Week of 5/31/2022

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Tax-Free Bond Yields Drop… Signs of Economy Cooling… Record Retail Orders For Connecticut Bond Sale… PREPA Plan by July-22… Texas Dirt Bonds Shine… Illinois Pension Consolidation Plan Moves Ahead… Ballys Chicago Moves Forward…

Tax-Free Bond Yields Drop… Municipal bond yields fell 40 to 65 basis points over last week. Municipal bonds rallied with top-rated tax-free benchmark returning 2.8% in a week. This year, muni bonds have lost 7.5%, and more volatility is not ruled out. Last week investors withdrew $1 billion from municipal bonds funds, the least since March-22. For fifteen straight weeks, outflows from municipal bond funds pummeled tax-free bond prices. As tax-free yields surged to multi-year highs, it made way for an attractive entry point for investors. Summer tends to bring a surge in muni bond prices as bondholders seek to reinvest billions of dollars from coupon payments and maturing bonds. New muni bond supply could fall short of reinvestment needs by as much as $61 billion over the next three months Citigroup estimates. Cheaper valuations of municipal bonds ahead of period of seasonal strength in the summer months has led demand to reemerge. The biggest rally in two years comes amid signs that the U.S. economy has softened.

Signs of Economy Cooling… The economy shows signs of cooling off. U.S. GDP shrank 1.5% in the first quarter, a steeper drop than estimated. Pending home sales fell in April for the sixth straight month, the longest such stretch since 2018. Household savings dipped to the lowest rate since 2008. Spending remains robust, but consumers dipped into savings. Personal consumption expenses, excluding food and energy cooled to a 4.9% year-over- year growth in April, down from 5.2% a month ago, the slowest price gain this year. Purchasing manager indices show larger slowdowns in both services and manufacturing activity. Jobless claims averaged higher for the eighth consecutive week. The Atlanta Federal Reserve revised down its estimate of second quarter U.S. economic growth to 1.9% from 2.4% prior. Fed Minutes released last week show the central bank is likely to lift its benchmark interest rate by a half-percentage point at its next two meetings, in June and July this year. Fed Minutes noted that an “expedited” tightening could position the Fed well later this year to consider a potential pause to assess the effects of restrictive monetary policy on inflation and economic growth and determine if any policy adjustments were needed. Seeking a ‘softish’ landing for the U.S. economy, Fed Chair Powell noted recently that financial conditions have tightened more quickly than in a very long time.

Record Retail Orders For Connecticut Bond Sale… Highest ever volume of retail orders for a State bond sale was marked with $1.7 billion of retail orders on a single day for $1 billion Connecticut general obligation bonds. Demand from institutional investors was equally strong. “Strong retail demand was helped in part by the Positive Outlook from S&P as well as the generally higher overall level of interest rates, which are more attractive particularly to individual investors,” State Treasurer’s office added that Connecticut achieved a favorable borrowing cost of 3.55% for 20-year tax-free bonds. The bond sale came on the heels of a positive outlook from S&P. Connecticut has received four credit upgrades in the last year, a first in over two decades. “This latest improvement in the State’s credit rating outlook from S&P is their confirmation that the State’s financial policies and management practices continue to keep the State’s fiscal house secure.”

PREPA Debt Plan by July-22… The mediation team has requested the Title III court for an additional month to negotiate a pact for restructuring Puerto Rico electric utility debt. The mediation covers more than $8 billion of bond debt and more than $700 million of unsecured fuel line loans, general unsecured claims, collective bargaining agreements, and unfunded PREPA pensions. PREPA was put in Title III bankruptcy in summer 2017. Efforts to restructure PREPA debt began in 2015. In March 2020, Governor Pedro Pierluisi withdrew the Island’s support of a prior debt pact. Judge Swain has asked for the mediation team for a proposed plan of adjustment, a term sheet for the plan, a litigation schedule, or a “declaration and memorandum of law showing cause why the court should not consider dismissal of PREPA’s Title III case.” Oversight Board Member Justin Peterson is confident that the mediation team would settle the PREPA bankruptcy by year-end. “It is long overdue.”

Texas Dirt Bonds Shine… The Lone Star State’s population gains has boosted the ranks of lower-rated bonds issued by Texas municipal utility districts, known as MUDs. Texas ranks second among U.S. states in net domestic migration gains. That has led to a surge in home valuations, up 24% per a Texas Association of Appraisal District poll. Lower-rated municipal utility districts’ property valuations surpass that of high-grade counterparts. Lower rated district tend to have a higher debt burden, as they fund new capital infrastructure. Many MUDs have seen recent rating upgrades, median rating across Moodys rated MUDs is ‘A’. Strong demographic growth has favored MUDs in Austin, Dallas and Houston areas. Governor Abbott’s proposal to seek a two-third majority voter approval for new local government bonds backed by property taxes underscores state oversight on debt practices. Texas Constitution requires voter approval for all tax-secured debt.

Illinois Pension Consolidation Plan Moves Ahead… An Illinois Judge upheld the constitutionality of 2019 legislation that seeks to transfer 600 local government police and firefighter pension plans into consolidated police and fire pension plans. While firefighters are supportive of consolidation, retired policemen challenged the legislation that seeks to transfer 600 local government police and firefighter pension plans into consolidated police and fire pension plans. While firefighters are supportive of consolidation, retired policemen challenged the constitutionality of consolidation. Illinois Constitution bars any impairment of promised retiree benefits. The Judge ruled that consolidated fund management does not infringe protected status. Local governments have faced pressures in funding growing public pensions. The funded ratio for Chicago police and fire pension plans has dwindled to about 54% from around 75% two decades ago. The new Illinois Police Officers’ Pension Investment Fund said “We are pleased with the court’s ruling rejecting plaintiff’s constitutional challenges to the statute, granting defendant’s summary judgment motion and denying plaintiffs’ motion.” Governor Pritzker added “This landmark ruling supports another pillar in my efforts to responsibly and comprehensively tackle Illinois’ pension debt, and I’m especially proud that we accomplished this consolidation after 75 years of previous efforts failed.”

Ballys Chicago Moves Forward… Chicago City Council voted 41-7 to approve a Ballys casino estimated to bring over $200 million in annual recurring revenue to fund city police pensions. New casino revenue helps the city avert property tax hikes, and helps relieve fiscal pressures of rising contributions to underfunded city police pension plans. Chicago’s pension liabilities are $33 billion across four pension plans, with funded ratios as low at 18%. A recurring revenue stream dedicated to pension funding brings the Windy City closer to its goal of structural balance.

Compare 30-Year taxable U.S. Treasury yield 3.01% to 30-Year tax-exempt muni bond yield “AAA” 2.96%; “AA” 3.39%; “A” 3.64%; “BBB” 3.94%. For investors in the 35% tax-bracket, a 3.9% tax-exempt yield is equivalent to a 6% taxable yield. Top rated tax-free bonds yield 98% of comparable taxable U.S. Treasuries.