Municipal Bond News 6/10/24

Airport Muni Bonds Oversubscribed…Muni Bonds Rally… High Yield Muni Bond Shortage…Mass Transit Outlook Boosted…MTA Congestion Tolls Stall…U.S. State Revenue Performance Mixed…Chicago Teachers Contract Talks… Puerto Rico Incumbent Handed Rare Defeat…

Airport Muni Bonds Oversubscribed…Twelve times worth of orders came to buy the $725 million muni bonds offered by Hollywood Burbank airport issued last week. Over 100 institutional investors competed to buy the new airport bonds rated Moody’s ‘A1’ S&P ‘A’/insured ‘AA’ Fitch ‘A-’. Strong demand led to yields as much as 15 basis points. Washington metro airports issued high grade $829 million bonds last week with a top yield of 4.3%. Last month, San Francisco International airport offered bonds rated Moody’s ‘A1’, S&P ‘A+’ Fitch ‘A+’ at a top yield around 4%. Airports have issued $3.5 billion muni bonds this year. The airport sector collectively has seen no downgrades in the last year, and excluding the car-rental portion, 24% of airport ratings now above pre-pandemic levels, a S&P analyst noted. After exceeding pre-pandemic levels last year, passenger volume is likely to grow 10% this year. Air travel has surged to a new high, boosting the prospects of airport muni bonds.

Muni Bonds Rally…Tax-free bond yields dropped 15 basis points last week. Comparable U.S. Treasury yields declined 8 basis points. Muni bonds outperformed U.S. Treasuries last week, after underperforming for two prior weeks. Compelling tax-free yield advantage led retail buyers to boost muni bond holdings. Last week’s decline in muni bond yields is notable, as over $15 billion worth of new bonds were priced in the primary market. Global bonds rallied after Canada and the European Central Bank cut rates last week.

High Yield Muni Bond Shortage…4% of new muni bonds issued this year are unrated or rated below investment grade. Only $8 billion high-yield muni bonds have been issued this year, although states and local government bond issuance has climbed 35% from a year ago. Last week, over $15 billion worth of new bonds were priced in the primary market. Recent weekly volume of new muni bond offering is the highest in four years, and double the 10-year weekly average. Low issuance of high yield muni bonds has defied the surge in overall muni bond issuance. Meanwhile, investors favor high yield muni bonds, as two-thirds of all cash inflows to muni bond funds are directed to high yield muni bonds. A shortage of high yield bonds has fueled the sector’s outperformance.

MTA Congestion Tolls Stalls…New York MTA is unlikely to implement congestion tolls in the near-term. State of New York is exploring additional funding sources for New York’s MTA. “I directed the MTA to indefinitely pause the program,” Governor Kathy Hochul cites inflation and financial pressures on citizens as a reason for the sudden change. Concerns that the new tolls would hurt Democrats in competitive House of Representatives races this year. “Now it’s time to get to work on a plan that actually makes sense for the entire state, not just New York City,” a New York Congressman said. New Jersey lawmakers also applaud the Hochul’s decision. Delaying or cancelling congestion pricing without another funding source would put a massive hole in the MTA’s current multi-year capital plan. Lawmakers are considering hiking the payroll tax on New York City businesses, that was imposed last year, to help plug a $1 billion-a-year hole created by the surprise decision. “This is a shocker,” an MTA board member who voted in favor of congestion pricing said “It’s just unreal. The longer you wait, the more expensive things get.”

Mass Transit Outlook Boosted…Government funding support for transit has accelerated in the past year and is expected to continue. New state and local sources will fill most of an estimated $8 billion operating funding gap for the mass transit sector by 2026. Such government support will offset operating losses post-pandemic shifts. Transit operators will be less reliant on fare revenue. New Jersey is considering a surcharge on corporate profits. Pennsylvania is looking to dedicate state sales tax for transit operations. California voters will decide on a new dedicated funding stream for transits. Improved funding prospects from states and local governments has led Moody’s to revise its outlook on the mass transit sector to ‘stable’ from ‘negative’.

U.S. State Revenue Performance Mixed…U.S. state revenue could be subdued in Fiscal 2025. U.S. state revenue performance to date has been mixed for fiscal 2024. A majority of states performing above or in line with current year forecasts. 21 U.S. states have reported year-over- year declines in recent tax collections. Steady sales tax collections have propped up state revenue. However, individual and corporate income tax collections have softened amid tax cuts across U.S. states. K-12 public education, Medicaid, infrastructure and pension funding are the largest expenses of U.S. states. U.S. state rainy day funds have grown over the past decade. Aggregate state rainy day funds, $159 trillion, are at 13.5% of state general fund spending, up from 4.9% a decade ago.

New Board To Steer Chicago Teachers Contract…In November, an elected Chicago Public School board will replace a mayor-appointed board, a historic transition. The Chicago Teachers Union (CTU) is starting talks with the city to secure a new four-year contract that starts in 2025. CTU wants to create new housing, levy new taxes, construct new parking garages, undertake new environmental initiatives, divest pension funds from fossil fuels and subsidize weight-loss surgery. Neither the CTU nor the city have provided details on how much these demands will cost.

Puerto Rico Incumbent Handed Rare Primary Defeat…Puerto Rico’s general election on November 5 will see Puerto Rico Rep. Jesús Manuel Ortiz (PDP) and Resident Commissioner Jennifer González (NPP) face each other and a third candidate Juan Dalmau of the Puerto Rican Independence Party. Puerto Rico Governor Pedro Pierluisi lost his re-election bid. The Island’s resident commissioner Rep. Jennifer González won 56% of the ruling party (New Progressive Party) primary election. Four years ago, González, a Republican, and Pierluisi, a Democrat, ran on a joint ticket to win their current appointments. In the opposition’s (Popular Democratic Party) primary election, Puerto Rico Rep. Jesús Manuel Ortiz defeated former treasurer and Sen. Juan Zaragoza by a wide margin.

Compare 30-Year taxable U.S. Treasury yield 4.53% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.82%; “AA” 4.03%; “A” 4.24%. 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.