Municipal Bond News 4/21/25

Bargains in Muni Bonds…New Tax-Free Bonds…Powell Gauges Financial Markets…Wall Street Forecasts Slower Economy…Public Power Bonds…PREPA Net Revenue Calculation…California Budget Lower…New York City Mayoral Race…

Bargains in Muni Bonds… “Munis have gotten extremely attractive,” Barron’s quoted an expert this weekend, who added, “For taxable investors, it’s pretty much a no decision-and you don’t have to be even in the highest tax bracket.” High grade ‘A’-rated and ‘AA’-rated muni bonds with 30-year maturities yield close to 5%. A Morgan Stanley expert, also quoted in Barron’s, said, “These are some of the highest outright yields we have seen in the market since 2011.” A 5% tax-free yield is equivalent to a 7.7% taxable yield for an investor in the 35% federal tax bracket. The muni yield advantage is even better for residents of high-tax states like New York and California who hold in-state bonds.

New Tax-Free Bonds…California sold $2.6 billion general obligation bonds at a top yield of 4.37%. “The bonds saw strong and balanced demand across all maturities from both individual and institutional investors,” California State Treasurer said. Meanwhile, New York City sold $1.75 billion taxable bonds at a top yield of 6.38%. Additionally, Dormitory Authority of State of New York sold new high grade muni bonds for Sloan Kettering Cancer Center at a top yield of 4.7%. Over $14 billion of new muni bonds are expected to be sold this week.

Powell Gauges Financial Markets… “Markets are functioning as you would expect them to in this time of high uncertainty,” Fed Chair Powell noted. He mentioned that recent tariff-induced volatility has tightened financial conditions. However, current market conditions alone would not prompt rate cuts. Fed officials need to have “greater confidence” that inflation is moving towards the Fed’s 2% target. Several Fed officials have signaled they are likely to leave interest rates on hold until there is more clarity on trade, immigration and regulation. Last week, New York President John Williams said that he now expects “real GDP growth will slow considerably from last year’s pace, likely to somewhat below 1%.”

Wall Street Braces For Slower Economy…A sharp slowdown in US economic growth is in the cards, per Wall Street economists. Morgan Stanley, BNP Paribas, RBC Capital Markets, Barclays Plc and UBS issued updated projections for gross domestic product ranging from negative 0.1% to 0.6% growth in 2025, and 0.5% to 1.5% growth in 2026. They forecast the unemployment rate would climb to almost 5% next year and penciled in higher inflation in the coming quarters. Goldman Sachs economists place 45% odds of a recession.

Public Power Bonds…The Artificial Intelligence (‘AI’) industry presents investment opportunities for tax-free income investors. The issuance of electric utility bonds is expected to increase alongside the AI boom. Data centers are critical infrastructure for AI, and their power consumption could rise significantly—potentially accounting for 12% of U.S. electricity use by 2028, up from the current 4.4%, according to the U.S. Department of Energy. “It’s going to be a growing part of the municipal bond market over the next five years, over the next 10 years,” a Nuveen portfolio manager told CNBC Pro last week. Electric utility bonds and general obligation bonds of cities were data centers are located are hunting grounds for such muni bond investments. For example, the Chicago metro area hosts 154 data centers. Rate setting powers and local economic impact are key to credit selection.

PREPA Net Revenue Calculation…Bondholders claim that Puerto Rico electric utility (‘PREPA’) failed to transfer a combined $2.9 billion over several years to reserve accounts for debt repayment. PREPA had $3.7 billion of total net revenue, or excess funds remaining after operating expenses, between fiscal 2018 and fiscal 2023, an independent firm hired by bondholders and bond insurers told the Title III court last week. Of that amount, PREPA was supposed to direct $2.9 billion to a trustee-held sinking fund that holds money for bond repayment. However, PREPA’s bond accounts hold only $19 million. The latest revenue analysis shows that the electric utility had the ability to allocate billions to bond debt service throughout its 2017 bankruptcy. The oversight board rejected the calculations, adding that the PREPA debt settlement would seek commonwealth funds to repay bondholders.

California Budget Lower…Governor Gavin Newsom said he is considering a reduction to the state’s Fiscal 26 budget plan. In January, Newsom proposed a $229 billion general fund budget for the fiscal year that begins July 1, which was about $3 billion less than the current year. This spending plan would have left the state with a modest $363 million discretionary surplus, ending a two-year streak in which state lawmakers needed to plug significant spending shortfalls. However, a downward revision to the proposed budget is anticipated in May. California’s economy is particularly sensitive to volatility in financial markets. Consequently, both state and independent economists have “universally downgraded” their projections for California’s gross domestic product for the next year.

New York City Mayoral Race…The race for the Big Apple’s next mayor is gaining steam. Key contenders for the top office include former governor Andrew Cuomo, incumbent Eric Adams, two former city comptrollers, along with a several other candidates. Cuomo is becoming a top contender for New York City’s June Democratic mayoral primary race. Cuomo’s campaign is leading in fund-raising and latest polls. Curtis Sliwa, who lost the general election to Eric Adams in 2021, is once again running for the Republican nomination.

Compare 30-Year taxable U.S. Treasury yield 4.89% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.51%; “AA” 4.77%; “A” 4.99%. For investors in the 35% tax bracket, a 4.5% tax-exempt yield is equivalent to a 6.9% taxable yield. Top-rated long- term tax-free bonds yield 92% of comparable taxable U.S. Treasuries.