Municipal Bond News 2/3/25

Muni Haven Lures Investors…Fed Wants ‘Wait-and-See’ Approach…PREPA Mediation Extended…States And Cities Brace For Federal Funding Cuts…FEMA Reform In The Cards…Housing Finance Agencies’ Stable Finances…Governor Defends Congestion Pricing…

Muni Haven Lures Investors…Investors sought the safety of tax-free fixed income amid uncertainty and market turbulence. As cash flows into the muni market to buy state and local government bonds, muni bond yields have fallen five basis points over the last two weeks. In mid- January, muni yields reached a 12-month peak. In January, significant issuances included billion-dollar municipal bonds from Columbus Airport, the Regents of the University of California, and MTA Bridges and Tunnels. The Columbus Airport bonds, rated ‘A2’ by Moody’s and ‘A’ by S&P, are currently in the market, offering a top yield of 4.5%. The Regents of the University of California issued high-grade bonds with a top yield of 3.43%. Overall, municipalities issued around $36 billion of debt in January, a 20% increase from the same period last year.

Fed Wants ‘Wait-and-See’ Approach… “We don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy. We’re only just beginning to see or actually are not really beginning to see much, and I think we need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be,” Fed Chair Powell said last week. The Fed has kept rates unchanged since December 2024, indicating a cautious approach as central bankers gauge price pressures. Inflation has eased significantly over the past two years but remains somewhat elevated relative to the Fed’s 2% target. Powell noted “We do not need to be in a hurry to adjust our policy stance.”

PREPA Mediation Extended…Mediating parties have hired PJT Partners to advise on the PREPA debt settlement. “The mediation team believes that PJT will play a key role engaging with all stakeholders to fashion and facilitate a settlement,” the mediator’s report added “Indeed, the mediation team and PJT have already met for several hours with principals and professionals for the non-consenting bondholders and such discussions are ongoing.” Judge Swain has extended mediation on PREPA debt settlement until April 30. The parties informed the Tile III court that mediators are ‘hopeful’ for ‘progress’ in negotiating a deal.

States And Cities Brace For Federal Funding Cuts…President Trump directed all federal agencies to temporarily halt federal financial assistance to states and local governments. In response, Democratic attorneys general from 22 U.S. states and the District of Columbia sued the administration in U.S. District Court for the District of Rhode Island. A federal judge subsequently ordered the Trump administration to keep taxpayer dollars flowing to 22 Democratic-leaning states for all government programs that have been approved by Congress, even if some of those programs might conflict with President Trump’s ideological stances. Over $1 trillion of federal grants to states and locals is at stake. Federal grants make up roughly 17% of state and local government revenue. White House officials clarified that only federal grants and loans considered to be in opposition to President Donald Trump’s executive orders would be affected by the temporary federal funding pause. The executive orders outlined the administration’s positions on various issues from clean energy, diversity, equity and inclusion programs, immigration and abortion. The administration also clarified that several programs such as Medicaid, and Section 8 rental assistance would continue as before.

FEMA Reform In The Cards…President Trump’s plan favors sending funding directly to states for disaster recovery instead of funneling it through FEMA. “They cost a tremendous amount of money. It’s very bureaucratic, and it’s very slow,” President Trump said. FEMA’s Disaster Relief Fund has provided $272 billion over the past 20 years. Overhauling or eliminating FEMA could result in shifting in more than $100 billions of disaster-recovery costs to U.S. states. State and local governments may be forced to pay a greater share of disaster recovery in coming years.

Housing Finance Agencies’ Stable Finances…Housing Finance Agency (‘HFA’) balance sheets and capital adequacy are likely to continue strengthening. HFA’s offer down payment assistance and low-cost housing loans. By issuing lower cost tax-free bonds to provide taxable home loans, HFA’s earn a net interest margin. In 2024, HFA loan production reached a new high, resulting in nearly 15% surge in bond issuance. Housing finance agencies are likely to continue expanding bond issuance plans. The median rating for HFA bonds is S&P ‘AA’, and S&P currently maintains its stable outlook on the HFA sector.

Governor Defends Congestion Pricing…Governor Kathy Hochul is urging the White House to continue congestion pricing in New York. President Trump has tasked the U.S. Department of Transportation to look at legal options to halt the program. The Department of Transportation is reported to be considering revoking a key federal authorization that the Biden administration gave the program last year, effectively killing it. Additionally, a lawsuit by the State of New Jersey is still pending. MTA CEO said “We’ve been sued in every federal court and state court east of the Mississippi, and we’re batting 1.000. We’ve won every time.” Governor Hochul said, “There’s going to be a follow-up conversation [with President Trump] on this next week. I don’t know what the outcome will be, all I know is I’ll always go into the arena and fight.”

Compare 30-Year taxable U.S. Treasury yield 4.73% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.95%; “AA” 4.28%; “A” 4.45%. 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 83% of comparable taxable U.S. Treasuries.