Municipal Bond News 4/28/25

Muni Bonds’ Generous Yield…New Muni Bonds Oversubscribed…Fed Officials Mull Rate Cuts…S&P Affirms Chicago Public School Rating…Texas MUD Bonds Shine… New York State Revenue Outperforms…Strong Demand Favors Student Housing…Electric Vehicles Fuel New Taxes…

Muni Bonds’ Generous Yield… ‘Munis are paying interest rates that are irrationally generous’, MarketWatch wrote on Friday. Investors could find individual tax-free municipal bonds rated A-grade or better paying upto 8% on a taxable-equivalent basis for individuals in the top federal income tax rate – even ignoring any state and city tax benefits. In April, muni bonds experienced the biggest three-day slump since the pandemic, triggered by a tariff-related broader market sell-off. Tax-favored munis have plummeted in price during the recent market turmoil, falling much further than the equivalent taxable bonds issued by the U.S. Treasury. “The selloff has created an opportunity, in our view,” an expert said. ‘You don’t need to be a top-rate taxpayer to benefit from this. If you assume that top-rate taxpayers will sooner or later wake up to this opportunity and bid up the price of municipal bonds, the rest of us could figure that if we buy now, we can sell to them later at a higher price,’ MarketWatch noted. Additionally, muni bonds offer advantages for ‘buy-and-hold’ long term investors.

New Muni Bonds Oversubscribed… “Despite volatility in the municipal bond market, the State of Connecticut attracted more than $9 billion in total orders from both retail and institutional investors, exceeding by nearly seven times the amount of bonds being offered,” Connecticut State Treasurer stated. The $1.6 billion Connecticut general obligation bonds came with a $3.59% borrowing cost for 20-year bonds. Large state general obligation bond new issues are front and center in the primary market. Massachusetts sold 30-year 5% coupon bonds at a top yield of 4.76%, 89 basis points more than its December bond sale. In the secondary market, ‘AAA’-rated tax-exempt bonds issued by elite Harvard University have cheapened amid headlines of political standoff. Investors are watching the developments to find buying opportunities.

Fed Officials Mull Rate Cuts…“I would expect more rate cuts, and sooner, once I started seeing some serious deterioration in the labor market,” Fed Reserve Governor Christopher Waller stressed he didn’t believe the impact of tariffs would have a significant impact on the economy before July, but after that point unemployment could rise, and quickly, if high tariffs again come into play. In Waller’s opinion, inflationary impact of the tariffs would likely be temporary. Cleveland Fed president Beth Hammock ruled out a May interest-rate cut but said the central bank could move as early as June if it has clear evidence of the economy’s direction.

Texas Municipal Utility District Bonds Shine…Texas Municipal Utility Districts (‘MUDs’) are likely to see more rating upgrades than downgrades, Moody’s said. Population influx to Texas has led to substantial housing demand. Tax bases of Texas MUDs continue to grow, albeit at a slower pace. Inflation and high interest rates have slowed the pace of growth. Any economic downturn could weigh on construction costs. Nevertheless, MUDs continue to benefit from appreciation of existing home values.

S&P Affirms Chicago Public School Rating…“The stable outlook reflects our expectation that the board’s reserve and liquidity positions will likely remain sufficient to support the current rating, despite the projected deficit (including the estimates cost increases from the CTU contract) in fiscal 2026, as the board will continually work toward addressing its structural budget gap,” S&P affirmed the ‘BB+’ rating and stable outlook for Chicago Board of Education bonds. The junk-rated school district faces governance challenges. Recent political gridlock between school leaders and the city administration and the ongoing contentious relationship between the board and the teachers’ union are factors to watch. Although its pension fund is poorly funded, CPS makes the full statutorily required pension contribution every year.

New York State Revenue Outperforms…New York State has more cash than expected. Tax receipts for Fiscal 2025, which ended on March 31, total $148.3 billion, $6 billion higher than forecast. Outperforming personal income tax collections and business taxes led to the outperformance. However, the state’s operating expenses are nearly $2 billion higher than projected last year. Favorable tax collections boost the Empire State’s Fiscal 26 budget anticipated next week.

Strong Demand Favors Student Housing…High occupancy, 98% for Moody’s-rated student housing projects that are affiliated with universities, reflects strong demand. Stable, below- market rent increases at university-affiliated projects supports strong ongoing demand. University-affiliated housing projects benefit from certain advantages that allow them to maintain lower, and more stable, rental growth rate. A lower cost of capital at initial construction, exemption from property taxes, and in some cases a degree of university support favors such student housing projects. The rental market around universities is usually tight, as off-campus housing availability is generally restricted.

Electric Vehicles Fuel New Taxes…A growing number of U.S. states are looking for new revenue sources to fund transportation infrastructure. Thirty-seven states have introduced 130 transportation funding bills in the first quarter of 2025. New taxes or fees account for 25% of the latest transportation measures. A fifth of the funding proposals seek local government funding. The rise of electric vehicles (‘EV’) has diminished gas tax collections, which fund infrastructure. On Capitol Hill, Congress is aiming for a national EV Fee to tax EVs.

Compare 30-Year taxable U.S. Treasury yield 4.73% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.54%; “AA” 4.77%; “A” 5.01%. 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 96% of comparable taxable U.S. Treasuries.