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Municipal Bond News 10/9/23
Smart Money Finds Muni Bond Advantage…MTA Earns Rating Upgrade… Tax-Free Bond Yields Less Volatile… Recession Odds Boosted…Chicago Tax Hikes Sought… Illinois Gaming A Winner…U.S. House Politics Adds To Volatile Mix…Spooked Muni Bond Issuers…
Smart Money Finds Muni Bond Advantage…“It’s now exciting to be a bond investor,” noted bond guru Jeffrey Gundlach said last week, highlighting the lure of higher yields. “With recent changes in the bond market, as longer-term yields have been shooting up, this is a good time for income seekers to do some calculations to understand which investments offer the highest after-tax yields,” WSJ urged investors today. U.S. state and local government bonds offer a distinct value to investors Longer-dated state and local government bonds currently offer close to 7.6% taxable equivalent yield for 35% tax bracket investors. That’s about 50% incremental yield relative to what taxable U.S. Treasury bonds and short-term cash instruments currently offer. Wealthy investors bought a record volume of municipal bonds last week when mutual funds sold over $2 billion of muni bonds to meet redemptions, in the ninth straight week of outflows. More than 70,000 muni trades were executed on Tuesday last week, the highest activity this year. Last week’s muni trading was about 40% higher than usual daily trading volume. Amid volatile market conditions, individual investors have added to muni bond portfolios, while mutual fund investors have sold muni bonds this year. Headlines often bring a herd mentality causing many investors to sell bonds at losses during volatile times. This has led municipal bonds to post losses of 1.8% in 2023, fading gains in earlier months of the year. Should the decline be sustained, it would be the market’s first back-to-back annual losses since at least the 1980s. “One of the hardest parts of investing is not letting the heart over-rule the head in times of uncertainty,” a strategist told Financial Times today that long term investors must fight the cash trap, which incurs tax, and look for better options. Opportunistic investors are taking advantage of a sharp selloff. Significantly higher tax-free yields and strong credit quality of muni bonds are drawing strong interest from sophisticated investors.
MTA Earns Rating Upgrade…S&P upgraded New York MTA bonds to ‘A-’ from ‘BBB+’, with a positive outlook. “The rating action is spurred by improving ridership performance as well as increased financial flexibility and operating stability resulting from the state of New York’s decision to raise the payroll mobility tax to enhance one of MTA’s recurring revenue sources to help offset lower fare revenues,” said a S&P analyst. Governor Kathy Hochul welcomed the upgrade, “I’m pleased to see S&P recognizing these investments through the improved rating outlook and an improved bond rating.” “There’s a reason Wall Street is expressing confidence in the MTA’s financial condition: the bold leadership demonstrated by Gov. Hochul in the 2023 New York State budget,” said MTA CEO highlighted that MTA has five years of balanced budgets. Last month, Moody’s revised its outlook on the MTA revenue bonds to positive from stable. S&P’s upgrade is the second favorable rating action for the MTA, which was hit hard by drastic ridership by COVID-19. The upgrade boosts investor confidence and could lead to lower interest rates for the nation’s largest transit. MTA’s essentiality is reflected in the strong support provided by federal, state and local government.
Tax-Free Bond Yields Less Volatile…Municipal bond yields barely moved 3 basis points higher last week. However, U.S. Treasury bonds saw the biggest weekly yield surge since December. The 10-year Treasury yield has increased by more than 20 basis points, the 30-year by more than 23 basis points last week. Benchmark 10-year U.S. Treasury yield touched 4.9%, and long-term Treasury bond yields surged above 5%, the highest since the Great Recession. High demand for tax shelter amid a drop in state and local government bond issuance bolster muni bond prices.
Recession Odds Boosted…A surge in market yields has boosted odds that the Fed could be close to ending rate hikes. Higher yields are tightening financial conditions at a time when headwinds are building from the resumptions of student loan payments and the autoworker strike. Higher borrowing costs for consumers and businesses could weigh on profits and economic growth. “Something is likely to break,” a noted economist explained that certain economic sectors are more vulnerable to paper losses and the steepest borrowing costs in 22 years. San Francisco Fed President Mary Daly said last week “If financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished.”
Chicago Tax Hikes Sought…Steeper taxes on high-end property sales are sought by Mayor Brandon Johnson. The change seeks a shift away from Chicago’s flat tax rate on all property sales to progressive taxes on real estate transfers. Amid high interest rates and a slow housing market, large property owners dispute the plan. Additional real estate transfer taxes are slated to boost affordable housing. Separately, a new financial transactions tax on certain has also been floated. After City Council approval, voters would decide upon real estate transfer taxes in 2024.
Illinois Gaming A Winner…Gaming taxes are poised to climb in Illinois. Bally’s opened a temporary casino in Chicago last month. Gambling, be it Blackjack, horse race tracks, video games or lottery, has brought a record $2 billion in tax revenue for Illinois in the recently ended fiscal year. Illinois’ gaming tax revenue amounts to less than 5% of state general fund revenue. U.S. states have continued to expand gambling in a bid to boost revenue.
U.S. House Politics Adds To Volatile Mix…The battle for the vacant U.S. House Speaker position reflects political brinksmanship. The situation boosts the chance of a government shutdown once 45- day government funding runs out on November 17. While there may be no immediate impact on the municipal bond sector, the events heighten uncertainty. It raises the prospect of the United States losing its sole remaining ‘AAA’-rating from Moody’s. Separately, geopolitical events and oil prices contribute to volatility.
Spooked Muni Bond Issuers…The sharp rise in interest rates has spooked some state and local governments that had planned to sell debt. Bond issuers in New York, California and Texas shelved planned bond sales last week to avoid volatile market conditions. Bellwether bond yields have surged as the US government has ramped up its borrowing this year to bridge widening budget deficits and make up for lower federal tax revenue. Meanwhile, state and local governments have scaled down governments that had planned to sell debt. Bond issuers in New York, California and Texas shelved planned bond sales last week to avoid volatile market conditions. Bellwether bond yields have surged as the US government has ramped up its borrowing this year to bridge widening budget deficits and make up for lower federal tax revenue. Meanwhile, state and local governments have scaled down municipal bonds.
Compare 30-Year taxable U.S. Treasury yield 4.96% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.49%; “AA” 4.81%; %; “A” 5.25%. 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 91% of comparable taxable U.S. Treasuries.