Municipal Bond News 3/10/25

Muni Yields Near 2025 High…Investors Lured to Attractive Tax-Free Yields…Rate Cut Odds…Powell Not In Rate Cut Hurry…Illinois Budget…Chicago Public School Seeks Budget Fix…PREPA Litigation…

Muni Yields Near 2025 High…After rallying for several weeks, muni bonds are showing a small loss in early March. Top-rated long-term muni bond benchmarks yield over 4% tax-free currently. The 4% tax-free index yield level has been crossed only thrice this year. Last week, Regents of University of California issued $1.2 billion high grade muni bonds with a top tax-free yield of 4.18%. Bonds offered by lower-rated U.S. states such as Illinois offer as much as 4.8% tax-free yield. The taxable equivalent for many individual muni bonds is close to 7% for top earners in high-tax states. Generally, investors who enter the market when yields are high tend to enjoy significant returns over the next year or two, J.P. Morgan wrote recently. New bonds issued by South Carolina Public Service Authority and New York City Municipal Water Finance Authority were upsized to around $1 billion due to strong investor demand.

Investors Lured to Attractive Tax-Free Yields…Muni bond yields climbed 10 basis points last week, surpassing the 5-basis point yield rise in comparable taxable U.S. Treasury bonds. The bellwether 10-year U.S. Treasury yield rose 8 basis point last week to 4.3%, before falling to 4.25% currently. Lower-than-expected jobs growth and Federal Reserve’s cautious approach on rate cuts contributed to the yield changes. States and local government bond issuance are 13% higher than a year ago. Muni bond trading is 7% higher than a year ago per SIFMA data. Lured by relatively higher tax-free yields, investors boosted cash inflows to muni bonds funds. Amid volatile financial markets, muni bonds could garner renewed investor attention as safe-haven assets.

Rate Cut Odds…Policy rates are likely to remain unchanged at the Fed’s upcoming March 17-18 meeting. Bond markets see a roughly 50% chance that Fed officials will lower rates by a quarter point when they meet in May. Odds of a June rate cut rose to near 50%. In all, bond markets expect about 73 basis points worth of rate cuts in the remainder of 2025. Additionally, many economists have revised their growth estimates for the economy down to as low as 1% at an annual rate for the first quarter of this year, a decrease from 2.3% in the final quarter of last year.

Powell Not In Rate Cut Hurry…“We do not need to be in a hurry, and are well positioned to wait for greater clarity,” Fed Chair Powell noted that despite elevated uncertainty, “the U.S. economy continues to be in a good place. Powell emphasized that Fed officials weren’t increasing risks by being patient. “The costs of being cautious are very, very low,” Powell acknowledged that the path to sustainably returning inflation to the Fed’s 2% target could continue to be bumpy. Typically, tariffs would cause a “one-time” price increase, rather than persistent inflation, and the Fed could ignore such a temporary effect. Looking ahead, Powell highlighted that the net effect of significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation, will matter for the economy and for the path of monetary policy.

Illinois 2026 Budget…Governor Pritzker’s seventh budget marks a $2 billion increase from prior year. The $55.2 billion Fiscal 26 spending plan increases new discretionary spending by less than 1% and avoids tax hikes. Illinois expects to finish Fiscal 25 with 5% revenue growth, and forecasts a 1.9% revenue increase in 2026. State aid for education funding includes the required $350 million increase. Illinois no longer has a backlog of unpaid bills, having paid off over $8 billion of past due payments since 2019. The FY26 budget plan fully funds the required pension contribution of $10.6 billion from the General Funds. The State contributed an additional $700 million to pensions in FY22 and FY23. Illinois pension funded ratio has improved to 46%, up from 40.3% in 2019. The lowest-rated U.S. state has paid down more than $12 billion in debt, secured nine credit upgrades, and built up a $2.2 billion rainy-day fund over the last six years. However, slowing economic growth is noted as a concern.

Chicago Public School Seeks Budget Fix…Chicago Board of Education is considering a budget amendment that would allow Chicago Public Schools (‘CPS’) to take on a loan to balance the budget, if needed or face budget cuts. This would allow the nation’s third largest school district to bear the costs of a new teacher contract, which is still being negotiated. CPS suggested that a separate city entity issue new debt. However, the city will not borrow on behalf of CPS, city officials stated. Moreover, CPS is poised to receive additional funds from the City’s tax-increment financing districts, which have posted a sizeable surplus. As pandemic -era federal aid runs out and a standoff with the teachers’ union threatens to hike labor costs, the district is facing annual shortfalls of atleast half-a-billion dollars.

More PREPA Litigation…The oversight board and bondholders are at odds over how much creditors should be repaid. Swain capped their unsecured lien at $2.4 billion, but the U.S. Court of Appeals for the First Circuit in June ruled their allowed claim to be $8.5 billion. Now, Judge Swain is seeking to determine what constitutes PREPA’s net revenue. “There are substantial unresolved issues with respect to the amount and priority of the PREPA bondholders’ claim that, unless settled, will impede the efficient consideration of confirmation of any new or amended plan of adjustment for PREPA,” Judge Swain said last week. Swain is again requesting a litigation schedule after pausing the legal dispute last year , “The court believes that these issues should be determined prior to a confirmation hearing in a manner that promotes judicial efficiency and the economical use of parties’ resources.” Bondholders have requested the dismissal of the Title III bankruptcy, while the oversight board intends to propose an amended debt settlement plan.

Compare 30-Year taxable U.S. Treasury yield 4.58% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.02%; “AA” 4.38%; “A” 4.53%. 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 88% of comparable taxable U.S. Treasuries.