Municipal Bond News 3/4/24

Muni Bond Market Lures Issuers and Investors…Muni Bonds Poised For Capital Appreciation…New Jersey’s Surplus Budget…Texas MUDs Grow…MTA Congestion Plan “Highly Probable” …U.S. State Revenues Weaken… IRS Seeks Wealthy Tax Returns…

Muni Bond Market Lures Issuers and Investors…Supply of new muni bonds has surged, and so has demand for state and local government bonds. Issuers are tapping into renewed investor demand for muni bonds. A relatively stable yield environment has led issuers to catch up on bond sales, that were deferred last year. Tax-free municipal bond issuance has grown 28% from a year ago. A slew of large muni bond issuers sold muni bonds last month. This includes New York City general obligation bonds and Princeton University. New York City general obligation bonds were about two times oversubscribed. Demand for muni bonds has grown this year. A key gauge of investor demand, cash inflows to muni funds are largely more positive this year, a change from redemptions in 2023 and 2022. In March, $32 billion muni bonds are expected to be issued. This includes New York’s biggest bond issuers such as MTA, Dormitory Authority of State of New York and New York Water set to issue over $9 billion muni bonds. In an election year, bond issuance tends to be front-loaded towards earlier months of the calendar. A healthy slate of new issues calendar could bring attractive valuations for tax-free bonds. Long term investors are likely to view any sell -off as an opportunity to buy muni bonds.

Muni Bonds Poised For Capital Appreciation…Although current tax-free yields have dropped from peaks hit last year, they’re still sharply higher compared with the pandemic. For much of the last decade, yields were at 60- year lows. The bellwether 10-year U.S. Treasury could yield 3.5% by year- end, down from 4.2% currently, UBS forecasts. Such a drop in bellwether yields could boost muni bond returns. The risk-reward proposition for muni bonds is attractive. In addition to appealing yields, there is potential for capital appreciation as inflation recedes and the Fed starts to cut rates. Muni bonds have historically delivered higher returns than cash over the long term.

New Jersey’s Surplus Budget…New Jersey anticipates a $6.1 billion surplus in Fiscal 25. For the fourth straight year, New Jersey will make a full pension contribution of $7.1 billion to the state’s pension system. New taxes on corporations, property tax relief and boosted school funding are part of New Jersey’s $55.9 billion Fiscal 25 spending plan. Tax hikes on corporations will generate close to $1 billion which will go to NJ Transit which faces a $100 million deficit. The state’s contribution to the transit agency’s operating budget would be the second largest in history. If approved, New Jersey corporations will face the highest tax rates in the nation. New Jersey will continue to avoid new borrowing. The state has lowered its debt obligations in recent years. New Jersey credit ratings have trended higher. The Garden state has earned seven ratings upgrades over the past two years. Governor Murphy’s seventh budget proposal plan, 5% higher than prior year, suggests continued fiscal progress.

Texas Municipal Utility Districts Grow…Current housing market conditions favor Texas municipal utility districts (‘MUDs’). New home sales make up a larger portion of the housing market transactions when mortgage rates are high and supply of existing homes is low. This brings growth for MUDs. MUD development and bond issuance is mainly driven by residential development and new home building. Over $83 billion of new bonds have been approved by voters over the past two years for MUDs to finance new infrastructure and refinance prior debt. MUD credit quality has improved considerably in recent years. The vast majority of Texas MUDs have seen credit upgrades. MUDs are expected to be significant source of new Texas bonds issued in the primary market. The Texas MUD sector is equipped with a strong tax base and ample debt affordability.

MTA Congestion Plan “Highly Probable”…It is “highly probable” that MTA will prevail in lawsuits on both sides of the Hudson on its controversial congestion pricing plan, MTA CEO said last week. Last year, the federal government approved the MTA’s congestion pricing plan. However, New Jersey sued to block the plan, claiming that federal approval was ill-advised. Amid uncertainty on congestion pricing plans, the MTA has lowered its 2024 funding commitment for capital projects to $2.9 billion, a steep drop from the $12 billions of work anticipated before the pending litigation. MTA faces $43 billion in repair costs over the next several years, NYS comptroller estimates. Public hearings on the congestion pricing plan, slated to bring $1 billion new revenue annually, are ongoing. Legal challenges to New York City’s congestion pricing plan threaten to delay much-needed repairs to the city’s century-old transit system.

State Revenues Weaken…Over the last six to eight months, state revenues have weakened considerably. 21 U.S. states have reported year-over-year tax revenue declines in recent months. State sales tax revenue is likely to contract further in 2024. Cooling inflation and a pullback in consumer spending has dented state sales tax collections, which are no longer recording the massive growth seen during the post-pandemic recovery. 2023 was the third straight year of state revenue exceeding expenses. That started to change in Fiscal 24. The extent of fiscal pressure depends on how revenues perform relative to budget expectations. Rating agencies anticipate that prior-year surpluses and prudent action will allow most U.S. states to manage lower revenue growth or revenue declines without affecting overall fiscal resilience or credit ratings.

IRS Seeks Wealthy Tax Returns…The IRS is sending out more than 125,000 notices to high earners who are behind on tax return filings. The IRS has only pursued non-filers sporadically since 2016 due to budget cuts and the pandemic. That has changed with tens of billions of dollars of new funding granted in 2022. The latest tax enforcement push targets those making more than $400,00 annually. The push could rake in hundreds of millions of dollars of unpaid taxes and showcase to the public that the IRS is utilizing the funding boost.

Compare 30-Year taxable U.S. Treasury yield 4.35% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.70%; “AA” 3.89%; “A” 4.17%. 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 85% of comparable taxable U.S. Treasuries.