Municipal Bond News 3/3/25

High Yield Muni Bonds Oversubscribed…Bellwether Bonds Rally…Rate Cut Odds Boosted…March1 Principal Redemptions…Muni Bond Insurance Grows…PREPA Bondholders Seek To Lift Litigation Stay…New Jersey Budget Plan Reins Spending… MTA’s New Toll…

High Yield Muni Bonds Oversubscribed…Recently, Brightline-West issued $2.5 billion in tax-free, unrated bonds for the Las Vegas-Los Angeles bullet train project. This bond issue could be among one of the largest high- yield municipal bond transactions of the year. The deal was structured with a single $2 billion CUSIP number, a relatively uncommon approach in the municipal market, which investors believe will enhance liquidity. The offering attracted over $3.4 billion in orders from 75 institutional accounts, showcasing strong demand. The bonds, which carry a yield with a 9.5% coupon rate subject to AMT and mature in 45 years, sold at a premium. “Compared to other opportunities in the high-yield market, these bonds offer greater liquidity, an excellent yield, and strong sponsorship backed by a sound economic premise,” a portfolio manager told Bond Buyer.

Bellwether Bonds Rally…Top-rated long term muni bond yields dropped 15 basis points since mid-February, which is less than the 25-basis point decline seen in comparable U.S. Treasury bonds. The U.S. Treasury market posted its biggest monthly gain since July, with short-term yields falling below 4%. The 10-year U.S. Treasury note yield fell to 4.21% and 30-year U.S. Treasury yield dipped below 4.5% for the first time since mid-December. Tax-free bonds currently offer 87% of taxable U.S. Treasury yield, reflecting attractive relative valuations of state and local government bonds.

Rate Cut Odds Boosted…A raft of weak economic growth indicators during the past week revived the case for the Fed to resume cutting interest rates after its recent pause. January personal consumption expenditures showed deceleration that matched economists’ estimates, offering some relief on the inflation front. Separately, the Atlanta Fed’s running estimate of U.S. GDP growth declined to -1.5% for the first quarter, from 2.3% on Feb. 26. Benign inflation data has boosted wagers on Federal Reserve interest-rate cuts. Bond markets are now pricing in around 32% probability for a May rate cut versus just an 8% chance a week ago.

March1 Principal Redemptions…March 1 principal payments bring $10 billion to muni bondholders. Texas will see the largest principal amount at $1.3 billion, followed by Missouri at $984 million and California at $828 million. Redemptions for the entire month are expected to be $20 billion. Primary market muni bond issuance by New York, New Jersey and California issuers will likely fall short of March principal redemptions. This year, $70 billion muni bonds have been issued so far, 8% higher than last year’s tally for the same period. The surge in issuance has been fueled by mega deals, such as a $1 billion-plus deal from the South Carolina Public Service Authority.

Muni Bond Insurance Grows…Demand for insured muni bonds grew in 2024, leading to robust business growth for Assured Guaranty and Build America Mutual. “Institutional investor demand drove issuers and underwriters to use insurance more frequently on larger transactions,” Build America Mutual noted that 2024 was its strongest year ever. Assured Guaranty echoed “We benefited from greater overall issuance and strong investor demand for our insurance, including from institutional investors on some very large infrastructure transactions.” Generally, Assured Guaranty focuses on offering bond insurance on larger-sized muni bond transactions, relative to Build America Mutual. Notably, Assured-insured Brightline bonds recently won Bond Buyer’s Deal of the Year.

PREPA Bondholders Seek To Lift Litigation Stay…Puerto Rico electric debt bondholders have asked the Title III court to lift a litigation stay, which could allow them to appoint a receiver at PREPA. “The Fifth Amendment and U.S. territory bankruptcy law PROMESA do not permit secured creditors to remain handcuffed, without a hearing, while their collateral disappears,” bondholders told Judge Swain. The bondholders said they could petition a local Puerto Rico court to allow them to appoint a receiver which would be a “better steward of PREPA for the people of Puerto Rico.” The oversight board is unwilling to significantly change its offer to bondholders. Additionally, bondholders want to challenge the board’s estimate of PREPA expenses. The bondholders said the court should dismiss the current bankruptcy altogether because the board has failed to propose and confirm a plan of adjustment.

MTA’s New Toll…A New York City congestion toll has raised $48.6 million in just one month, in line with the $500 million estimated annual congestion toll revenue. Traffic in mid-town Manhattan has decreased about 10% since the new tolls launched in January. However, the U.S. collections. MTA has filed suit against USDOT’s action, which faces a lengthy and uncertain resolution. The MTA intends to continue with congestion pricing pending a court decision. While the legal process for rescinding approval is unclear, USDOT, New York State and MTA could negotiate a compromise that lowers funding for capital plans.

New Jersey Budget Plan Reins Spending…In Fiscal 26, New Jersey aims to boost funding to pensions, schools, and transit, while reducing overall spending. For the fourth straight year, the state’s underfunded pension system will receive a full annual state contribution. A new Corporate Transit Fee, a 2.5% surtax on the Garden State’s largest and wealthiest corporations is expected to generate $815 million in revenue for New Jersey Transit. The $56 billion spending plan allocates a record $12 billion for K-12 schools. New Jersey plans to spend about $70 million less in Fiscal 26 than the current fiscal year. “When the proposed fiscal 2025 pension contribution is included, the combined pension contributions during the Murphy administration will total nearly $40 billion, more than three times the total amount contributed by the previous six governors combined,” the governor’s budget message claims. The funded ratio for all state pension systems will have increased from 49.8% in fiscal 2022 to a projected 52.4% in 2025. Governor Murphy’s seventh and final spending plan includes a $6.1 billion surplus and spending reductions of $1 billion.

Compare 30-Year taxable U.S. Treasury yield 4.52% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.91%; “AA” 4.25%; “A” 4.36%. For investors in the 35% tax bracket, a 3.91% tax-exempt yield is equivalent to a 6.02% taxable yield. Top-rated long -term tax-free bonds yield 87% of comparable taxable U.S. Treasuries.