Municipal Bond News 3/24/25

New York Muni Bond Sales Centerstage…Tax-Free Primary Market Offerings Grow…Fed Dials Down Economic Growth…Wall Street Mulls Bellwether Yields…Title III Court Partially Lifts PREPA Litigation Stay…Record High College Bond Issuance…Los Angeles’ Deficit Woes…Senior Housing Prospects Grow…

New York Muni Bond Sales Centerstage…States and local governments sold over $10 billion new muni bonds last week. Dormitory Authority of State of New York sold $2 billion high-grade tax-exempt bonds at a top yield of 4.4%. New York’s MTA sold $1 billion of new tax-free bonds at a top yield of 4.82%. Additionally, New York State sold general obligation bonds to refund prior debt and pay for voter-approved capital investments. “The state’s GO credit continues to have significant investor interest thanks to the safety and rarity of the credit, translating into favorable pricing and refunding savings.” The new issues drew strong demand.

Tax-Free Primary Market Offerings Grow…U.S. states and local governments have sold almost $100 billion of bonds this year, marking the fastest annual start in at least a decade. The volume of issuance is running about 27% higher than last year’s pace. Last year also saw a record annual borrowing wave, with close to $500 billion of new debt hitting the market. The surge in new bond issuance has affected bond prices. Longer-dated muni bonds are the cheapest relative to comparable U.S. Treasuries, since 2023. Governments in Texas have sold the most muni bonds this year.

Fed Dials Down Economic Growth…The Federal Reserve has slashed its U.S. growth forecast and lifted its inflation outlook. The Fed expects the U.S. economy to grow at a 1.7% annual rate down from 2.1% forecast in December. Fed officials broadly expect one or two more quarter-point rate cuts this year, the same as in December. However, four Fed officials now expect no cuts at all this year. In December, only one Fed official had voted against a 2025 rate cut. The Fed may not have to adjust its interest rate plans as “tariff inflation” could be “transitory”, Powell said. When asked about the unchanged expectation for two quarter-point rate cuts this year, Fed Chair Powell said the combination of weaker growth and higher inflation in the Fed’s new economic projections “cancel each other out.” All Fed Reserve members voted to keep policy rates unchanged at last week’s Fed meeting.

Wall Street Mulls Bellwether Yields…Morgan Stanley expects the bellwether 10-year U.S. Treasury yield to decline to about 4% by year-end from 4.3% currently. Pressure from tariffs could push yields lower. Morgan Stanley expects one interest rate cut in 2025 but said that “as the weakness in hard data begins to manifest, the market will start to expect that there will be a lot more cuts needed in the year ahead” That would lead to more back-loaded cuts in 2026, when “inflation would be coming down partly because growth would be much weaker.” Moreover, Bloomberg economists noted last week that if upcoming employment data falls short of expectations, the yield on 10-year Treasuries could rally toward 4%.

Title III Court Partially Lifts PREPA Litigation Stay…U.S. District Judge Laura Taylor Swain has ordered a partial lifting of the litigation stay and set new deadlines in PREPA’s debt dispute. Judge Swain has asked the oversight board to submit an amended plan of adjustment by March 28. This will be a reference point to help resolve critical issues in the debt dispute. Opposing bondholders will also be permitted to pursue their administrative expense motion, in which they claim that PREPA has used billions of dollars of their collateral to pay for professional fees since the electric utility’s bankruptcy began. The claims are entitled to the highest priority in distribution of the assets of the estate. A joint ‘targeted discovery’ of PREPA’s current fiscal plan, which will delve into the utility’s revenue, expenses and other assumptions, is sought by the Title III court. Judge Swain noted that by partially lifting the stay on litigation, the court is, to some extent, responding to the bondholders’ demands. There must be compromise, Swain added that the PREPA’s best future lies in successful mediation rather than continued litigation.

Record High College Bond Issuance…Colleges are flocking to the muni bond market to sell bonds. Municipal bond sales for higher education, $10 billion so far this year, is up 40% from a year ago. This year’s college bond volume is poised to overtake the prior record set in 2017. College bond sales are outpacing broader muni market bond sales. Colleges have been ramping up bond sales since last year after holding off in 2022 and 2023. Elite colleges such as Northwestern University and Stanford, also recently tapped the corporate bond market for financing needs, alongside the traditional muni market. When Emerson College in Boston sold $88 million of debt in early January, the BBB+ rated deal received more than $900 million in orders from 26 different investors.

Los Angeles’ Deficit Woes…Los Angeles faces a projected deficit of nearly $1 billion in the next fiscal year. Rising costs related to wildfires and a decline in revenues are weighing on the finances of the nation’s second-most populated city. Revenue is expected to drop $315 million below projections for the next fiscal year that begins July 1 per the city comptroller. “We are not looking at dozens or even hundreds of layoffs, but thousands,” Mayor Karen Bass stated. The mayor’s office is finding ways to save between $500 million and $900 million in structural budgetary expenses. Most US cities can’t operate at a deficit. The mayor added, “We must deliver fundamental change in the way the city operates.”

Senior Housing Prospects Grow…Net operating income for the largest senior housing communities continues to outpace most other real estate segments per Bloomberg. Healthcare REITs, a bellwether for the senior housing sector, show favorable operating trends no signs of reversing in 2025 even if the pace of acceleration slows. After steep losses in 2020-21, the sector’s occupancy continues to recover and approach pre-pandemic levels. With rent gains outpacing costs, and robust demand above falling supply, senior-housing sector operating fundamentals are poised to improve.

Compare 30-Year taxable U.S. Treasury yield 4.62% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.18%; “AA” 4.42%; “A” 4.60%. For investors in the 35% tax bracket, a 4.18% tax-exempt yield is equivalent to a 6.46% taxable yield. Top-rated long -term tax-free bonds yield 90% of comparable taxable U.S. Treasuries.