Municipal Bond News 12/9/24

Muni Bonds Rally…Vibrant Primary Market…Muni Bond Deal of the Year…COFINA Bonds Score High… Central Bankers Weigh Rate Options…Board Appeals PREPA Ruling…Chicago Public Schools Face Credit Risks…Tri-State Tops Sports Betting…

Muni Bonds Rally…In November, state and local government bonds posted their best monthly returns since June. The gains come after October’s sell off was the biggest monthly loss in about a year. Attractive tax-free yields have fueled cash inflows to bond funds, driving up demand. Notably, issuance of muni bonds slowed to the lowest this year during November. This month, muni bond investors are poised to receive $36 billion in principal and $15 billion in interest, a tailwind for returns. Historically, December has brought gains for the muni market.

Vibrant Primary Market…An array of new tax-free muni bonds ranging from transportation and airports to affordable housing and senior living were sold last week. A $1.5 billion New Jersey Transportation Trust Fund Authority bonds rated Moody’s ‘A2’ S&P ‘A-’ Fitch ‘A’ offered a top yield of about 4.2%. Additionally, Orlando’s airport and State of Connecticut sold high grade bonds last week. This thriving new issue market presents opportunity for additional tax-free income and for investors looking to reposition their tax-free portfolios.

Muni Bond Deal of The Year…“Orders were flying in,” said Westchester Medical Center’s CFO referring to the medical center’s $286 million tax- free insured bond offering that won The Bond Buyer’s Deal of the Year award in the healthcare category. The deal attracted participation from 81 different institutional investors, and the bonds were oversubscribed, reducing yields by 10 to 22 basis points for all maturities. Strong demand led the borrower to upsize the financing by $30 million. S&P affirmed its ‘BBB-’ rating on the borrower and revised its outlook from negative to stable. Bond insurer Assured Guaranty said, “Assured Guaranty was pleased to partner with Westchester Medical Center Health Network to help bring this unique and important transaction to market.”

COFINA Bonds Score High…Puerto Rico’s COFINA bond issuer has provided a timely financial audit for the fifth straight year. About four months of sales tax collections are sufficient to cover annual sales tax pledged to COFINA bonds, which are unrated. COFINA’s Executive Director stated, “This achievement underscores COFINA’s financial stability and reinforces the success of its restructuring efforts.” In Fiscal 24, the commonwealth collected $1.8 billion of sales-tax revenue from its 5.5% levy, which is $565 million above a baseline used to determine payouts to holders of the Island’s contingent value instruments (CVIs). Puerto Rico general obligation bondholders received CVIs as part of the 2022 central government debt restructuring. Annual bondholder distributions on CVIs have ranged from $362 million for Fiscal 22 to $390 million most recently. Taxable CVIs recently traded as high as 62 cents on the dollar, up from 57 cents in March 2022.

Board Appeals PREPA Ruling…Puerto Rico’s oversight board, government parties and unsecured creditors have asked the U.S Court of Appeals to reconsider its ruling that upheld bondholders’ claim on PREPA’s net revenues. Holders of over 60% of PREPA bonds, including Assured Guaranty and National Public Finance said that the board intends to distort and ignore \the clear holdings of the First Circuit’s decisions. They believe this approach will lead to unnecessary litigation that ultimately harms PREPA and the people of Puerto Rico. Bondholders raised the question, “Given the Board’s refusal to move towards a consensual resolution of PREPA’s seven-year bankruptcy case to facilitate the provision of reliable electricity to the people of Puerto Rico, can the Board really claim to be working in good faith to meet the needs of the people of Puerto Rico?”

Chicago Board of Education Faces Credit Risks…Ongoing political resistance from the teachers’ union and the mayor could pressure the ratings of junk-rated Chicago Public Schools (‘CPS’). Additionally, contentions between school leaders and city administration, particularly during the transition to an elected school board, poses governance challenges. S&P noted last week, “Failure to sustain structural solutions by either increasing ongoing revenues or containing costs to offset the financial impact of a new CTU contract could mark a turning point in the board’s recent positive financial trend and jeopardize its fiscal stability.” S&P believes that although CPS’s current reserves continue to support the current rating, it will closely monitor developments.

Tri-State Tops Sports Betting…The growth of online gaming has outpaced that of traditional casino-based gaming. New York and New Jersey, the nation’s largest mobile-betting markets, have overtaken Nevada’s previous dominance in the gaming industry. This year, New York and New Jersey reported sports betting handles of $15.8 billion and $9.2 billion respectively, two to three times Nevada’s $5.4 billion. Notably, the profitability of Atlantic City’s nine casinos has decreased almost 14% in the third quarter from a year ago. A shift in consumer preference post- COVID-19 has boosted mobile betting.

Central Bankers Weigh December Rate Options…“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell noted that the Fed is “on a path to bring rates back to a more neutral level over time.” Fed officials stopped short of committing to a rate cut later this month. San Francisco Fed president Mary Daly said a December rate cut is not certain, while Fed Governor Christopher Waller said he was leaning towards a rate cut. Chicago Fed President Austan Goolsbee said he expects interest rates will “come down a fair amount from where they are now” over the next year. Traders assign higher odds to a 25-basis point rate cut in November.

Compare 30-Year taxable U.S. Treasury yield 4.37% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.47% “AA” 3.81%; “A” 4.03%. For investors in the 35% tax bracket, a 3.5% tax-exempt yield is equivalent to a 5.4% taxable yield. Top-rated long-term tax- free bonds yield 79% of comparable taxable U.S. Treasuries