Week of 07/19/2021

Bond Market Shrugs Off Transitory Inflation… New Jersey Outlook Boosted… Chicago Convention Center Bond Yield Cut… Chicago Public Schools Fy22 Budget Plan… Highway Bonds Solid… Puerto Rico Debt Pact Advances Amid Political Risks…

Bond Market Shrugs Off Transitory Inflation… Looking at receding economic growth, the Fed is in no hurry to adjust its low interest rate policies right now and would have a better understand how the reopening is proceeding by year end. “We don’t have another example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” Fed Chair Jerome Powell told lawmakers last week that preemptive action would harm the economy. Price pressures are transitory and the economy will continue to need accommodation even when the pandemic ends and the labor market rebounds. “Inflation has increased notably and will likely remain elevated in coming months before moderating,” Powell said that it would be an error to overreact to inflation that results from one-time price increases of certain sectors recovering from pandemic- related price drops last year, such as air travel, hotels, cars, which are attributable to the reopening. Such price increases “should partially reverse as the effects of the bottlenecks unwind.” Responding to questions, Powell said reaching “substantial further progress” toward its maximum employment and price stability goals “is still a ways off” and it’s “difficult to be precise” about what constitutes substantial further progress, but he again vowed to give ample advance notice before tapering the Federal Reserve’s asset purchases. Weaker growth expectations are keyed in declining Treasury yields. 30-year U.S. Treasury bond yield slid 55 basis points from 2.38% in May 2021 to 1.83% today.

New Jersey Outlook Boosted… Moody’s upgraded New Jersey’s credit outlook to “positive,” the first upward move since it last downgraded the state’s credit rating to “A3” in 2017. The outlook boost comes on the heels of the Garden State’s largest pension contribution in history. A year ago ratings agencies lowered New Jersey’s outlook to negative amid Covid-19 fears. Governor Murphy scores high marks for ushering a millionaire’s tax, higher wages and free community college, amid economic improvements. “The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management,” Moody’s stated. Pivotal credit considerations over the next one to two years will be governance and financial improvement that restore structural balance. Welcoming the good news from Wall Street, Governor Murphy praised his administration’s efforts to “right our fiscal ship” adding, “On the heels of a record 11 credit downgrades under the prior administration and in the midst of an unprecedented global pandemic, we’ve delivered historic levels of pension funding including the first full contribution in a quarter of a century, set aside money to pay off a sizable portion of state debt and avoid future issuances, secured long term savings for the state and its taxpayers, bolstered our surplus and positioned ourselves well to tackle the remaining challenges that lie ahead.” New Jersey general obligation bonds trade at premium prices. New Jersey bonds proved to be the most lucrative for investors among the five largest municipal borrowers with a total income and appreciation of 21.7% since the beginning of 2018, per Bloomberg.

Chicago Convention Center Bond Yield Cut… At the first sizeable public event at the McCormick Place convention center, large crowds at the Chicago Auto Show mirrored Wall Street’s strong reception of the Chicago downtown convention centers’ new tax-free bonds. New Chicago convention center long term bonds rated S&P “BBB+” Fitch “BB+” yielded about 98 basis points more than top rated muni bonds. Last summer, the convention center’s new issue bond yield penalty was close to 200 basis points. “Interest in the authority’s bonds was strong across all maturities, including the current interest bonds and the capital appreciation bonds,” the convention center added “While it’s always difficult to pinpoint, there were a number of tailwinds that likely helped the authority achieve a successful pricing” including rating momentum and market conditions.

Chicago Public Schools Fy22 Budget Plan… Chicago Public Schools’ (CPS) proposed $9.3 billion Fiscal 2022 budget is about $1 billion higher than prior year. Sizeable federal aid, $1.8 billion from the America Rescue Plan in March 2021, $800 million from the Coronavirus Response and Relief Supplemental Appropriations Act in December 2020 and $206 million from the CARES Act in March 2020, have boosted the junk rated school district’s prospects. Last year, the district won one-notch upgrades from Moody’s and S&P Global Ratings to “Ba3” and “BB” with stable outlooks. The district currently carries about $8.4 billion of debt with $763 million earmarked in the budget for debt service and $667 million for teacher pensions. The nation’s third largest school district last sold tax-free bonds in January that yielded about 117 basis points more than top rated muni bonds. CPS CFO stated, “We are going to be issuing debt closer to late fall or beginning of winter and we are probably looking at the same size that we did” in the last bond sale which provided $450 million of new money.” On July 28, the Chicago Board of Education will vote on the budget.

Highway Bonds Solid… States’ solid credit, their active role in aligning taxation to usage and anticipated federal infrastructure funding, bring stability for tax-free bonds issued for highway systems. States’ quest for an alternative to fuel taxes has begun. States’ stance on taxing electric vehicles’ road usage could be compared to Internet sales tax. States eventually found a way to capture online retail sales taxes as e-commerce grew significantly larger. Electric vehicles make up only 1.5% of registered cars. That could change if President Biden’s climate agenda initiatives are enacted by Congress. A few states, California and Massachusetts, have a long term goal of phasing out fuel-based engines. Higher car registration fees, license renewal fee and electric car recharging station taxes could be ahead. Since 1960, the number of cars on American roads has never declined.

Puerto Rico Debt Pact Advances Amid Political Risks… The focus of the Island’s four-year bankruptcy proceedings now shifts to the political arena after key agreements were struck last week. A verbal agreement with bond insurers AMBAC and FGIC was outlined and a separate agreement with the Island’s suppliers and vendors has cleared the path for the debt pact to move forward. The Island’s legislature could become an obstacle to the debt pact. Governor Pedro Pierluisi is fighting the Oversight Board’s plans to reduce pension benefits for some retirees. Puerto Rico’s Fiscal Agency reiterated that Puerto Rico’s legislature will not enact legislation for new bonds needed by the debt plan if pensions are cut. If the Island government does not approve, questions would arise on full faith and credit credentials and tax status of the new bonds issued in exchange for legacy central govt debt. The Oversight Board’s lawyers assert that the debt plan does not need legislature’s approval and it favors a ‘legal blessing’ and/or IRS input could be part of the disclosure statement. “I certainly encourage the parties to hope and work toward cooperation because that clearly would be in the interest of the people of Puerto Rico and all of the stakeholders,” Judge Swain is calling for a hearing on the decision on the final disclosure statement on July 27. “Disclose the risk associated with the implementation of the proposed plan of adjustment should the Oversight Board proceed without the enactment of legislation contemplated in the plan of adjustment,” Judge Swain ordered.

Compare 30-Year taxable U.S. Treasury yield 1.83% to 30-Year tax-exempt muni bond yield “AAA” 1.41%; “AA” 1.51%; “A” 1.69%; “BBB” 2.15%. For investors in the 35% tax-bracket, a 2.15% tax-exempt yield is equivalent to a 3.3% 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.