Municipal Bond News 5/5/25

Historically High Tax-Free Yield…New Mega Muni Bonds’ Attractive Yield…Rate Cut Odds…New York State Supports MTA…Bullish Outlook” on Munis…Reinvestment Demand Grows…April Muni Bond Volume Slower…Bondholders Urge PREPA Debt Resolution…

Historically High Tax-Free Yield Opportunity…Volatile market conditions have pushed muni bond yields to historically high levels, an opportunity for long term investors. Benchmark long term tax-free yields have ranged from 4.2% to 4.86% over the past month. At the beginning of April, benchmark muni bond yields rallied up to 29 basis points, before selling off up to 98 basis points between April 7, and April 9. Muni yields rallied up to 48 basis points on April 10, before selling off again on April 11, with yields higher up to 27 basis points. Since then, long-term benchmark muni bond yields have retreated to around 4.4%. Movements in state and local government bond yields mirrored those of comparable taxable U.S. Treasury bond yields. The Muni-Treasury yield ratio, which serves as a gauge of relative value, is nearing a three-year high, indicating attractive valuations for municipal bonds. Furthermore, top earners from high-tax states can anticipate taxable equivalent yields of up to 8% from state and local government bonds, marking a multi-year high.

New Mega Muni Bonds’ Attractive Yield…Four times worth of orders came for Washington D.C. $1.2 billion bonds rated Moody’s ‘Aa1’ S&P ‘AAA’ which offered a top tax-free yield of 4.5%. Notably, Los Angeles water and power utility sold $991 million bonds rated Moody’s ‘Aa2’ Fitch ‘AA-’ at a top yield of 4.8%. Port Authority of New York and New Jersey sold high grade bonds at a top tax-free yield of 4.6%. ‘AAA’-rated East Bay Municipal Utility District in California sold $1 billion tax-free bonds at a top yield of 4.1%. Over $14 billion of new muni bonds were sold last week including several billion dollars plus tax-free bond offerings.

Rate Cut Odds…Bond markets are betting that the Fed will likely keep policy rates unchanged until July or September. Earlier, there were strong odds of a June rate cut. Wall Street banks have pushed back their forecasts for the next rate cut to July from June. In April, employment grew sharply. However, U.S. economic growth decreased 0.3% in the first quarter, down from 2.4% growth a year ago. Central bankers are broadly expected to hold rates steady at this week’s Fed meeting.

New York State Supports MTA…New York State will fully fund MTA’s $68 billion five-year capital plan. Much of the capital plan, about $30 billion, will be paid for by hiking the payroll mobility tax on New York corporations. The payroll mobility tax was last raised two years ago. Governor Hochul also expects the MTA to come up with $3 billion in savings to fund the capital plan, which will likely be achieved through cost efficiency measures within the plan itself. “This is a huge moment for the MTA,” MTA CEO said he was “ecstatic” about the state support, adding, “What Albany has done is said, ‘We’re going to make a massive investment in New York.’ And the investment’s going to benefit the riders.”

“Bullish Outlook” on Munis…Muni bond yields rank in the 99th percentile compared to the past decade. Tax-exempt muni bonds also look attractive compared to corporate bonds, JPMorgan Chase strategists noted. “Valuations have become exceptionally attractive for tax-aware investors,” PIMCO added “Despite concerns over potential federal spending cuts and legislative changes, we believe that the muni bond market remains attractive, and that excess volatility creates more opportunities for active managers.” PIMCO’s five-year estimated returns for municipal bonds and other asset classes, suggests that muni bonds will be among the best-performing public market asset classes for tax-aware investors. Bank of America strategists stated, “The recovery in munis will be better in May after tax season weakness, as long as Treasury market trading remains normal.”

Tax-Free Reinvestment Demand Grows…Muni bondholders are set to receive $68 billions of principal and interest repayments over the next 35 days. Principal payments expected in May are 73% higher than April’s and 21% higher than a year ago. The past two months’ (March and April), interest and principal repayments have totaled $55 billion. California, New York and Michigan will see the largest bond redemptions. Growing reinvestment demand is a significant seasonal strength for the $4 trillion muni bond market.

April Muni Bond Volume Slower…The tally of new muni bond sales grew 2% in April compared to a year ago. April’s primary market volume, $45 billion, outpaced the 10-year average of $35 billion. However, volatile market conditions in April led some issuers to postpone bond plans. April new money issuance grew 0.5% and refunding bond issuance dropped 47%. Many refunding deals became unfeasible as market yields rose sharply, particularly during a three-day sell-off in April. General obligation bond issuance rose and fewer insured bonds were sold in April. This year, $165 billion new muni bonds have been sold, 11.5% higher than a year ago.

Bondholders Urge PREPA Debt Resolution…“Instead of completing the bankruptcy process so that PREPA can raise the funds needed to repair the grid, the Oversight Board has needlessly extended the case by making and then breaking numerous settlements with bondholders, and by choosing to waste years taking increasingly frivolous legal positions, including two rehearing petitions after a federal court of appeals declared that bondholders have a properly perfected lien on PREPA’s net revenues and have a claim for the full $8.2 billion they lent PREPA plus accrued interest. Implausibly, after losing repeatedly at the federal appellate court, the Oversight Board is now pivoting to the new position that PREPA has no net revenues, contradicting years of PREPA’s own financial reports and the Oversight Board’s own prior fiscal plans. This litigious approach needlessly prolongs PREPA’s bankruptcy, further delays repair of the grid,” bondholders and insurers of Puerto Rico electric utility stated last week. Bondholders urged the oversight board to seek a reasonable agreement that enables PREPA to promptly emerge from bankruptcy as a credit- worthy utility.

Compare 30-Year taxable U.S. Treasury yield 4.79% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.41%; “AA” 4.68%; “A” 5.02%. 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.