Municipal Bond News 3/31/25

March Rout For Muni Bonds…Fed Officials Weigh Rate Cuts…Chicago Public Schools Near Teachers’ Contract… Chicago, CPS Spar On Pensions…MTA Seeks Federal Funding…Infrastructure Report Card…Elite Prep Schools Turn To Muni Market…High Tax Burden…

March Rout For Muni Bonds…An opportunity for higher yields, diversification and tax-loss harvesting has emerged amid a muni market sell- off. Current muni yields are the highest this year. High grade muni bonds are currently underperforming lower-rated peers, allowing investors to trade up for higher quality bonds. Prices of muni bonds are relatively attractive. Top earners stand to earn around 6.6% taxable equivalent yields from top- rated long-term state and local government bonds. That’s 200 basis points above the yield on comparable U.S. Treasury bonds. In March, long term muni bond yields have surged 40 basis points higher, while U.S. Treasury bond yields climbed about 25 basis points. April 15 Tax Day-related selling, and higher supply of muni bonds has contributed to the rise in muni yields. Long term investors are seeking tax-free investment opportunities during this market downturn. Notably, muni bond funds reported cash inflows last week. Last week, Moody’s ‘AA’-rated Los Angeles airport sold $1.3 billion muni bonds at a top yield of $4.8% tax-free.

Fed Officials Weigh Rate Cuts…Some Fed officials see just one interest rate cut in 2025, rather than two. “I moved to one mainly because I think we’re going to see inflation be very bumpy and not move dramatically and in a clear way to the 2% target,” Atlanta Fed President Raphael Bostic explained last week. Richmond Fed President Tom Barkin said “like businesses and consumers, we are waiting for the fog to clear.” Boston Fed president Susan Collins noted it is too early to tell if the data are turning weaker, echoing that the economic outlook is now much cloudier. However, San Francisco Fed president Mary Daly still sees two interest rate cuts this year. Daly said, “We have no reason to rush to judgment because policy is in a good place, the economy is in a good place.”

Chicago Public Schools Near Teachers’ Contract…The nation’s third largest school district and its teachers’ union (‘CTU’) have reached a potential agreement. The union’s ‘Big Bargaining Team’ is set to consider the latest changes. That team will decide whether to approve the tentative agreement before recommending the package to the union’s 730-member House of Delegates. A final ratification vote by the Chicago Teacher’s Unions’ 30,000 members would seal the deal. If approved, this would be the first time the CTU has landed a contract without a strike vote in the 15 years under the union’s current leadership.

Chicago, CPS Spar On Pensions…The question of who will cover the disputed $175 million pension payment for non-teaching staff at Chicago Public Schools (CPS) has become a contentious issue between the City of Chicago and Chicago Public Schools (‘CPS’). City administration had warned the school of a March 30 deadline to reimburse the city for this pension funding. However, CPS said it doesn’t have the money to cover the pension payment in addition to the costs of a new teacher’s contract. Some Chicago Board of Education members oppose new borrowing to make the pension payment. Regardless, “we have sufficient liquidity to meet our obligations,” Mayor Johnson’s office noted, “The City’s strong liquidity position will allow the City to manage the financial impacts while we work on a long-term solution.

Infrastructure Report Card…America’s infrastructure has earned a ‘C’ grade on its report card for last year, the best grade received since the American Society of Civil Engineers’ first report card in 1998. The nation’s ports received the highest grade, a B, indicating generally good conditions. Rail received a B–, a decline from its B in 2021. Bridges, drinking water systems, hazardous waste treatment and solid waste received grades of C+, C or C–, suggesting mediocre conditions needing attention. Dams, levees, roads, schools and aviation infrastructure, energy, storm water, transit and wastewater received grades of D+ or D, indicating poor conditions. Although America’s infrastructure has improved in recent years, a $3.7 trillion infrastructure funding shortfall is forecast over the next decade.

MTA Seeks Federal Funding…New York State officials are calling on the federal government to deliver more aid to New York City’s public transit system. “The MTA carries 43% of the nation’s mass transit riders, but its share of the federal-funding formula is 17%, representing a “fundamental misalignment,” Governor Hochul urged. Calls for higher federal funding came after a key federal approval for congestion pricing was reversed in February, just a month after congestion tolls began. In response, the MTA filed a lawsuit, claiming that the attempts to halt the initiative were illegal. Since the introduction of the new congestion tolls two months ago, the MTA has raised over $100 million.

Elite Prep Schools Tap Muni Market…Private K-12 schools are increasingly turning to the muni bond market for new borrowings. Traditionally, elite schools relied on bank loans for funding campus upgrades. However, bank loans have become costlier and less predictable. In 2023, a regional banking crisis sparked by the Fed’s aggressive rate hikes, led to the shift. Last year, at least 17 independent schools sold $803 million of tax-free bonds at favorable borrowing costs. This week, Campbell High School, a Los Angeles private school sold ‘A’-rated bonds that offer a tax-free yield of 4.34%.

High Tax Burden…29 U.S. states and the District of Columbia levy progressive income taxes. California’s top income tax rate is 13.3%, while New York and New Jerseys are 10.9% and 10.75%. Top income tax rates kick in at or above $1 million incomes. The average U.S. household pays nearly $14,000 in federal income taxes. Additionally, state and property taxes vary across U.S. states. Texas residents also don’t pay income tax but spend 1.58% of their income on real estate taxes, one of the highest rates in the country. California residents owe almost 6% of their income in sales and excise taxes, and just 0.71% in real estate tax.

Compare 30-Year taxable U.S. Treasury yield 4.62% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.33%/4.18%; “AA” 4.58%/4.42%; “A” 4.73%/ 4.60%. For investors in the 35% tax bracket, a 4.3% tax-exempt yield is equivalent to a 6.6% taxable yield. Top-rated long-term tax-free bonds yield 90% of comparable taxable U.S. Treasuries.