Municipal Bond News 12/4/23

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$500 Million School Deal Brings Securitization to Muni Markets……Biggest Muni Bond Rally in Four Decades… High Yield Muni Bonds Outperform…Fed Officials Weigh Rate Pause…New York Congestion Pricing Advances…Illinois Bonds Oversubscribed…Rapid Drop in Bellwether Yields…

$500 Million School Deal Brings Securitization to Muni Markets… Jeffries Financial Group managed the deal that introduced the Muni Bond Market to a technique used by Wall Street investment bankers that pools a group of lower rated securities into Certificates/Bonds in order to insulate investors from some of the risk associated with the individual bonds. In the industry these types of securitizations are commonly referred to as CDO’s or Collateralized Debt Obligations. The Class A Senior Certificates/Bonds were given a very high Aa3 rating by Moody’s. The securities have a 5.75% rate of interest, mature in 2062 and are callable 2034@100. The New Issue settles 12/15/2023. Your GMS Account Executive can supply a prospectus, complete details, and an Offering on this very interesting Tax-Free investment rated “Aa3” by Moody’s.

Biggest Muni Bond Rally in Four Decades…Returns of over 10% were delivered by a long-term state and local government bond index last month. The best monthly returns in nearly forty years, municipal bonds gained 6.35% in November. A boon to bonds, softer-than-expected inflation and cooling job gains have boosted odds that the Federal Reserve may be done hiking rates. The aggressive rally, which has delivered a 4.15% muni bond index returns so far this year, comes after losses in October, September and August. On the heels of favorable returns and attractive tax-free yields, demand for municipal bonds is picking up. Boosting demand, cash inflows to bond funds could be ‘consistently positive’ in 2024, the largest muni bond underwriter explained. Next year, a broad muni bond index could deliver 7.5% returns per Bank of America forecasts, while Barclays sees returns of 3%-3.5% for high grade muni bonds, and 4.5%-5% for high yield muni bonds. “Next year’s theme may be a reminder that your cash rates only guaranteed overnight,” a bond expert highlighted “And if and when the Fed starts cutting rates you may wish you locked some of those rate’s in.” November’s muni bond gains show missed opportunities from sticking to cash. The $4 trillion municipal bond market is poised for gains in 2023, a turnaround from losses in the prior two years.

High Yield Muni Bonds Outperform…Easing inflation and a soft landing for the U.S. economy has brought cheer to lower-rated municipal bonds. High yield municipal bonds delivered 7.75% returns last month, outperforming overall muni markets’ returns. Institutional investors have been buying high yield muni bonds to meet cash inflows in the past two weeks. High yield muni bonds in the transportation sector have returned 14% this year, followed by Puerto Rico bonds’ 12% return so far this year. Inflows to high yield bond funds have been positive for the last two weeks, reflecting demand for lower-rated tax-free bonds.

Fed Officials Weigh Rate Pause…The Fed might be done raising interest rates, New York Fed President John Williams said last week that interest-rate policy was tighter than at any time in the past 25 years. Officials are “moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,” Fed Chair Powell added “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.” The Fed has held rates steady since July. Fed Governor Christopher Waller dismissed some concerns that a recent market rally could ease financial conditions in a way that advances the case for more rate hikes, adding that the Fed would leave rates unchanged at least until its subsequent meeting in late January, extending the current pause to six months. Bond markets assign high odds of about 100 basis points of rate cuts next year, starting as early as March.

New York Congestion Pricing Advances…A congestion pricing plan, slated to generate $15 billion for MTA, will be reviewed by the Triborough Bridge and Tunnel Authority this month. Public hearings will be held in February, followed by voting by the MTA board. Although New York won final federal approval for its congestion pricing plan, it faces opposition from the Garden State. Last week, the MTA released its 2024 preliminary operating budget, the second in five years with a projected balanced budget. The MTA said it is ahead of schedule in identifying the $500 million annual savings that is set to start in 2025. However, a non profit think tank believes that cost savings and certain revenue may fall short leading to potential budget gaps that could widen to nearly $900 million by 2026. MTA CFO said “We’re continuing to show balanced budgets for five years thanks to Gov. Kathy Hochul and the state legislature providing stable long-term funding sources.”

Illinois Bonds Oversubscribed… “Illinois is very pleased with very aggressive bids received today from as many as 10 bidders,” a state official added “This results in tighter credit spreads and a lower interest cost to Illinois residents in a relatively volatile market.” The lowest-rated U.S. state offered a top yield of 4.7% on 5% coupon long term bonds. Illinois’s penalty above benchmark 10-year tax-exempt bonds fell below 100 basis points, among the lowest spreads for the state’s general obligation bonds in at least a year. Illinois, which has demonstrated its own turnaround with higher pension contributions, a bigger rainy-day fund, consecutive budgets passed on time and a pay down of its bill backlog, received an upgrade from Fitch in November, and earlier upgrades from Moody’s and S&P. The lowest-rated U.S state, once at the risk of being cut to junk, has climbed to the ‘A’ category.

Rapid Drop in Bellwether Yields… Top-rated long term muni bond index yields have dropped about 90 basis points in November. 10-year U.S. Treasury yield has dropped to 4.27%, the lowest since September. It is a rapid plunge from a peak of 5% in October. “Looking at yields in the market right now, they are tremendously attractive,” an institutional investor noted. Tax-free yields are still close to multi-year highs, with long term muni bonds offering about 3.75% tax-free, relative to 1.5% at the end of 2021. For top earners in high tax states, long-term top-rated muni bonds offer taxable equivalent yield of 5.7%, about 120 basis points higher than comparable U.S. Treasury yield.

Compare 30-Year taxable U.S. Treasury yield 4.39% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.77%; “AA”4.08%; %; “A”4.42%. For investors in the 35% tax bracket, a 4.2% tax-exempt yield is equivalent to a 6.46% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.