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Investors Weigh Higher Long-Term Tax-Free Bond Yields Amid Volatility...Investors are beginning to find value in higher tax-free bond yields, after February’s market-wide bond losses eroded January price gains. Long-term tax-free bonds issued by states and local governments yield about 96% of taxable U.S. Treasury bonds. Meanwhile, long-term U.S. Treasury bond yields broke through 4% last week, the highest in three months. Last month, markets reckoned that central bank policy could keep the fed-funds rate higher for longer, sparking a bond rout, driving yields higher. Investors sold bond mutual funds and ETFs, although, at a slower pace than last year. Top-rated municipal bond indices posted 2.5% losses in February, in contrast to January’s 2.87% index gain. A steady spate of cash inflows to buy bonds at the start of the year boosted tax-free bond prices. The municipal bond market “is quite vulnerable to a correction” and it would only “need a trigger such as if rates were to continue moving higher, responding to stronger economic data, and it would happen regardless of if there are fund outflows or heavier issuance,” Barclays strategists noted. Bank of America strategists said, “We continue to hold the view that the selloff in munis is near its end, and the market should be more constructive in March.” The largest municipal bond underwriter, Bank of America, expects longer-term muni yields to be more stable.
Airport Municipal Bonds Fly High…A bright spot, airport sector tax-free bonds’ 1.17% index return this year, has outperformed the broader municipal bond market. Shunned when COVID-19 hit, airports have hit a milestone: 2023 passenger traffic, so far, exceeds pre-COVID-19 levels. Last year, air travel was constrained, despite widespread vaccinations as labor shortages forced airlines to cut back on flights. International travel hit a new high in December. China’s re-opening could boost airport revenue, although it could take one or two years before China air traffic to the U.S. fully recovers, Fitch says. At home, airports in tourist destinations have outperformed. Infrastructure upgrades, which came to a halt during the pandemic, are a priority for many airports. The upgrades come at a higher-than-expected price tag due to inflation. However, higher payments from airlines will boost airport revenue. The largest airports forecast airline revenue to grow 78% by 2026 relative to 2019, Moody’s said. Amid a positive revenue outlook, airports plan to issue at least 50 billion of debt in 2023. Boosted passenger traffic is bringing a spate of credit upgrades and favorable outlook changes to the airport sector. Last week, Fitch upgraded Miami International Airport, citing that passenger traffic surpassed. pre-pandemic levels by 10% in 2022. In a supply starved municipal bond market, investors are likely to see more airport tax-free bonds this year.
New Jersey Budget Continues Fiscal Progress…Aiming for the highest reserves and lowest debt in at least a decade, Governor Phil Murphy outlined a $53 billion spending plan for Fiscal 24. The plan makes a full pension payment for public employees for the second straight year and increases public education funding — both required by law. The Murphy administration has made paying off debt a priority. By June, NJ’s outstanding debt will be $1.8 billion lower than a year ago. The budget puts away $2.4 billion into a recently established debt specialization fund to lower NJ’s high debt further. “This surplus — all $10 billion of it — is a signal to the credit rating agencies that we can pay our bills. That our foundation is strong,” Murphy said. Expecting a “shallow, fairly short-lived recession” Murphy noted that he has seen wage growth slow “significantly” this year, and income revenues are “stabilizing” after beating expectations post-COVID-19, a large factor in the state’s strong current finances. New Jersey has earned three major ratings agencies with three credit upgrades in the last 14 months, after a string of downgrades during previous administrations. The spending plan is the largest in the state’s history. In an election year for the state’s democrat-led legislature, the budget does not hike taxes or transit fares. In Fy24, Murphy seeks to continue policies that have improved the financial condition of the second-lowest rated U.S. state.
Vallas Leads Path to Chicago Mayor…Paul Vallas (D), a former Chicago Public School CEO, and Brandon Johnson (D), a Cook County commissioner backed by the former Chicago Teachers Union, will face an April 4 run-off election for Chicago’s top office. Mayor Lightfoot became the city’s first incumbent to lose a re-election bid in forty years. None of the nine contenders for the mayor’s office secured a clear majority. Vallas secured 34% of the vote, Johnson came in second with 20% and Mayor Lightfoot trailed with 17%. Chicago’s police union has endorsed Vallas, also the top fundraiser, whereas Johnson has been accused by rivals of wanting to ‘defund’ the police.
Lower Municipal Bond Supply…42% fewer municipal bonds were issued in February compared to a year ago. Last month, states and locals issued $19 billion new bonds in the primary market, significantly lower than a 10-year average $27 billion new bond February volume. Texas issued the most municipal bonds last month, California came in second, and New York, third. Florida and Illinois saw the largest decline in year -over-year bond issuance. 2023 is poised to the be the second straight year of declining municipal bond issuance.
New Municipal Bonds See Strong Demand…Nine times worth of orders flooded to buy $232 million tax- free ‘Sustainability’ bonds issued by Boston medical center issued recently. Boston Medical Center became the first non-profit healthcare organization to issue ‘sustainability bonds’ which are both ‘green bonds’ and ‘social bonds. The ‘Baa2’/’BBB’ hospital bond sale attracted over 50 institutional bidders, with nearly $90 million directly from ESG-focused buyers. Last week, the Chicago Board of Education tapped its investment-grade dedicated capital improvement tax credit for the first time in five years, selling Fitch ‘A’ rated bonds at yields around 4.8% for 5.75% coupon long term bonds; yields traded lower in secondary market trading. ‘Green’ bonds issued by Portland, OR airport rated ‘AA- ‘fetched yield of 4.6% for 5.5% coupon long term bonds.
Compare 30-Year taxable U.S. Treasury yield 3.84% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.70%; “AA” 4.11%; “A” 4.59%. For investors in the 35% tax-bracket, a 4% tax-exempt yield is equivalent to a 6.15% taxable yield. Top-rated long-term tax-free bonds yield 96% of comparable taxable U.S. Treasuries.