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Municipal Bonds Rally… Municipal bonds rallied with tax-free yields dropping the most since April 2020 as bellwether bond yields fell. Top-rated long-term municipal benchmark yield dropped to 3.88% last week after hitting a twelve-month peak of 4.1% in late October. The world’s biggest bond market, United States Treasuries saw the biggest single-day yield drop since 2009 for some maturities. Prospects of slower inflation led long-term municipal bond yields to drop twenty basis points, while the bellwether 10-year U.S. Treasury bond yield fell 27 basis points. A significant decline in inflation next year could be in the cards. Fewer supply-related constraints, more rental apartments in the construction pipeline and wage pressures could reign in high inflation. Goldman Sachs expects the Fed- preferred core PCE inflation gauge to drop from 5.1% currently to 2.9% by December 2023.
Inflation Pulls Back From Four-Decade High… In October, price pressures eased. The annual pace of consumer price index (‘CPI’) slowed to its lowest since January. CPI slowed to a 7.7% annual pace in October down from 8.2% prior month. Compared to a month ago, CPI advanced 0.4% lower than forecast. Core CPI, which strips out volatile food and energy, rose 0.3% from prior month, at half the pace of prior months’ 0.6% and lower than consensus forecast. Compared to last year, core prices are 6.3% higher, a pull back from forty-year high recorded last month.
Fed Officials Eye Slower Rate Hikes… A smaller fed-funds rate hike is likely in December, evidence of softening price pressures led investors to reckon. “Stepping down is an appropriate thing to think about,” San Francisco Fed President Mary Daly added, “Pausing is not the discussion, the discussion is stepping down.” Philadelphia Fed President Patrick Harked echoed, “In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance.” Inflation is still far above the Fed’s 2% target, Dallas Fed President Lorie Logan clarified “This morning’s CPI data were a welcome relief, but there is still a long way to go.” Bond markets expect a lower peak fed-funds rate of 4.8% in 2023 down from over 5.15% a week ago.
Chicago Earns Moody’s Investment Grade Rating … Last week saw Chicago exit its junk status upon earning a Moody’s upgrade to ‘Baa3’ from ‘Ba1’ with a stable outlook. Substantial increase in pension funding, and a new pension funding policy that aims to keep Chicago’s net pension liabilities in check have driven the rating upgrade and stable outlook from Moody’s. In 2015, Moody’s downgraded Chicago bonds to junk territory. “Governance is a driver of the rating action because the city has improved budgetary management through a willingness and ability to increase revenue that reduced a structural deficit and facilitated the elimination of debt-based budget maneuvers and pension cost deferrals,” Moody’s said. The Moody’s upgrade comes on the heels of Fitch’s rating upgrade and positive outlook on Chicago bonds. “There is a high likelihood that we’ll be upgraded again in the next one- to two-year timeframe, assuming that we persist on the financial path that we’ve laid for ourselves,” Chicago CFO highlighted recent upgrades of not just city general obligation bonds, but also Chicago O’Hare airport, a recipient of favorable ratings actions.
S&P Awards Positive Outlook to Chicago Bonds… S&P has boosted its outlook on Chicago bonds to ‘positive’ from ‘stable.’ The favorable outlook comes from marked improvement in Chicago’s financial position, proactive rapid improvement of its structural operating performance, and progress in addressing the inherent structural imbalance from pension underfunding, S&P said. Favorable rating actions could save over $100 million a year in interest costs for the Windy City. Mayor Lightfoot acclaimed, “The ratings agencies and our bondholders have taken notice and are rewarding our hard work.”
COFINA Fiscal 23 Revenue Fully Funded… As of October 21, 2022, 100% of COFINA Revenue for full payment of Fiscal 2023 COFINA bond debt service have been transferred to COFINA bond trustee Bank of New York Mellon. Hurricane Fiona-related temporary measures are not expected to impact COFINA debt service as 100% of Fiscal 23 debt service has already been transferred to the Trustee on October 21, 2022. In the first two months of Fiscal 23 (July and August), the Island’s revenue collections are 5.7% lower than same period last year but outperformed projections by 3.3%.
Voters Approve Half of Municipal Bond Issuance… Voters approved just over half of new bond measures, although the volume of bond measures on last week’s ballot is the highest since 2009. New York State claimed the top spot in the tally of bond measures approved by voters after a $4.2 billion statewide climate bond secured 60% voter approval. San Diego Schools garnered voter support for $3.2 billion school bonds and Austin voters favored $2.4 billion bonds for school improvements. This year, $66 billion new municipal bonds were up for voter approval, almost double last year’s tally of $27 billion bond measures. The surge in bond initiatives is driven by three states, Texas, California and New York. Some smaller states too have increased bond plans. For example, Rhode Island, which issued $27 million new bonds last year, received overwhelming voter support for $400 million new bonds on Election Day.
U.S. States Re-elect 31 State Governors… California, Connecticut, Florida, New York, Michigan, Illinois and Texas are among 30 U.S. states that re-elected governors. From coast-to-coast, voters approved second -terms for incumbent governors on Election Day, which saw 36 U.S. states and 3 territories vote for a governor. Incumbent defeats are rare. In 2018, only two sitting governors were unseated. Four years earlier, only three lost. Republicans went into this Election Day with a 28-22 lead among governors, their lead had been trimmed to 26-24, pending a few uncalled races. Voter approval of incumbents suggests continuity in state and local government fiscal policies.
Compare 30-Year taxable U.S. Treasury yield 4.05% to 30-Year tax-exempt muni bond yield “AAA” 3.88%; “AA” 4.42%; “A” 4.97%. For investors in the 35% tax-bracket, a 4% tax-exempt yield is equivalent to a 6.15% taxable yield. Top rated long-term tax-free bonds yield 96% of comparable taxable U.S. Treasuries.