Municipal Bond News 11/25/24

Muni Bonds Outperform…High Yield Muni Bonds Lure Investors…Tax-Loss Harvesting Season…Solid Demand For New Muni Bonds…Chicago Gets S&P Warning… California Budget Outlook Improves…MTA Toll Advances…Senior Housing Recovery Gains…

Muni Bonds Outperform…The recent up-tick in tax-free yield has given retail investors another chance to capture more tax-free income. Since mid- September, yields on 30-year AAA rated municipal bonds have risen 14 basis points, while similar-dated US Treasury yields have increased about 70 basis points. As a result, the ratio of 30-year muni-to-Treasury yields fell to 80.4%, its lowest since January 2022. Muni bond price gains have outpaced those of U.S. Treasury bonds. Despite this, absolute tax-free yields remain attractive when compared to historical levels and expectations of lower policy rates next year. Investors have consistently purchased municipal bonds for 21 consecutive weeks. The quest for yield among both traditional and crossover municipal buyers has driven the high-yield municipal bond index to a nearly 7% gain for the year.

High Yield Muni Bonds Lure Investors…Over half of last weeks’ new investments were high yield muni bonds. Lower-rated state and local government bonds have underperformed high yield corporate debt in recent months. High yield muni bonds offer higher tax-equivalent yields than similar rated corporate bonds. Last week, United Airlines borrowed $1.1 billion from the muni bond market offering 50 basis point of extra yield on a tax-adjusted basis, relative to similar United Airlines’ taxable corporate bonds. The yield gap boosts demand for muni bonds.

Tax-Loss Harvesting Season… As the year-end approaches, investors often engage in tax-loss harvesting by selling investments at a loss to reduce their tax burden. These losses are typically used to offset any gains they have. A trading platform noted “There is compelling evidence that both institutional and retail investors are leveraging recent yield volatility to book advantageous losses.” They observed that the volume of bid-wanted lists on the platform increased throughout the fall and spiked again in November 2024. There may be fewer tax-loss harvesting opportunities this year relative to a year ago. State and local government bond indices show gains this year. Volatile market conditions present opportunities for investors to diversify into certain muni bonds sectors or states that are well positioned for the upcoming year.

Solid Demand For New Muni Bonds…Houston Airport offered $1.1 billion tax-free bonds rated Moody’s ‘Ba3’ S&P ‘BB-’ for a United Airlines Terminal project with a 5% coupon due 2039 at 4.66% and 156 basis points above top-rated benchmarks. In contrast, a high-grade Connecticut bonds offered last week came with a top yield of 2.94% for 7 years. Omaha Airport issue rated ‘A1’ S&P ‘AA-’ yielding 4.4% for 30 years. About $8 billion new muni bonds were sold last week, the most since the post- election issuance slowdown. An expert told The Bond Buyer that “if you had any kind of spread, like in the 40 or 50 spread for either a ‘A’ or ‘AA-’ those are all five to 10 times oversubscribed.”

Chicago Gets S&P Warning…S&P has placed Chicago’s credit rating on credit watch negative, while affirming its ‘BBB+’ rating. The change comes a week after the City Council unanimously rejected the mayor’s property tax increase a week ago. In response, the mayor has scaled back his proposed property tax increase to $152 million from $300 million. Reliance on one-time budget balancing measures such as a $1.5 billion bond refinancing plan has drawn flak from S&P. “We are following the day-to-day developments, but budget negotiations remain fluid and have already brought us several surprises so far this year,” the S&P analyst added “So we really want to see what the final budget package that gets passed by City Council looks like before making a determination as to the credit significance of particular provisions being considered.”

California Budget Outlook Improves…California’s upcoming biennial budget for Fiscal 25-26 is roughly balanced. This is largely due to income tax collections in the current fiscal year being 20% higher than expected, driven by significant revenue increases. This trend in revenue growth is expected to continue over the next two years. This balanced budget forecast comes after lawmakers had to fill an estimated $27.6 billion shortfall a year ago. Proactive measures taken last year such as spending cuts and a $7 billion draw from the state’s rainy-day fund have contributed to the improved budget outlook. The state’s Legislative Analyst’s Office stated “We describe the budget as being in fair shape. There is no new capacity for new budget commitments for the upcoming budget or in the out years” beyond the upcoming budget.

MTA’s New Toll Advances…MTA Board voted to implement a $9 toll to enter Manhattan’s central business district last week. This new toll is at 40% of what the MTA originally planned and will grow to the originally planned $15 toll by 2031. While MTA’s Chairperson noted that this plan would take longer to generate the needed revenue for the MTA’s capital program for 2020-2024, the agency is still satisfied with the decision. MTA CFO mentioned that the lower tolls would require adjustments to the bonding plan.. Meanwhile, President-elect Trump said last week that congestion pricing was “a massive tax to people coming in” to the city. New York Republican lawmakers are exploring whether Congress could pass laws to stop congestion pricing. New Jersey has sued the federal government complaining that the federal environmental review was inadequate.

Senior Housing Recovery Gains…Margins for the senior housing sector are outpacing most other real estate segments. Occupancy continues to recover from pandemic losses, but still lags pre-pandemic levels. However, rent growth exceeds cost hikes for the largest senior housing operators. Notably, demand is robust while new construction has slowed considerably. The trend reflects that the sector’s recovery is gaining momentum and will likely continue into 2025.

Compare 30-Year taxable U.S. Treasury yield 4.51% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.69% “AA” 4.03%; “A” 4.17%. For investors in the 35% tax bracket, a 3.7% tax-exempt yield is equivalent to a 5.7% taxable yield. Top-rated long-term tax-free bonds yield 82% of comparable taxable U.S. Treasuries.