Municipal Bond News 5/20/24

New Muni Bonds Oversubscribed…Bellwether Yields Fall… Long Bonds Favored…Connecticut’s Surplus…Lawsuits Weigh on MTA Capital Plans…Illinois Budget Talks… Cannabis Taxes Record High…Calls To Renew Infrastructure Funding…PREPA Update…

New Muni Bonds Oversubscribed…New York City received orders more than double the size of the $1.8 billion ‘AAA’-rated bond offering. Long bonds fetched taxable equivalent yield of about 8% for top earners. Strong investor demand cut yields by as much as 8 basis points relative to the start of the order period. San Francisco airport issued $925 million bonds rated Moody’s ‘A1’, S&P ‘A+’) at a 4.24% yield. MTA’s ‘AA+-rated’ $592 million payroll mobility tax secured bonds offer a top yield of 4.21%. Over $20 billion muni bonds have been sold this month, the highest since 2021. In May, investors receive over $32 billion of cash from interest and principal repayments. Summer months typically bring a seasonal slowdown in bond sales, and reinvestment demand climbs higher. Current tax-free benchmark yield are about 43 basis points higher than at the start of the year. Investors are taking advantage of attractive tax-free yields while they last.

Bellwether Yields Fall…U.S. Treasury yields fell 10 to 15 basis points last week. The yield drop came after U.S. Treasury yields hit 2024 highs in the prior week. Muni bond yields have fallen about 16 basis points this month. Cooler jobs data and progress in inflation has renewed hopes of rate cuts this year. In April, prices climbed the least since 2021. “The first quarter in the United States was notable for its lack of further progress on inflation,” Fed Chair Powell added “What that has told us is that we’ll need to be patient and let restrictive policy do its work.” Central bankers have repeated that borrowing costs need to stay higher-for-longer. Muni bonds’ taxable equivalent yield is close to 6%, about 150 basis points higher than comparable U.S. Treasury bonds.

Long Bonds Favored…Signs of disinflation have boosted the prospects of longer-dated bonds. Longer dated bonds are the highest conviction trade, a recent Bank of America survey suggested. A UBS strategist added “The re- establishment of a disinflation trend in the coming months should allow the Fed to start easing policy in September.” Investor interest in longer-dated U.S. bonds has shot up since the Federal Reserve signaled interest-rate hikes are unlikely. Long duration bonds are poised to outperform as the Fed nears rate cuts, the next turn in monetary policy.

Connecticut’s Surplus…For the fifth time in six years, Connecticut state budget surplus is projected to exceed $1 billion. In 2019-20, when COVID- 19 first struck Connecticut, the state still finished with a healthy $569 million surplus. State officials project two more $1 billion surpluses by 2026. Income and business tax receipts have outperformed estimates by more than two times. Healthy surpluses have allowed Connecticut to boost pension contributions and stay on its ‘debt-diet.’ Lawmakers are looking to boost education and social spending. Connecticut House Speaker said last week, “Folks, the state is in a very solid financial position.”

Lawsuits Weigh on MTA Capital Plans…Congestion tolls, set to start in June, may be delayed by four different lawsuits in federal courts. $15 billion of new revenue from congestion pricing is part of MTA’s 2020-2024 capital plan. The MTA is still working on completing its 2010-2014 capital plan. MTA made few capital commitments in 2020, as capital spending paused during the pandemic. MTA resumed capital spending in 2022 with close to $12 billion capital commitments, but pulled back once again in 2023. In February, the MTA halted awarding new capital contracts. The longer the MTA’s capital plan drags out, the greater the risk of asset deterioration, the New York State Comptroller stated. Should lawsuits against congestion pricing prevail, MTA will have to find other funding sources, and new bonds cannot be ruled out.

Illinois Budget Talks…Last week, Pritzker reiterated that his main objective is a balanced budget, “whether there are cuts that are made, revenue enhancement, whatever it is.” In February, Pritzker proposed a nearly $53 billion budget for Fiscal 25 that would increase levies on sports betting, extend caps on corporate tax deductions and limit sales tax retailers’ discounts. In May-end, lawmakers will vote on the spending plan. Revenue growth is slowing and pandemic aid is winding down. Illinois tax collections through April 2024 (10 months of Fiscal 24) are about 2% higher than the prior year and just a little higher than the budget. Illinois faces the tightest budget in about three years.

Cannabis Taxes Record High…More than $4 billion in cannabis taxes were collected by U.S. states in 2023, the highest annual collections on record. California leads in cannabis sales tax revenue, bringing in more than $1 billion in 2023, followed by Illinois and Washington. A 37% cannabis tax in Washington is the highest in the nation. U.S. states began legalizing cannabis a decade ago. Since then, over $20 billion of cannabis taxes have been collected. Twenty-four U.S. states have legalized some form of cannabis.

Calls To Renew Infrastructure Funds…As the infrastructure spending law reaches its halfway mark, talks over reauthorization have begun. U.S. infrastructure needs are estimated to be $7.4 trillion over the next decade. The 2021 Infrastructure Investment and Jobs Act and 2022’s Inflation Reduction Act together injected $580 billion into the country’s infrastructure from 2022 to 2026. “Reauthorization is extremely important,” a National Official of Counties spokesperson added “Infrastructure takes it’s complicated, you need predictability.” Notably, Brightline trains have received significant federal funding from the infrastructure spending laws.

PREPA Update… The Title III court has declined to reopen the hearing on the debt plan. Judge Swain has dismissed bondholder’s request to consider new evidence that shows PREPA’s higher debt capacity. The ruling stated that the court does not favor rejecting PREPA’s Fiscal 23 fiscal plan based on “preliminary load projections by LUMA that are allegedly more optimistic.” In July, Judge Swain will hold a hearing on lifting a stay that could allow bondholders to appoint a receiver to control the utility’s finances.

Compare 30-Year taxable U.S. Treasury yield 4.51% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.83%; “AA” 3.99%; “A” 4.26%. 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 85% of comparable taxable U.S. Treasuries.