she would “fight to secure as much funding as possible,” including pressuring federal lawmakers to help support the transit system’s infrastructure needs.

College Enrollment Dips…U.S. colleges have reported a 5% drop in freshman enrollment for Fall 2024 per National Student Clearinghouse. This marks the first decline since the pandemic led freshman enrollment to drop 10%. Four-year colleges that serve low-income students saw the most severe enrollment declines. A steady decline in the national birth rate and high school graduation has contributed to the enrollment decline. Several small and less selective schools have closed due to financial troubles. Freshman counts are closely watched as a smaller class size can hurt a school’s revenue for years. Slowing revenue growth and rising costs have brought credit pressures for the higher education sector.

Compare 30-Year taxable U.S. Treasury yield 4.50% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.85% “AA” 4.09%; “A” 4.33%. For investors in the 35% tax bracket, a 3.85% tax-exempt yield is equivalent to a 5.92% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S Treasuries.