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High Yield Muni Bonds Lure Investors…A small sliver of the $4 trillion muni bond market, high yield muni bonds are gaining investor attention. Demand for high yield muni bonds has surpassed that of top-rated peers. “Some investors focus on growth while others are interested in current income. For that second group, broader horizons within the bond market can lead to better returns over the long haul. You might be surprised to see that diversified high-yield (or junk) bond portfolios can be the best performers, as long as the portfolio managers do a good job analyzing credit risk,” Market Watch wrote last week, adding “High-yield municipal bonds have more price volatility and credit risk, but they have outperformed investment-grade munis dramatically over the past 15 years.” State and local government bonds rated ‘Ba’, the highest non-investment grade rating, had an average 10-year default rate of 1.03%, which is lower than the 1.85% cumulative default rate of investment grade corporate bonds over 2013-2022 per Moody’s. A Municipal Bond Specialists’ expertise in researching high yield muni bonds helps investors assess the risk-reward and bondholder protections offered by lower-rated or unrated tax-free bonds.
‘Bills Bonds’ Oversubscribed…NFL’s Buffalo Bills’ new stadium bonds issued last week were oversubscribed. The ‘AA’-rated ‘Bills Bonds’ offered a top tax-free yield of 3.67%. ‘Bills Bonds’, full faith and credit general obligation of Erie County, New York, were eagerly snapped up by investors. “We were oversubscribed for the sale which is not uncommon and a good problem to have,” an official said. Highlighting the “generational opportunity”, an Erie County spokesperson added “It’s an investment opportunity, but it also has an emotional attachment to it.”
Muni Bonds Rally…The $4 trillion muni bond market reported its best quarterly returns since 2011. Muni bonds posted a 2.6% index return in the third quarter of 2024, the highest since 2011. The muni bond rally pales in comparison to the Treasuries rally. U.S. Treasuries have posted gains for five straight months, the longest monthly winning streak in 14 years. The rally in muni bonds has been fueled by a steady influx of cash over the last quarter. However, a surge in state and local government bond issuance has led muni bond returns to underperform. In September, nearly $46 billion muni bonds were issued, the second-highest total for the month in more than a decade. Currently, muni bonds offer attractive yields relative to taxable counterparts. Wealthy long-term investors are particularly interested in the current historically high tax-free yields, as they seek reliable future tax-free income.
Brightline Muni Bonds Sought… Brightline bonds are the largest high yield new issue this year. Sophisticated investors are clamoring to buy Brightline bonds. Some institutional investors have reported a significant exposure to the Brightline bond complex, which includes insured and unrated bonds. There is limited availability of high yield bonds. Only $ 20 billion high yield muni bonds have been sold this year, a fraction of $375 billion year-to-date muni bond volume.
Rate Cut Odds…The likelihood of a 50-basis point November rate hike are near-even. Bond markets are pricing in 37 basis points of rate cuts this year, roughly 75 basis points of cumulative cuts by the end of 2024. Inflation cooled in August to a 2.2% annual pace, the latest sign of progress in the Federal Reserve’s years long fight to bring inflation to its 2% goal. The U.S. economy grew at a 3% pace in the second quarter, higher than 1.6% growth in the first quarter. Federal Reserve Governor Christopher Waller noted “If the data starts coming in soft and continues to come in soft, I would be much more willing to be aggressive on rate cuts.”
Muni Bond Refunding Volume Picks… The volume of muni bond refunding has increased by 75% from a year ago. About one in five new muni bonds sold this year brings interest savings to states and local governments. Refunding bond activity is the highest since 2021 and is occurring alongside a rise in demand for muni bonds. Bond funds have been purchasing muni bonds for thirteen consecutive weeks, marking a turnaround from significant redemptions in 2022 and 2023. The pipeline of refunding bonds is growing. Chicago estimates it can save about $70 million of debt service costs through a proposed $1.5 billion refunding sale to help close its budget deficit. New York’s MTA plans to sell $872 million new refunding bonds next week.
Political Discord At Chicago Public Schools…Mayor Brandon Johnson’s call for Chicago Public Schools (‘CPS’) CEO Pedro Martinez to resign has sparked a row in Chicago’s political circle. The CEO’s refusal to sign on to the mayor’s proposal for a high-interest short-term loan to help pay for a new teachers’ contract and pension payments has likely led to the dispute. Chicago Board of Education and other leaders support the CPS CEO. The nation’s third largest school district has had at least six CEOs over the last decade. In November, Chicago Board of Education will begin its transition from a mayor-appointed board to a fully-elected one. Last week, the Chicago Board of Education has put a moratorium on school closures until 2027, amid tense contract talks with teachers’ union.
California Tops State Tax Revenue Growth…U.S. state tax revenue increased 8.1% to $440 billion in the second quarter of 2024. Aggregate U.S. state revenue is 25% higher than the first quarter per U.S. Census Bureau. California experienced the highest growth in tax revenues, with a 44% increase from a year ago, while Illinois saw the biggest decline with tax revenue dropping by 3.9% from the previous year. Most U.S. states anticipate slow growth in fiscal 2025. This largely reflects an expectation of slower economic growth, even though the U.S. economy may have avoided an outright recession. U.S. states have $314 billion of outstanding general obligation bonds.
Compare 30-Year taxable U.S. Treasury yield 4.13% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.55% “AA” 3.89%; “A” 3.98%. For investors in the 35% tax bracket, a 3.5% tax-exempt yield is equivalent to a 5.38% taxable yield. Top-rated long-term tax-free bonds yield 86% of comparable taxable U.S. Treasuries.