Week of 07/06/2021

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Illinois’ First Credit Upgrade in 20 Years…Detroit Earns Fourth Waiver From State Oversight… Oversight Board Sues Island Governor… Municipal Bond Market A Bright Spot For Bond Investors…Lawmakers Find A Fine Balance…

Illinois’ First Credit Upgrade in 20 Years…“It’s a huge note of progress for our state,” Governor Pritzker welcomed Illinois’ first rating upgrade in more than two decades. Illinois’s fiscal condition is heading in the right direction for the first time in the 21st century. A one-notch ratings upgrade from Moody’s reverses the tide of more than a decade of ratings downgrades for Illinois general obligation bonds. Moody’s last upgraded Illinois in1998, while Fitch Ratings last upgraded the state in June 2000 when Governor George Ryan was at the helm. S&P Global Ratings, which last upgraded Illinois in 1997, moved its rating down three notches while Governor Rauner was in office. With the Moody’s upgrade, Illinois’ credit rating is back to where it was before the last of three downgrades during Governor Rauner’s tenure when Illinois operated without a complete budget for two years. Material credit improvement comes from prudent use of outperforming revenues and direct federal aid. “Illinois’ enacted Fiscal 2022budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act, ”Moody’s stated. Moody’s credit upgrade to “Baa2” from “Baa3” impacts$33 billion of tax-free bonds. “The stable outlook indicates the state’s capacity to manage near term fiscal pressures while carrying a heavy long term liability burden,” Moody’s stable outlook follows a positive outlook assigned last week by Fitch. Governor Pritzker highlighted “I promised to restore fiscal stability to Illinois and Moody’s ratings upgrade demonstrates that Illinois’ finances are heading in the right direction for the first time in two decades. A ratings upgrade pays momentous dividends for taxpayers, and the people of Illinois deserve credit for their incredible resilience and determination.”

Detroit Earns Fourth Waiver From State Oversight… For the fourth year in a row ,Detroit received clearance to operate independent of direct
state oversight. “Based upon a review of the city’s financial information, submitted reports and discussions during the finance and contracts subcommittee meetings, staff recommends the Financial Review Commission certify that the city of Detroit has met the statutory conditions to grant the city of Detroit the year-four waiver, ”the Detroit Financial Review Commission stated. The commission was put in place after the city’s December 2014 exit from Chapter 9 bankruptcy. To maintain financial independence, Detroit must maintain a deficit free budget for at least three years, among other conditions. When COVID-19 struck, Detroit was staring at a $400 billion deficit across Fiscal 2021 and Fiscal 2022, threatening its continued financial independence. With spending cuts, reserve draws and upbeat revenues, Detroit balanced its books, the key to financial freedom. Earning the latest waiver from state oversight is a notable feat for the Motor City.

Oversight Board Sues Island Governor… The federal Oversight Board filed a suit against Governor Pierluisi and Puerto Rico lawmakers. The Oversight Board is against a new law, Act 7, that interferes with the central government debt restructuring plan. The controversial law signed last month says that the Island government will not enact legislation approving new bonds envisioned in Commonwealth debt restructuring plans if pensions are impaired. The Board proposed plan contains a pension cut. The Governor’s new law would mandate a $4.5 billion transfer from government accounts to a newly created pension trust, which is not part of the board’s current fiscal plan. The Oversight Board asked the Title III court to void the new law that “purports to dictate the terms of a new plan of adjustment, contrary to the Oversight Board’s currently proposed plan of adjustment.” Board Executive Director Natalie Jaresko said, “For four years, the Oversight Board, the Puerto Rico government, retirees, and creditors have been negotiating to reach a consensual agreement that would allow Puerto Rico to emerge from bankruptcy. This law would derail that progress and result potentially in years of deadlock and litigation.” Governor Pierluisi responded, “I believe that litigation is not necessary at this time and we will let the court know,” Pierluisi added “At the same time, I will continue to focus on finding solutions to this controversy that protect our pensioners and that are fiscally viable.”

Municipal Bond Market A Bright Spot For Bond Investors… The $4 trillion muni bond market is proving to be a winning investment for bond investors. High yield munis have earned 6.1% this year, compared with 3.6% for corporate debt of that quality. The $4 trillion market for state and local debt earned 1.1% in the first half of the year, trouncing negative returns on U.S. Treasuries and corporate bonds. Money has been flowing into municipal bonds at an unprecedented clip of nearly $2 billion a week. On pace for a record year, investors have added around $37 billion to municipal bond funds in the first half of 2021. Institutional investors have complained about the competition to get in on new bond offerings as underwriters are deluged with orders. “We think technicals remain strong, and if anybody was willing to buy bonds in the past several months, this correction presents an opportunity to add to their holdings.” Barclays analysts noted. Awaiting clarity on federal infrastructure package, most governments are holding off on borrowing plans, having sold $221 billion of long term bonds this year. With the U.S. economy expected to be fully open by mid-summer, institutional investors see “solid opportunities” in investments tied to the reopening of the U.S. economy. Tax-free bonds issued for convention centers, hotels and malls, as well as lower rated general obligation bonds are set to benefit from the ongoing reopening. A spate of credit upgrades and favorable outlook changes by ratings agencies have reversed COVID-19 related uncertainty. A federal infrastructure package will add more cement to further strengthen tax-free bonds.

Lawmakers Find A Fine Balance… High stake deal on the bipartisan infrastructure funding, along with and Democrats’ ‘family infrastructure’ proposal is a delicate balancing act. Biden is likely to push multi- trillion social spending plans funded by tax hikes through the Senate’s budget reconciliation process. Climate related spending sought by Democrat’s is another sticking point. Democrats’ ability to maintain narrow government control in the 2022 midterms could hinge on the outcome of the talks.

Compare 30-Year taxable U.S. Treasury yield 2.02% to 30-Year tax-exempt muni bond yield “AAA” 1.56%; “AA”1.76%; “A” 1.84%; “BBB” 2.31%. For investors in the 35% tax-bracket, a 2.3% tax-exempt yield is equivalent toa 3.6% taxable yield. Top rated tax-free bonds yield 77% of comparable taxable U.S. Treasuries.

If you have any questions or desire updated information contact your GMS Account Executive.