Municipal Bond News 11/11/24

Muni Investors Buy-The-Dip… Muni Bonds Rally After Election Rout…Airport Bonds Oversubscribed…Fed’s Second-Rate Cut…Riskiest Muni Bonds Lure Yield Seekers…Volatile Bellwether Yields… Pension Cuts Reconsidered…Voters Decide…

Muni Investors Buy-The-Dip…Investors seized the opportunity to buy tax -free municipal bonds following a sell-off related to election day, which fueled a rally for state and local government bonds. Muni bonds have rebounded after a dramatic sell-off triggered by former President Trump’s election victory. Federal Reserve chair Jay Powell explained that it was too early to judge whether the incoming president’s policies would alter central bankers’ interest rate outlook. Yields on top-rated long-term state and local government bonds rose 18 basis points to near 4% on November 6, before falling 23 basis points by November 8. Since October, the bond markets had largely priced in a Trump presidency. President-elect Trump’s election agenda suggests higher federal debt and inflation. Tax cuts may undermine the appeal of munis’ tax-exempt interest. The fate of the $10,000 cap on state and local tax (‘SALT’) deductions created to pay for 2017 tax cuts is also uncertain. While concerns around Trump’s policies pushed up bond yields over the last month, investors are now seizing the opportunity to lock in currently higher tax-fee yields. As the Federal Reserve cuts interest rates, yield-seeking investors have more reason to park their cash in tax- free muni bonds.

Muni Bonds Rally After Election Rout…Friday’s muni bond rally was the strongest in three months. “A bullish reversal is underway for the municipal market. Current levels for all investment-grade munis present good opportunities for new long positions,” Bank of America strategists noted. Similarly, J.P. Morgan emphasized, “Given a data-driven Fed that is likely to maintain its current approach, we continue to adopt a buy-the- dip mindset, especially with long-dated municipal market rates near their year-to-date highs.” Additionally, current muni bond yields are lower than they were before the election. Recent indicators of demand in the muni bond market also showed cash inflows last week.

JFK Bonds Oversubscribed…$11 billion worth of orders were received for $2 billion JFK bonds sold recently. Strong demand led the airport to increase its tax-free bond offerings from an initial $1.5 billion to $1.95 billion. Insured bonds and uninsured bonds rated Moody’s ‘Baa3’ S&P ‘BBB-’ were recently sold a top yield of 4.8%. The transaction is among the top three largest municipal bond financings for a U.S. airport since 2021. Last week no new muni bonds were sold in the primary market. Many issuers hurried to bring deals to market ahead of the election to avoid volatility.

Fed’s Second Rate Cut…The Fed cut its benchmark policy rate by 25 basis points last week. This was a unanimous decision and follows a 50 basis point rate cut in September. Fed Chair Powell said that “in the near term the election will have no effects on our policy decisions” adding, “Here, we don’t know what the timing and substance of any policy changes will be. We, therefore, don’t know what the effects on the economy would be, specifically whether and to what extent those policies would matter for the achievement of our goal variables, maximum employment, and price stability.” Powell’s remarks led to rally in bond markets.

Riskiest Muni Bonds Bonds Lure Yield Seekers…Brightline Trains’ unrated bonds have returned some 13% since issuance in April. Some institutional investors have loaded up on Brightline’s high yield tax-free bonds. Brightline’s unrated bonds carry a 12% tax-free coupon, equivalent to a taxable yield of around 20%. Such coupons are rarely seen in the muni bond market. Only $225 million bonds in the $4 trillion muni market have coupons higher than 12%. These municipal bonds come with higher risk and reward, which investors should assess with the guidance of a Municipal Bond Specialist. This year, about $20 billion high yield muni bonds have been issued, representing just 5% of overall muni bond supply. An expert noted, “Forty- four cents of every dollar has gone into a high-yield muni mandate this year.”

Volatile Bellwether Yields …Yield on the 10-year U.S. Treasury declined to 4.29%, almost exactly as it was on November 5, the day before the election results. However, the 10-year Treasury yield jumped to 4.48 per cent, a four-month high, as the election results came in. The initial market reaction to Trump’s victory was a ‘knee-jerk’ response. However, Fed Chair Powell noted, “We don’t guess, we don’t speculate, and we don’t assume,” There is still considerable uncertainty over the extent to which the new administration’s policies implemented or their actual effect on inflation.

Pension Cuts Reconsidered…Several U.S. states are considering boosting pension benefits. High inflation and labor market pressures following the pandemic have led to a reassessment of previous cuts. New York, Rhode Island and Illinois are among U.S. states that have recently expanded pension benefits. After the Great Financial Crisis, public pension reform included higher employee contributions and suspension of cost-of-living adjustments. Since then, healthy long-term investment returns and, in some states, substantial supplemental pension contributions, have improved the funding levels of pensions.

Voters Decide…Voters are set to approve about $52 billions of muni bonds on election ballot. Two of the largest bond measures aggregating to $20 billion are for California’s climate programs and schools. Not all bond measures won voter support. Houston voters blocked a $4 billion school bond initiative. Illinois voters approved a nonbinding proposal to add an extra 3% levy on annual incomes of more than $1 million to help ease property taxes. This advisory question on the ballot won 60% voter support. “The vote is a gigantic step in the right direction,” a former Illinois governor noted. Voters have paved the way for higher taxes on the state’s highest earners. Meanwhile, Florida voters blocked a proposal to legalize marijuana.

Compare 30-Year taxable U.S. Treasury yield 4.48% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.90% “AA” 4.06%; “A” 4.25%. For investors in the 35% tax bracket, a 3.8% tax-exempt yield is equivalent to a 5.85% taxable yield. Top-rated long-term tax- free bonds yield 87% of comparable taxable U.S. Treasuries.