Municipal Bond News 3/11/24

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Robust Muni New Issue Calendar Lures Investors…Allure of High Yield Muni Bonds…MTA Earns Rating Upgrade… PREPA Debt Plan Court Hearing…Chicago Mansion Tax… Social Security Shortfall Burdens Wealthy…Fed On Track For 2024 Rate Cut…

Robust Muni New Issue Calendar Lures Investors…Lower-than-expected yields and upsized muni bond offerings were centerstage in the primary bond market last week. Amid strong investor demand, New York City Water sold $1.4 billion high grade bonds, almost $600 million more than planned at a top tax-free yield of 3.69%. Regents of the University of California sold over $1 billion high grade general revenue bonds with a top yield of 3.38% on 5% coupon bonds. ‘ AAA’-rated taxable bonds issued by Harvard University priced at 47 basis points above U.S. Treasuries, one of the narrowest yield gap for such bonds since 2009. Next month, Harvard is expected to issue tax-exempt bonds. New bonds experienced a rally in secondary trading markets, indicating strong demand.

Allure of High Yield Muni Bonds…This is a great time to buy high yield muni bonds, a Bank of America strategist told Barron’s, “High yield munis offer 8% to 9% yields on a tax-adjusted basis, near the highest levels since 2017, but with less default risk than high yield corporate bonds.” Those yields are what someone in the 37% tax bracket would need to earn on fully taxable bonds to match an actual tax-free yield of 4%. With tax day a month away, it is worth considering potential tax drags on portfolios. High yield muni bonds are a diverse market. Expert credit analysis helps investors select high yield muni bonds for diversified portfolios. Those looking for tax-free returns and some of the fattest yields in the bond markets should consider the high yield muni bond sector.

MTA Earns Rating Upgrade…Fitch has upgraded MTA’s Transportation Revenue Bonds to ‘AA’ from ‘A’. “Fitch’s upgraded rating and stable outlook is a continued sign of confidence in the MTA’s improved financial stability and proven State support to maintain that strong position,” MTA CFO said. “The upgrade is driven by Fitch’s newly revised criteria, which recognizes that support from New York State support would be extremely likely in case of need, citing consistent and meaningful financial support to the Authority during periods of stress, allowing the MTA to maintain a sufficiently strong financial profile. “This upgrade from Fitch reflects the continued growth of confidence in the MTA’s sustainable financial strength, bringing tangible benefits when we look to finance critical transit projects,” MTA CEO noted. Recognizing MTA’s economic importance and state support, the latest upgrade follows several favorable rating actions from all three ratings agencies last year.

PREPA Debt Plan Court Hearing…Judge Swain is hearing testimonies on the deeply contested electric utility debt plan. 56% of PREPA bondholders such as Assured Guaranty, some hedge funds and the bond Trustee oppose the debt plan. The debt plan has the support of a few bondholders such as National Public Finance Guarantee and BlackRock, fuel lenders and unsecured creditors. PREPA’s main union, retired workers association, and a commercial group oppose the debt plan stating that it is unaffordable. PREPA Bond Trustee said the plan cannot be confirmed stating “There is a fundamental clash between the duties of bondholders to each other in the trust agreement and the three bondholder plan support agreements in the plan,” the bond trustee added that the trust agreement requires any proceedings to be for the benefit of all bondholders. It bars bondholders from harming the agreement’s security for others, and requires bondholders to equally share any available money. The board’s proposal isn’t confirmable as a matter of law, GoldenTree Asset Management attorney said the board sought to “wipe out” $4.6 billion of revenue bond debt on a “non-consensual” basis with $140 million in cash. This would be a result “without precedent.” The plan gives early settlers better treatment and nowhere does the bankruptcy code say this can be done. The board has underestimated PREPA’s debt capacity, opposing parties said. Assured Guaranty termed the plan as ‘nonsense’ and said that the government parties have been working in the last few years to “bludgeon” PREPA bondholders, adding have used its experts as “puppets on a string” to achieve the goal. Meanwhile, U.S. Court of Appeals for the First Circuit is considering opposing parties’ appeal of Judge Swain’s March 2023 ruling that undermined bondholders’ lien on PREPA revenues.

Chicago Mansion Tax…Voters will decide on progressive real estate transfer taxes sought by Mayor Brandon Johnson. The change could bring in $100 million annually to help Chicago support its population. The proposal would hike one-time real estate transfer taxes on residential and commercial real estate transactions above $1 million and decrease such taxes on sales below $1 million. Chicago’s office real estate prices have tanked by more than 50% in recent years. Vacancy rates in its central business district climbed to a record. A $1 billion repurposing of empty downtown office buildings is planned by city officials. Meanwhile, Chicago bustled with an auto show in February, and will host the Democratic National Convention in August as well as a manufacturing trade show in September, a boost for the local economy.

Social Security Shortfall Burdens Wealthy…Social security funding faces a 25% shortfall by 2034. Benefit cuts face political challenges. “Republicans recently joined Democrats in promising not to cut Social Security, which leaves raising revenue as the only option to protect the program,” two law makers propose to solve the problem solely by raising taxes on those earning more than $400,000. The proposal seeks a 2.4% Social Security payroll tax on both wages and self-employment income more than $400,000. Under current law, such taxes only apply to the first $168,600 in earnings for 2024. Such a hike could raise the top combined marginal federal income tax rate to about 53.4%, placing the U.S. at number 11 in the OECD. A Tax Foundation expert said, “Relying solely on raising taxes on the top 1% will not fully solve the entitlement crisis and will hurt economic growth.”

Fed On Track For 2024 Rate Cut…“We’re not looking for better inflation readings than we’ve had. We’re just looking for more of them.” Fed Chair Powell told lawmakers last week that the recent strength of the economy and labor market “means that we can approach rate cuts carefully and thoughtfully.” The Fed could cut interest rates two times, or potentially just once in 2024, non-voting Minneapolis Fed President Neel Kashkari said. Atlanta Fed President Raphael Bostic said last week that an initial rate cut during the third quarter should probably be followed by a pause to assess its impact, per Atlanta Fed President Raphael Bostic. Powell said the Fed is “not far from” being confident that inflation is moving sustainably lower.

Compare 30-Year taxable U.S. Treasury yield 4.24% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.65%; “AA” 3.81%; “A” 4.07%. For investors in the 35% tax bracket, a 3.7% tax-exempt yield is equivalent to a 5.7% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.