Municipal Bond News 4/1/24

Muni Yields Hit 2024 High…Hospital Muni Bonds Outperform… “No Rush” to Cut Policy Rates…Detroit Earns ‘Baa2’ Investment Grade Rating…Congestion Toll Wins MTA Vote…Voters Nix Chicago Mansion Tax… Controversial SALT Cap…

Muni Yields Hit 2024 High…Long term tax-free bonds yields are currently the highest this year. Yields on top-rated tax-free bonds climbed about 30 basis points in the first quarter of 2024. This year, states and local governments have issued 38% more bonds than a year ago. In April wealthy investors tend to sell muni bonds to meet hefty tax bills. There are fewer principal redemptions in April, leading to lower reinvestment demand. Typically, April is a period of seasonal weakness for the muni market. Several large bond issuers such as California, New York City, Dallas, TX and Harvard University are currently offering tax-free bonds. Long term investors are likely to take advantage of attractive absolute yields, 3.7% for long term top-rated muni bonds equivalent to a 5.6% taxable yield for high earners.

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Hospital Muni Bonds Outperform…Amid a high yield bond rally, hospital muni bonds are among the biggest outperformers this year. A high yield hospital muni bond index has posted 2% returns this year, while the overall muni market posted a 0.4% loss this year. Operating performance for the Hospital sector began to stabilize in 2023. Hospital patient volumes have improved, led by strongest gains in outpatient volumes. However, shifts to Medicare Advantage plans will pressure reimbursement for many systems. Slower expense growth helped operating conditions, but higher costs remain an obstacle. Recent operating margins have improved slightly. Moody’s said last week “Performance will continue to improve incrementally in 2024 and 2025, but that will continue to vary across the sector as changing labor and revenue trends impact systems differently depending on size and market.”

“No Rush” to Cut Policy Rates…A resilient economy is allowing the Fed to be patient before cutting policy rates. “We can, and we will be, careful about this decision — because we can be,” Fed Chair Powell said on Friday. The Fed’s preferred inflation gauge rose 2.5% in February from a year ago, far below its over 7% peak in 2022. “That means that we don’t need to be in a hurry to cut,” Powell added “It means we can wait and become more confident that, in fact, inflation is coming down to 2 percent on a sustainable basis.”. Federal Reserve Governor Christopher Waller echoed, “In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data.” Atlanta Fed President Raphael Bostic, a voting member of the Fed, said he anticipates lowering interest rates just once this year.

Detroit Earns ‘Baa2’ Investment Grade Rating…For the first time since 2009, Detroit has earned an investment grade credit rating. Last week, Moody’s raised its rating on Detroit by two notches from ‘Ba1’ to ‘Baa2’. Moody’s expects Motor City to continue bolstering its “financial resiliency and maintain the track record of solid operating performance” as seen in the past several years. Motor City’s tax base and economy are expected to grow in 2024 and 2025. A double upgrade is rare, Mayor Mike Duggan added that “No one would have predicted Detroit returning to investment grade in less than a decade.” Duggan expects the city to jump to another level next year. Detroit exited bankruptcy protection in 2014. The investment grade rating opens a wider market for Detroit bonds and lowers the city’s future borrowing costs.

Congestion Toll Wins MTA Vote…MTA board voted 11-1 to approve a congestion pricing toll structure, the first of its kind in the U.S. “Today’s vote is one of the most significant the board has ever undertaken, and the MTA is ready,” MTA Chair said. Congestion pricing could be implemented as early as mid-June. However, there are several lawsuits opposing the new toll program. State of New Jersey, Borough of Staten Island, United Federation of Teachers and a Manhattan citizens group have filed lawsuits that are winding their way through federal courts. Amid the legal turmoil, MTA has put on hold capital construction. “We don’t want to commit to the projects until we have a high level of certainty that revenues are going to support the bonds issued to fund those projects.” MTA CFO said. Next week, MTA will sell recently upgraded $1.3 billion transportation revenue bonds.

Chicago Voters Nix Mansion Tax…Voters have rejected progressively steep real estate transfer taxes on properties over $1 million to fund housing for the homeless. Opponents claim that the tax could weigh on the city’s real estate. Commercial real estate sales prices have been cut 50% amid empty downtown offices. Notably, voters in Los Angeles, CA and Santa Fe, NM have approved ‘mansion taxes’. Meanwhile, a $1.25 billion Chicago bond issuance is under consideration. The new economic and affordable housing bonds are slated to be part of a $3 billion investment that includes city, state, federal and private sources. Chicago expects a windfall of property tax revenue to be released from several tax-increment financing districts slated to expire in coming years.

Controversial SALT Cap…State-level workarounds have made the cap on state and local tax (‘SALT’) deductions controversial. 36 U.S. states and New York City have passed laws that help certain taxpayers, mainly business owners, avoid the $10,000 cap SALT deductions. The cap on SALT deductions was estimated to bring in a trillion dollars for the U.S. Treasury, to help pay for broad tax cuts from the Tax Cuts and Jobs Act of 2017. But state-level workarounds dented that plan. While some tax groups favor outlawing the state-level workarounds, no federal legislation has been introduced so far. The controversial SALT cap led droves of wealthy and working-age residents flee high tax U.S. states such as California and New York. Much of the 2017 Tax Cuts and Jobs Act including the SALT cap expires in 2025. Both Democrats and Republicans from higher-tax states are searching for ways to raise or repeal the cap on SALT deductions.

Compare 30-Year taxable U.S. Treasury yield 4.36% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.73%; “AA” 4.02%; “A” 4.11%. 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 86% of comparable taxable U.S. Treasuries.