Municipal Bond News 2/18/25

Attractive Muni Bond Prices Lure Investors…Muni Bonds Underperform Treasury Rally…Central Bankers Favor Rate Pause…Muni Bond Upgrades Surpass…PREPA Debt Resolution…Seniors Housing Prospects Boosted…2025 New Chicago Bonds…Charter Schools, A Muni Bond Niche…

Attractive Muni Bond Prices Lure Investors…Longer-dated muni bond prices are currently the most attractive since November 2024. Top-rated long -term muni bonds currently yield about 85% of the level of comparable taxable Treasury yields. The Muni-Treasury yield ratio, a gauge of relative value, is the highest since November. Top-rated long-term muni bonds offer about 4% tax-free. “There’s a lot of value in the market with yields being this high” on munis, a portfolio manager told Bloomberg, adding, “We do see some opportunities.” Investors have poured cash to buy muni bonds for four consecutive weeks. While state and local government bonds are underperforming U.S. Treasury bonds, this presents an opportunity to lock in relatively higher tax-free yields.

Muni Bonds Underperform Treasury Rally…Long term muni bond yields are about the same as a week ago. However, U.S. Treasury yields fell 9 basis points last week. U.S. Treasury yields have fallen for five straight weeks, the longest streak of yield decline since 2021. The bellwether 10-year U.S. Treasury yield declined to 4.48% on Friday after surging higher mid-week. The 10-year U.S. Treasury yield peaked near 4.8% in mid-January. January retail sales fell the most in two years, widely falling short of consensus forecasts. Bond markets currently assign higher odds of a 37-basis point rate cut in 2025, with the first quarter-point rate cut anticipated in September.

Central Bankers Favor Rate Pause…“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Fed Chair Powell testified to the Senate Banking committee last week. Federal Reserve Governor Christopher Waller added to expectations that rates will likely stay on hold for now, as did Philadelphia Fed President Patrick Harker. Economic growth and production remain resilient, and the labor market is in balance, Harker explained, adding, “These are reasons enough for holding the policy rate steady.” Fed officials expect inflation will continue a downward path and the policy rate will be able to decline over the long run.

Muni Bond Upgrades Surpass…In 2024, Moody’s muni bond upgrades exceeded downgrades by a margin of 597 to 242. This is the fourth year in a row that upgrades outpace downgrades. A steady economy and strong tax base growth led to broadly stronger finances for muni bond issuers. Local governments accounted for the most credit upgrades. Although the not-for- profit health and higher education sector saw more downgrades than upgrades last year, Moody’s has a stable outlook for both these sectors as revenue growth continues to rebound and expense growth slows.

PREPA Debt Resolution…Puerto Rico’s oversight board chair expects the commonwealth to pay for the electric utility’s debt settlement, instead of an electric rate hike. The commonwealth coffers are overflowing with outperforming tax revenues, and central government bank account boast $24 billion in cash. Puerto Rico’s oversight board said it is unwilling to improve its recovery offer to electric utility bondholders. The board said it will continue to offer $2.6 billion to creditors, about the same deal that was offered to bondholders last year. Governor Jennifer González Colón has talked about using government reserves to pay PREPA creditors and bring the eight-year long bankruptcy to a close. Bondholders complained to the Title III court last week, “PREPA has incurred over $400 million in professional fees during the nearly eight years this case has been pending. And yet, almost nothing constructive or of value to PREPA and its stakeholders has been achieved.”

Senior Housing Sector Prospects Boosted…The fortunes of the seniors housing sector could improve, largely due to aging baby boomers. By 2030, Americans older than age 80 will grow 28% to 18.8 million. “We’ve never had an industry pyramid that looks like this,” said a seniors housing industry expert. The sector will have to develop twice as many units as it has ever developed in any single year every year to keep up. However, high interest rates and inflated building costs have led large senior housing operators to keep away from building new facilities. Instead, the largest players are buying up smaller facilities as valuations are attractive. Valuations of seniors housing facilities are about 20% to 30% below pre-pandemic levels. The senior’s housing sector is expected to move from having an oversupply to facing a shortage in just a few years.

2025 New Chicago Bonds…A slew of new muni bonds from Chicago issuers are slated to be issued in 2025. This includes 250 million for housing and economic development, $275 million for wastewater projects and $445 million for O’Hare International Airport. City officials are planning to seek council authorization for $1 billion for O’Hare International Airport in new money as well as refinancing worth $650 million for that airport as well as $260.8 million refinancing for Midway International Airport. The city’s finance committee approved a proposal for $830 million general obligation bonds. Chicago CFO assured that the new general obligation bonds would solely fund infrastructure.

Charter Schools, A Muni Bond Niche…Charter school enrollment has grown by nearly 400,000 students over the past five years, although headcount in traditional school districts fell by 1.75 million. 46 U.S. states have laws permitting charter schools. There are roughly 8,000 charter schools nationwide enrolling over 3.7 million students. Charter school laws vary from state to state. States that put a statutory cap to limit the number of charter schools tend to have higher quality charter schools. Charter schools “are still an incredibly good risk” due to the public dollars supporting them, said the CEO of The Center of Education Reform. Scale, balance sheet strength, and state funding are credit differentiators. A Municipal Bond Specialist can help investors assess the credit quality of charter school muni bonds.

Compare 30-Year taxable U.S. Treasury yield 4.73% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.02%; “AA” 4.28%; “A” 4.41%. 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 85% of comparable taxable U.S. Treasuries.