Municipal Bond News 4/8/24

Tax-Free Bonds Stand Tall…New Muni Bonds See Strong Demand…Bellwether Yields Soar…Rate Cut Odds Dialed Back…Bond Issuers Lured to Muni Market…Housing Bond Sales Surge…Sports Betting Booms…Tax Day Hits HNWs…

Tax-Free Bonds Stand Tall…Today’s investor wants more yield, more safety and tax advantage from investments. Muni bonds score high on all three. Top earners stand to earn above 7% taxable equivalent yields from top-rated state and local government bonds. That’s about 240 basis points higher than comparable U.S. Treasury yields. Top-rated muni bonds’ taxable equivalent yield is about 150 basis higher than the 5.08% index yield on top-rated corporates. Credit quality of the municipal bond sector surpasses that of corporate bonds. Typically, municipal bonds are rated ‘A’ and above. In contrast, corporate bonds’ average rating level is much lower, Moody’s explained that “Nearly half of global corporates are rated ‘Ba1’ or lower, compared to less than 2% for municipals.” Those that sold muni bonds in recent years, are now adding them back.

New Muni Bonds See Strong Demand…Orders worth double the number of bonds offered came for New York City’s recent $1.45 billion bonds. Investor demand led to yield cuts. An attractive yield of 4.25% tax-free on 4% coupon bonds maturing in 2050 is equivalent to over 8% taxable for top tax bracket New Yorkers. Chicago sold $230 million of wastewater revenue bonds, which showed a tighter spread from the last time this credit was in the market. The S&P ‘A+’-rated bonds fetched a top yield of close to 4%, or 48 basis points above top-rated benchmarks. The spread or yield penalty for such bonds was as high as 75 basis points a year ago. Both New York City and Chicago used a portion of the new bonds to save interest costs.

Bellwether Yields Soar…Treasury yields are at their highest levels this year. Long-term U.S. Treasury bond yields jumped about 23 basis points higher last week. The benchmark 10-year U.S. Treasury yield moved about nine basis points higher to about 4.40%. Meanwhile, long term municipal bonds saw a relatively smaller yield surge of about 10 basis points last week to the highest levels this year. Prospects that the U.S. economy will continue to grow at a solid pace led bellwether yields to surge. Investors have pumped cash over $10 billion over the last three months to buy tax- free bonds.

Rate Cut Odds Dialed Back…The earliest rate cuts are likely by September. Earlier optimism about three rate cuts this year has faded. Odds of a June rate cut have been trimmed to about 52%. Bond markets estimate rate cuts of about 60 basis points of rate cuts this year, which is lower than 75 basis points of rate cuts forecast by most Fed officials. Wall Street is divided on the number of rate cuts this year. Citigroup forecasts five quarter-point cuts while Vanguard reckons the Fed could see out 2024 with no change. U.S. payrolls expanded the most in nearly a year and the unemployment rate declined. The Fed will let incoming data guide its decision on rate cuts. Powell said last week, “The outlook is still quite uncertain, and we face risks on both sides.”

Bond Issuers Lured to Muni Market…Close to $100 billion of new municipal bonds were sold in the first quarter of 2024, the highest quarterly volume in three years. There were 15 transactions of $1 billion or more from borrowers, about double the number in the same quarter last year. The surge comes ahead of an unpredictable presidential election and an uncertain path for Federal Reserve interest rate cuts. Investor demand for state and local governments has soared this year. Amid a resilient economy, muni bond issuers are tapping into robust investor demand for pent up borrowing needs. Pandemic relief funds are mostly spent. New York State issuers have issued the most muni bonds this year, followed by California and Texas.

Housing Bond Sales Surge…State and local governments have issued nearly $9 billion of new muni bonds for affordable housing this year. That is a 57% jump in housing bond issuance from a year ago. Lower borrowing costs relative to much of last year led to the bond issuance surge. However, state housing agencies’ annual issuance of tax-exempt bonds is capped per the state’s population and other factors. State housing agencies issue tax-free bonds to help low-income families access lower-cost mortgages and build affordable housing. For example, a Rhode Island housing agency recently issued tax-free bonds at a yield of about 4.5%, down from 5.45% in October. That allowed the agency to put a lid on mortgage rates at 5.87%, compared to the national rates of around 7%.

Sports Betting Booms…U.S. states have cashed in on $4.3 billion from taxes on sports betting since 2018. A third of the tax haul comes from New York State, the top sports betting market in the nation. New Jersey, which legalized sports betting a year before the Empire State, ranks third in sports betting tax revenue. 38 U.S. states, the District of Columbia and Puerto Rico have legalized some form of sports betting since 2018. The latest U.S. state that legalized sports betting is Vermont, where sportsbooks went live in January 2024. State expenses ranging from general fund, education to retirement are funded from sports betting taxes. The amount of money gambled on sports has grown rapidly from $4.6 billion in 2018 to $104 billion in 2023.

Tax Day Hits HNWs…Hit harder by taxes than others, wealthy Americans benefit most from tax-free investments. The average U.S. household pays around $11,000 in federal income taxes. In addition, the richest Americans pay around 7.2% of their income in state taxes. Taxpayers in the most tax-expensive states pay more than double the state taxes paid by those in the least tax- expensive states. Illinois ranks as the most tax-expensive U.S. state, with an effective tax rate (state income, property, sales and vehicle taxes as a share of median income) close to 17%. Next are, New York, Connecticut and New Jersey, where effective tax rates surpass 14%. Tax differences across U.S. states are a factor in municipal bond investing.

Compare 30-Year taxable U.S. Treasury yield 4.59% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.84%; “AA” 4.08%; “A” 4.31%. For investors in the 35% tax bracket, a 3.8% tax-exempt yield is equivalent to a 5.8% taxable yield. Top-rated long-term tax-free bonds yield 84% of comparable taxable U.S. Treasuries. If you have any questions or desire updated information.