Municipal Bond News 7/8/24

Muni Bonds Kick Off Reinvestment Season With Record Supply…PREPA Bondholders Seek New Debt Plan, Receiver…Chicago Seeks New Revenue…Powell Notes Disinflationary Path…New York City Revenue Outperforms…Record High Infrastructure Spending Falls Short…Elections Fuel Tax Uncertainty…

Muni Bonds Kick Off Reinvestment Season With Record Supply…In the first half of 2024, California governments issued the highest volume of tax- free bonds, followed by Texas, New York and Florida. Education sector and transportation sectors accounted for the majority of new muni bond offerings. Municipal bond issuance has surged 38% higher than a year ago. Close to $240 billion municipal bonds have been issued in the first half of 2024. Refunding activity picked up in 2024, after reaching a standstill last year. Extraordinary redemptions of taxable Build America Bonds and several billion-dollar plus muni bond offerings contributed to the wave of higher supply. An uptick in hospital mergers brought several large muni bond sales. States and local governments are catching up on pent up borrowing plans amid recession fears, election year uncertainty and the end of federal pandemic aid. Muni bond yields have ranged between 3.4% and 4% over the past six months. Municipal bond returns outperformed taxable U.S. Treasuries in the first half of 2024. After losses in April and May, June presented the best muni bond returns since 2016. Summer is the season for reinvesting coupon payments from interest coupons and principal redemptions. In July, muni bonds are broadly expected to outperform.

PREPA Bondholders Seek New Debt Plan, Receiver…PREPA’s current debt plan is ‘dead’, the bond Trustee and non-settling bondholders are seeking a completely new plan of adjustment and disclosure statement for the electric utility’s debt. National Public Finance Guarantee has withdrawn its support of the current debt plan. BlackRock and Nuveen continue to support the current debt plan. Opposed to the debt plan, GoldenTree Asset Management, nvesco Ltd., and Assured Guaranty Corp want a longer, more in depth litigation that could extend through mid-2025. Meanwhile, the oversight board wants only slight modifications to the current debt plan that it aims to file in court by mid-July, with plans for a court hearing in September. The board is seeking to amend a debt-cutting plan by allocating settling bondholders’ recoveries to non-settling bondholders. The board claims that “the identification of a secured claim requires only that the same pie be redistributed.” Opposing parties claim that the board’s current proposed plan is illegal and conflicts with the federal appeals court ruling and U.S. territory bankruptcy law, PROMESA. GoldenTree Asset Management, Invesco Ltd., and Assured Guaranty Corp want an accounting of a $3 billion PREPA “administrative expense” claim and a revisit of the bond parties’ request to lift the bankruptcy’s stay and allow them to petition for a receiver. For seven years, the oversight board failed to submit a confirmable plan of adjustment.

Powell Notes Disinflationary Path…The last reading on inflation, and to a lesser extent the one before it, “suggest that we’re getting back on a disinflationary path,” Fed Chair Jerome Powell added “Because the US economy is strong and the labor market is strong, we have the ability to take our time and get this right.” San Francisco Fed President Mary Daly said that if the labor market began to weaken then officials could consider lowering rates. U.S. hiring and wage growth stepped down in June while the jobless rate rose to the highest since late 2021. This boosts odds that the Federal Reserve will begin cutting interest rates in coming months.

Chicago Seeks New Revenue…Chicago faces a revenue shortfall. City revenue is 17% below budget in the first four months of Fiscal 2024. The city forecasts revenue to decline over the next two years. End of federal pandemic aid has lowered Chicago’s revenue outlook. To address this issue, a new city council revenue committee began to explore taxation strategies. Suggestions include expanding taxes to services, fining big rig trucks that drive on residential streets and higher taxes on the wealthy. In March, voters rejected a mansion tax. Chicago property taxes are among the highest in the country. Mayor Brandon Johnson favors expanding the tax base by imposing a sales tax on services, which could require state approval.

New York City Revenue Outperforms…Dire predictions of large deficits in the Big Apple never came true. Instead, a windfall of almost $7 billion from higher than anticipated tax revenues for the two years ending July 2025 have virtually wiped away the $7.1 billion deficit the city faced this coming year. This marks the fourth straight year of revenue outperformance, with personal income, corporation, property and sales taxes all exceeding expectations. Since 2020, New York City’s budget office has consistently underestimated revenue by 10%. Rating agencies view cautious revenue estimates as favorable. Mayor Eric Adams’ warnings of swelling deficits in 2023 led to migrant care cost reductions. In light of strong revenues, New York City unveiled a $112.4 billion spending plan for Fiscal 2025, which is larger than earlier estimated.

Record High Infrastructure Spending Falls Short…The current level of state and local government infrastructure spending is at a record high, on pace to reach nearly $600 billion annually. However, when adjusted for inflation, the real buying power for government infrastructure has fallen sharply between 2022 and 2024. The real or inflation-based buying power has been cut as much as 40% based upon construction cost indices. This rapid deterioration in real buying power for government infrastructure investment brings real spending down to 1% of GDP, which is only two-thirds of what it was just four years ago. This decline in real buying power may lead to higher costs for essential projects in the future, a concern for taxpayers.

Elections Fuel Tax Uncertainty…Significant tax legislation is on its way. If Republicans win the White House, Senate and House of Representatives, a fast-track renewal of Trump-era tax cuts is possible. In a split Congress, regardless of who wins the White House, it’s likely that fewer tax cuts will survive. The 2017 Tax Cuts and Jobs Act enacted by former President Trump will sunset in 2025. The investment implications of U.S. fiscal policy are a major concern. Faced with political uncertainty, affluent investors are exploring ways to lower their tax burden.

Compare 30-Year taxable U.S. Treasury yield 4.47% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.81%; “AA” 4.07%; “A” 4.29%. 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.