Municipal Bond News 8/12/24

Varied Mix of New Muni Bonds…Volatile Bellwether Yields…Recession Odds…MTA Mulls New Mansion Tax Bonds…Bondholders Oppose PREPA Lien Rehearing…Big Apple Office Real Estate Resilient…Florida Muni Bond Supply Outpaces…

Varied Mix of New Muni Bonds…Several airports and a Louisiana river bridge are among last week’s primary bond market issuers. A public-private partnership in Louisiana issued $1.3 billion bonds rated ‘Baa3’ by Moody’s for a toll bridge. These bonds offered about 132 basis points of additional yield relative to top-rated muni bonds. Tampa International Airport sold $484 million high grade bonds last week at a top yield of 4.3%. Portland International Airport sold $589 million high grade bonds at a top yield of 4.13%. Earlier this month, Minneapolis St Paul International Airport sold bonds rated S&P/Fitch ‘A+’ at a 4.29% yield.

Volatile Bellwether Yields…The market has been volatile in August. 10- year U.S. Treasury yields moved 25 basis points higher last week, reversing a similar decline from the week before. Ten-year U.S. Treasury yield jumped back to 3.93% after slumping to 3.67% in the previous week. Policy- sensitive two-year securities saw their yield rise 15 basis points this week to 4.03%. Top-rated state and local government bond yields rose up to seven basis points. Notable shifts in the labor market, the upcoming presidential election, and the broadly anticipation rate policy action have made yields volatile. Last week, several large muni issuers such as Chicago and a Tennessee hospital shelved new bond sales to avoid unstable market conditions.

Recession Odds…JPMorgan Chase now sees a 35% chance that the US economy tips into a recession by the end of this year, up from 25% as of the start of last month. Meanwhile, Goldman Sachs estimates a 25% probability of a recession in the next year. A sharper-than-expected weakening in labor market led to the forecast changes. However, the U.S. economy grew at a solid 2.4% annual pace in the second quarter. Fed officials view the cooling job growth as a sign of a slowing economy, but not indicating a recession. Growth continues at a “fairly steady level,” Chicago Fed President Austan Goolsbee said last week, and San Francisco President Mary Daly added that the US labor market, while slowing, is “reasonably solid.” Bond markets anticipate 100 basis points of rate cuts this year. Experts are debating whether the bond market is overestimating the number of 2024 rate cuts, similar to what occurred at the start of the year.

MTA Mulls New Mansion Tax Bonds…MTA plans to issue $2 billion of new bonds backed by real estate transfer taxes on high-end residences. The borrowing will help MTA fund capital upgrades. New York City mansion tax, a real estate transfer tax on residential sales higher than $2 million, will secure the new bonds. Such taxes were allocated to the MTA by New York State in 2019. Real estate transfer taxes amounted to $345 million in 2023; a similar amount is forecasted annually for the next five years. Strong demand for New York City housing favors the new high-grade credit expected to hit the muni bond market later this year or in 2025. Such bonds paid by transit fares, or a combination of motor fuel taxes, petroleum business taxes, mortgage recording levies or payroll mobility tax. This new borrowing tool could provide some relief to MTA’s operating budget.

Bondholders Oppose PREPA Lien Rehearing…The Bond Trustee, bond insurers and major holders of Puerto Rico electric utility bonds have asked the U.S. Court of Appeals to reject the Oversight Board’s request for a rehearing on the revenue lien granted to bondholders per bond documents. In June, the U.S. Court of Appeals for the First Circuit ruled that bondholders have a lien on the authority’s net revenues. This ruling overturned a 2023 Title III court ruling that sought to diminish bondholder’s revenue lien. Assured Guaranty told the Appeals Court last week that the bond trust agreement pledged not just “money received” but also revenues not yet collected and income derived. Following the U.S. Court of Appeals’ June ruling on the revenue lien, the Title III court ordered a 60-day court mediation for an amended consensual debt plan. During this mediation, the Island moved to reject the revenue lien dimming hopes for an early mediation of the debt dispute.

Big Apple Office Real Estate Resilient…New York City’s property tax base has defied post- pandemic woes. The city will see a small rise in property tax collections from the office sector. Office buildings are set to pay $7.6 billion this fiscal year, up from $7.1 billion in 2020. The assessed market value of city offices has reached $204.8 billion, a 4.4% increase since fiscal 2020. NYC office real estate assessed valuations fell in 2022, and slowly recovered thereafter. New buildings in Hudson Yards and Union Square are helping drive the growth in valuations. Amid softer asking rents, citywide peak-day occupancy is 64% in July, well below pre-pandemic levels. “Recent pronouncements concerning drastic changes to valuations in the sector and their impact on the City’s tax base have not yet come to pass,” New York State Comptroller said. New York City Deputy Comptroller echoed, “For the most part in the aggregate, we just don’t see a doomsday scenario playing out, because there is growth throughout the city.”

Florida Muni Bond Supply Outpaces…Florida governments are issuing tax-free bonds at the fastest pace in over a decade. Florida muni bond sales have more than doubled from a year ago, outpacing 30% surge in nationwide muni bonds sales. Southern states, including Florida, account for about 35% of total bond sales this year, marking a 10-percentage point increase from 2004. A demographic shift to southern states intensified post-pandemic. The influx of residents has strained infrastructure like sewers, highways and schools, community development districts and affordable housing. Florida is expected to draw close to 900 new residents each day through 2028. Florida’s real GDP surged more than any other state in the nation last year.

Compare 30-Year taxable U.S. Treasury yield 4.22% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.64% “AA” 3.97%; “A” 4.25%. 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 86% of comparable taxable U.S. Treasuries.