Municipal Bond News 9/6/23

Muni Bonds on Sale, Buy at Value Prices…Bellwether Yields Retreat…Recent Muni Bond Sales…Muni Bond Supply Shortfall Persists…Tourism Grows, Conventions Lag…Cities Seek Office-to-Housing Conversions… Growing Cannabis Taxes Spur Bond Plans…Bondholders Push for PREPA Receiver…

Muni Bonds on Sale, Buy at Value Yields… Faced with volatile markets, waiting to invest cash until there is more certainty could potentially be a drag on tax -free income and returns. Current tax-free yields are high, such that interest payments are generally large enough to insulate from potential price losses from policy rate hikes. Bond markets anticipate that the policy rates will peak this year, and rate cuts are likely next year. When Fed policy changes, bond yields are likely to decline. Bellwether yields could decline modestly by year end, experts reckon. The 10-year U.S. Treasury could end 2023 with a yield of 3.75% to 4%, down by half a percentage point from recent levels, Nuveen’s fixed income chief noted last week. Muni yields are correlated with yields on comparable U.S. Treasury bond yields and fed-funds rate policy. The Fed has slowed the pace of rate hikes this year, as inflation has receded from last year’s peak. Historically, muni bonds showed positive returns when interest rate hikes ended. The $4 trillion muni market has gained 1.5% this year, as it struggles to emerge from an 8.5% loss in 2022. This year, six of eight months have delivered positive returns, with muni bond indices posting losses in February and August. Last week, individuals put over $676 million of cash to buy long term muni bonds, after selling muni bonds in several prior weeks. While they last, currently attractive tax-free yields are an opportunity for long term investors to move cash from sidelines to buy muni bonds to save on taxes and lock in attractive long-term income.

Bellwether Yields Retreat…After hitting 2023 highs earlier in August, U.S. Treasury yields dropped last week. The benchmark 10-year note’s yield touched 4.085%, the lowest level since Aug. 11. The 2-year U.S. Treasury yield slid to 4.75% last week after climbing to 5.09% in August. Investors pared back odds for an additional quarter point rate hike to 50%, down from 75% recently. U.S. GDP rose 2.1% in the second quarter, below expectations. In August, jobs growth moderated. Broad inflation measure ran at a 2.1% annual clip over the three months through July and household spending remained robust. Some moderation in economic signals boosts chances of a rate pause at the Fed’s September meeting. Less volatile than U.S. Treasuries, yields on state and local government bonds remained steady from prior week. Current tax-free bond yields, near the highest this year, offer 91% of taxable Treasury bond yield, reflect attractive muni bond valuations.

Recent Muni Bond Sales… August saw several billion-dollar deals from states and local governments. This includes a $1.2 billion Michigan Trunkline deal and a $1 billion New York City Transitional Finance Authority deal. A ‘AAA’-rated Texas school-district bonds, backed by the state’s $50 billion wealth fund, Texas Permanent School Fund, offered attractive yields in excess of top-rated benchmarks. Amid busy air travel, Atlanta brought a $706 million airport revenue bond deal to market this month which offered around 4.2% yield on 5% coupon long-term tax-free bonds. This week, California’s $2.6 billion GO bond issue is much anticipated by muni investors.

Muni Bond Supply Shortfall Persists… In September, between $5 to $10 billion of new muni bonds are expected to be sold. On September 1, bondholders received $21 billion of muni bond interest and principal repayment. The largest September 1 principal payouts were from California, followed by Texas and Georgia. Reinvestment demand is unlikely to be met by new issuance. A demand-supply gap has persisted in the $4 trillion muni bond market for several years. This factor has contributed to lower volatility in muni bond yields, relative to U.S. Treasury bond yields.

Tourism Grows, Conventions Lag…A bellwether for the tourism and convention trends, Las Vegas is seeing an uptick in visitors and fewer conventions. So far in 2023, the number of visitors to Las Vegas is up 8% from a year ago. In 2022, visitor volume grew 20% from prior year. 3.5 million tourists visited Las Vegas in July, down 4.3% from pre-COVID-19 levels. The record year for visitors was in 2016. Meanwhile, Las Vegas convention attendance in July was 270,300, down 45.6% from July 2019, and also down 16.8% from July 2022. While tourism has grown, convention center attendance has lagged.

Cities Seek Office-to-Housing Conversions…New York City, Chicago, Boston and Washington D.C. are among large cities willing to offer tax breaks to help convert vacant office buildings into market-rate and affordable housing apartments. Boston is offering 75% property tax reductions on conversions. New York City Mayor Eric Adams is pushing Albany to create a tax incentive to help convert offices into affordable housing. Amid high interest rates, zoning and building code challenges, policy makers are trying to facilitate such conversions. Roughly 11% of office buildings in large cities are prime candidates for such a conversion per National Bureau of Economic Research. 38 office-to-multifamily conversion projects were started last year across the 65 largest US metros compared to a 10-year average of just 30 such projects per year.

Growing Cannabis Taxes Spur Bond Plans…A marijuana industry thinktank urges states to begin issuing ‘Cannabis Municipal Bonds’ (‘CMB’ Bonds) secured by cannabis taxes. New York State has already caught on, with lawmakers proposing a $51 billion CMB. And, why not: U.S. states had collectively reported more than $15.1 billion in tax revenue from legal adult-use cannabis sales since 2014, per the Marijuana Policy Project. In 2022 alone, states generated more than $3.77 billion in tax revenue from cannabis sales. Currently, 23 states have legalized marijuana, and levy a combination of percentage- of-price tax, a weight-based tax, and a potency-based tax. Delaware and Minnesota are the most recent U.S. states to legalize marijuana. Recently, the White House recommended that marijuana be moved to lower drug classification, signaling that state and local governments could rake in more from marijuana.

Bondholders Push for PREPA Receiver…Four large institutional bondholders, collectively owning $3.6 billion of the $8.2 billion outstanding PREPA Bonds are working to get better recovery than the board’s latest offer. Opposing parties state that the board’s latest plan “utterly disregards applicable black letter law and that has deepened bondholder dissension, ensuring a hotly contested confirmation process that in the end will fail.” Syncora Guarantee and GoldenTree Asset Management are seeking a receiver to be appointed at Puerto Rico’s electric utility, and Assured Guaranty will appeal in the First Circuit if the latest plan is court approved. Earlier, Judge Swain had put a stay on bondholder efforts to appoint a receiver, stating that such a stay could be lifted after determining ‘adequate protection’ of bondholder’s collateral. Since then, the Title III court ruling on the lien challenge has limited bondholder claim. “The plan and its associated side-deals are premised entirely on rank vote-buying, which the Bankruptcy Code prohibits,” GoldenTree and Syncora told Judge Swain last week. Allowing more time for court discovery, Judge Swain is ‘inclined’ to postponing the debt plan confirmation hearings in March 2024.

Compare 30-Year taxable U.S. Treasury yield 4.34% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.90%; “AA” 4.23%; %; “A” 4.50%. 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 90% of comparable taxable U.S. Treasuries.