Municipal Bond News 4/29/24

Muni Advantage, Robust Primary Market Brings Investment Opportunity…Rate Cuts Delayed…Illinois Outlook Upgraded…MUD Bonds Shine…Vacant Offices Not a Major Hurdle…New Jersey Cuts Debt…Competing for Marijuana Taxes…Elite Colleges on a Muni Bond Spree…

Muni Advantage, Robust Primary Market Brings Investment Opportunity…Current muni yields, the highest this year, are 60 basis points more than year-end levels. Top-rated muni bonds’ taxable equivalent yield (about 6.15% for high earners) is 150 basis points more than comparable long-term U.S. Treasury bond yield. Billion-dollar plus muni bonds sold by high-grade and non-rated issuers took centerstage last week. New Jersey’s RWJ Barnabas Health rated Moody’s ‘A1’, S&P ‘AA-’ fetched a 4.28% tax-free yield for 30-year bonds. Florida’s privately-owned passenger train, Brightline, issued $3.1 billion muni bonds. Assured Guaranty insured Brightline train bonds offered a 4.65% tax-free yield. The large bond offerings came amid volatile market conditions. U.S. Treasury yields dropped slightly after reaching a new six-month high last week. Investors poured cash to buy muni bonds last week. Issuers are tapping investor demand for tax-free income and funding upgrades deferred during the pandemic. A varied mix of muni credits and bonds sectors in the primary market is helping investors build diversified tax-free bond portfolios and lock in higher yield.

Rate Cuts Delayed…Prospects of rate cuts this year are fading away. The economy grew slower in the first quarter of 2024, but there has been an uptick in the pace of inflation. Wall Street has pared back rate cuts forecasts. Bank of America and Deutsche bank expect the earliest rate cuts by December. Bank of America expects four rate cuts in 2025, and another two in 2026. Bond markets assign higher odds of a September rate cut. Federal Reserve governor Michelle Bowman sees “the risk that at a future meeting we may need to increase the policy rate further.

Illinois Outlook Upgraded…A positive outlook from Moody’s last week reflects fiscal progress in Illinois. Stable revenues, improved budget reserves, and state decisions that shored up finances led Moody’s to the higher outlook. Moody’s affirmed its “A3” rating on Illinois general obligation credit. “Bond rating agencies notice when Illinois puts more money toward the rainy-day fund and the pension stabilization fund, as we have been and must continue to keep doing,” Illinois Comptroller added “Better ratings from the bond rating agencies mean lower costs for Illinois taxpayers on infrastructure projects like roads and bridges.” Governor Pritzker’s office noted, “Five balanced budgets, paying off debt and increasing the state’s rainy-day fund has led to nine credit upgrades.”

MUD Bonds Shine…One-in-five Moody’s-rated Texas MUD bonds saw a credit upgrade last year, reflecting the positive trajectory of the sector, also known as Dirt Bonds. Tax base growth and improved finances led to the upgrades. Fueled by the Lone Star State’s booming population, strong housing demand and more construction activity led to the tax base growth. Real estate valuations have continued to grow. However, high interest rates have slowed the tax base growth recently. MUDs, a higher yielding muni bond sector, carry a median rating of Moody’s ‘A3’.

Vacant Offices Not A Major Hurdle…Despite office real estate woes, U.S. cities’ property tax base remains resilient. Real estate valuations have grown since 2019. The relatively large size of the residential and industrial real estate, and robust home prices have cushioned cities from lower office real estate values. Most U.S. cities are minimally reliant on office real estate. “Home- Rule” cities, such as Chicago, levy a flat dollar amount property tax such that homeowners’ property tax bill could be higher when commercial real estate valuations decline. Office vacancy issues are not likely to bring a significant negative rating bias, Moody’s said last week. However, prolonged office vacancies led ratings agencies to assign a negative outlook on ‘AAA’-rated San Francisco. Most U.S. cities are likely to see sluggish revenue growth in the coming years, rather than steep declines.

New Jersey Cuts Debt…New Jersey has the lowest debt outstanding in ten years. Bonded debt, $41 billion outstanding is 15% lower than 2021. Three years ago, the Garden State started set up a debt defeasance fund. Close of $3.7 billion of bond principal has been paid off over the last three years. “We have made great strides towards righting our fiscal ship, including actions such as making full pension payments and defeasing bond obligations, leading to reductions in the state’s overall debt levels,” NJ state treasurer noted. The latest budget plan makes a full pension payment for the fourth straight year. New Jersey has earned seven ratings upgrades in the past two years.

Competing For Marijuana Taxes…More Americans use marijuana than smoke cigarettes. However, most U.S. states have seen a decline in marijuana tax collections. Price competition among neighboring states has cut marijuana prices. For example, Ohio, which legalized marijuana earlier this year, will most likely detract from Michigan’s marijuana market. Marijuana taxes are a small sliver of U.S. state own-source revenue. The nation’s third most populous state, Florida will ask voters to decide on marijuana legalization in November. Legalization of marijuana has gained traction across the nation. To offset the impact of price competition, U.S. states are looking at varying taxation structures.

Elite Colleges on a Muni Bond Spree…Hundreds of millions of dollars of new muni bonds have been sold by elite U.S. colleges over the last month. Moody’s ‘A3’, S&P ‘A-’-rated Bryant University sold $132 million tax-free bonds at a top yield of 4.28%. ‘Baa2’-rated New York Institute of Technology sold $100 million tax-free bonds at a top yield of 4.24% last month. Cornell, Harvard and Princeton sold tax-free bonds at top yields of up to 4%. Earlier, Harvard sold similar dated taxable bonds at a yield of 4.6%. Most of the new borrowings will upgrade campuses. Last month’s lower yield allowed University of California and Purdue University to refinance costly prior debt.

Compare 30-Year taxable U.S. Treasury yield 4.77% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.01%; “AA” 4.2%; “A” 4.49%. 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 84% of comparable taxable U.S. Treasuries.