Municipal Bond News 10/30/23

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It’s Time to Buy Muni Bonds…Value in Bellwether Bond Yields… It Pays to Invest in Municipal Bonds…MTA Earns Another Upgrade… “Really Big Opportunities” in Tax-Free Muni Bonds… Bondholders Unite to Block PREPA Plan…COFINA Pledged Revenue Outperforms… Bondholders Unite to Block PREPA Plan…

It’s Time to Buy Muni Bonds… “The bull case for bonds starts with the fact that today’s entry point is the best in years,” Barron’s highlighted this weekend, “Rarely in American history has it been this bad for bonds – and rarely has it been such an opportune time to buy bonds.” Since current yields are at multi-year highs, the tax-free income from muni bonds is a cushion against any potential losses. Odds of positive bond returns outweigh downside risks. Long term U.S. Treasury bonds would gain nearly 13% over 12-months with a 0.5 percent drop in yields but stand to lose less than 3% if rates rose by a 0.5 percent, Barron’s explained this weekend. Yields on bellwether U.S. Treasuries exceed inflation expectations. While inflation has been trending lower, it may turn out be sticker than expected. At the same time, federal deficits continue to grow. Annual interest on federal debt could soon hit $1 trillion, making it the U.S. Treasury’s third largest expense. U.S. Treasury Secretary Janet Yellen said it is not clear that interest rates will stay high in the long run. For decades structural forces, like demographics, had driven interest rates down, “Those underlying trends, they’re still there,” Yellen added “So I think it’s perfectly possible that we will see longer-term yields come down, but nobody really knows for sure.” Stabilizing policy rates, continued geopolitical conflicts, or signs of a recession could favor bond returns. Comparable to U.S. Treasury bonds, tax-free muni bond yields move closely with taxable U.S. Treasury yields. Investors value the tax exemption offered by muni bonds. Taxable equivalent yields offered by muni bonds, close to 8% for top income tax payors, have been termed ‘equity like’ by some market experts.

Value in Bellwether Bond Yields “There is too much risk in the world to remain short bonds at current long-term rates,” Billionaire investor Bill Ackman added last week that growth in the United States was weaker than the mainstream data suggests. Veteran bond guru Bill Gross predicted a U.S. recession in the fourth quarter, stating “Higher for longer is yesterday’s mantra.” Ackman bought long term bonds to cover his short position, and Gross bought rate futures, betting that bellwether yields may have peaked. Their comments and trades led long term U.S. Treasury bond yield to recede from a multi-year peak of 5.18% to 5.01%. Bond markets are debating whether the Fed will raise rate one more time, before rate cuts next year.

It Pays to Invest in Municipal Bonds…Muni bonds might be especially attractive to high earners, Wall Street Journal highlighted last week. “If you fall in the 30% tax bracket or higher, you can earn more from municipal bonds than Treasurys or corporate bonds after accounting for taxes.” The yield on munis was 4.56% this month, per the S&P Municipal Bond Index, the highest in more than a decade. That is up from 1.40% in October 2020. A broad municipal bond price index dropped almost 1% in October, and long-term muni bond indices lost over 2%. Top-rated long term muni yields have surged about 90 basis points higher over the last three months.

MTA Earns Another Upgrade…Marking the third favorable rating action for the nation’s largest transit agency, Fitch upgraded MTA transportation revenue bonds to ‘A’ from ‘A- ‘and assigned a stable outlook last week. The recent payroll mobility tax hike will help MTA’s finances. For the first time in twenty years, MTA forecasts balanced budgets through 2027. “We continue to execute on our historic five-year financial plan, which demonstrates five consecutive years of balanced budgets,” MTA CFO added “Fitch’s improved rating and outlook is another sign of confidence in the MTA’s ability to deliver.” MTA CEO echoed, “Wall Street is taking notice with continued growth in confidence in the MTA’s sustainable financial position.” Fitch noted the A rating incorporates “the exceptional franchise strength of the MTA system and its importance to the regional and national economy, as evidenced by the PMT increase and the substantial federal commitment to the MTA following the onset of the pandemic.” Recently, MTA earned an S&P rating upgrade, and positive outlooks from all three ratings agencies.

“Really Big Opportunities” in Tax-Free Muni Bonds…While nobody knows what the peak in rates will be, individual investors are buying more muni bonds this year, SIFMA and MSRB data suggests. They have plenty of reasons: State and local government bonds currently offer the highest tax-free income since 2007, which is about 250 basis points of additional yield relative to U.S. Treasuries for top tax-bracket earners. Investors are lured to state and local governments’ strong finances. The haven status of muni bonds fuels demand. There are “really big opportunities” in tax- exempt municipal bonds for investors with a long-term investment horizon, an expert told financial advisors at a Philadelphia conference last week “And I think if you like your bond investments to be safe to a certain extent, that municipal credit is in a really strong position. Even if the economy slows, munis will hold up well because of the surplus of federal government funding.” In times of economic or geopolitical uncertainty, government bonds are a traditional haven for investors, while risky assets generally underperform. Adding tax-free state and local government bonds helps buffer investment portfolios.

Bondholders Unite to Block PREPA Plan…On December 4, the U.S. Court of Appeals for the First Circuit will hear arguments on the issue of whether to lift a stay and permit a receiver for the Puerto Rico Electric Power Authority (‘PREPA’). GoldenTree Asset Management, Syncora Guarantee, Assured Guaranty, Invesco, Goldman Sachs and other PREPA bondholders have entered a cooperation agreement where they pledge to work together against the agency’s potential debt- cutting plan. The pact aims to prevent bondholders or insurers from striking their own deals with PREPA and Puerto Rico’s financial oversight board. The Trustee also opposes the PREPA debt plan. About 61% of bondholders currently oppose the oversight board’s latest settlement offer.

COFINA Pledged Revenue Outperforms…On October 20, 2023, 100% of pledged sales and use tax revenue for Fiscal 24 has been transferred to the COFINA Bond Trustee. This amount is sufficient to pay Fiscal 24 debt service on COFINA bonds in accordance with bond indenture.

Compare 30-Year taxable U.S. Treasury yield 5.06% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.64%; “AA” 4.99%; %; “A” 5.34%. For investors in the 35% tax bracket, a 5% tax-exempt yield is equivalent to a 7.69% taxable yield. Top-rated long-term tax-free bonds yield 92% of comparable taxable U.S. Treasuries.