Week of 9/23/2019

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Muni Bonds Offer Higher Yields Than Treasuries… Fed Cuts Rate To Counter Global Headwinds… Investors Flock To High Yield Munis… Mayor Meets Chicago Bondholders… Wayne County Earns Ratings Upgrade… More Schools Seek State Help For Pensions… Opioid Settlement To Benefit Govts… Global Growth To Hit Decade Low…

Muni Bonds Offer Higher Yields Than Treasuries…Tax-free muni bonds offer 103% of comparable U.S. Treasury yield. Muni bonds are priced conservatively. A range of issuers such as New Jersey Transportation Trust Fund Authority, Texas Water Development Board, State of Mississippi and Baptist Health South Florida Obligated Group will issue new tax-free bonds this week. $7.84 billion of new muni bonds are to be issued this week. $12.6 billion of new tax-free bonds will not be enough to replace $25 billion bonds due for maturity next month. Moreover, inflows to munis have continued for 37 straight weeks. The muni bond pricing advantage over comparable taxable U.S. Treasuries is enticing investors.

Fed Cuts Rate To Counter Global Headwinds…In line with investor expectations, Fed lowered interest rates for a second time this year. The ‘insurance cut’ against negative hits from a weakening global economy is the second Fed Funds rate cut this year. Three Fed voting members voted against the cut, including St. Louis Fed President Bullard who sought a 50 bps cut. The Fed noted “Although growth of household spending has picked up from earlier in the year, growth has been rising at a strong pace, business fixed investment has been soft and exports have weakened”. The Fed reiterated it would look at incoming economic data and “act as appropriate to sustain the expansion”. Markets reflect a 75% chance of another rate cut by early 2020.

Investors Flock To High Yield Munis…Super low rates this year have driven investors to seek out a niche of the municipal bond market that offers higher yields, Wall Street Journal reported. Investors seeking higher yields prize riskier corners of the traditionally safe municipal bond market. High yield muni bonds make up only 9% of the muni market. High yield municipal bonds range from lower-rated public and charter schools, healthcare facilities to affordable housing and energy projects and carry unique risks. Investors are well-advised to seek a municipal bond specialist to understand such risks when looking for high yield muni bonds to diversify a portfolio. High yield municipal funds have attracted more money this year than any other year since 1992, drawing $14 billion through August. An index of high yield munis has returned 9.3% this year.

Mayor Meets Chicago Bondholders…Mayor Lightfoot referred to possible one-time revenues in Chicago’s 2020 budget at the Windy City’s annual meeting with bondholders. A substantial property tax hike could be in the cards. The Mayor believes that tax assessments are skewed in favor of business property-owners and against low-income homeowners and will seek the Cook County assessors for assessment reform. A surplus in tax-increment financing districts could be a source of funds. A hike in city real estate transfer tax and a congestion tax on Uber and other ride-hailing services are strong bets for additional revenue. Lightfoot still does not know to what extent Illinois will offer assistance to plug Chicago’s looming budget gap of $838 million. Illinois administration appears to be forthcoming on making a casino viable, but has balked on pensions. The Mayor has begun to see significant savings in city spending by hiring a risk manager; reforming the city’s $100 million-a-year workers’compensation program and refinancing high-cost city debt. “My administration is unafraid to make the tough but necessary decisions to get us on the path to fiscal health,” the mayor pointed to efforts to reign in overtime, freeze hiring. The Mayor offered only the remotest hints to bondholders as she prepares to present Chicago’s budget on October 23.

Wayne County Earns Ratings Upgrade…Wayne County, Michigan, received a credit rating upgrade to “Baa1” from “Baa2” from Moody’s. Three years after exiting state oversight, a series of ratings upgrades have earned Wayne County an investment grade rating from all three major ratings agencies. “Wayne County’s recovery has created a foundation for growth, but even Wall Street recognizes that sustainable growth must be broad-based,”Wayne County Executive Warren C. Evans said. Since taking office in 2015, the Evans administration has eliminated a $52 million structural and an $82 million accumulated budget deficit, delivered four consecutive budget surpluses, and increased Wayne County’s pension funding from 45% to 61%. “Wayne County’s recovery has created a foundation for growth,” Warren added “Our finances are stable and we are better prepared to weather future economic downturns. We are focused on maintaining that progress.”

More Schools Seek State Help For Pensions…States are likely to bear a higher portion of K-12 teacher pensions. This could become more of a trend if local pension burdens rise above local revenue-raising opportunities. Michigan and Colorado have enacted laws to shift school district pension bills to the state on a recurring basis. One-time funds from state budget surplus or reserves allowed California, Indiana and Oregon to support teacher pension shortfalls in Fiscal 2020. Formula-based state aid is often found lacking for schools in large urban areas as they operate in a dynamic economic ecosystem. In recent years, growing pressures to increase school funding has led to widespread teacher strikes. Shifting more teacher pension bills to states could increase the pension burden for some states. In total, U.S. states’ net pension liabilities add up to $1.56 trillion in 2018 representing 7.7% of U.S. GDP. Favorable investment returns in both 2017 and 2018 on state pension plans are a bright spot. Outperforming targets, the average U.S. state pension plan returned 8.8% in 2018, allowing states to lower net pension liabilities by 3.6% from a year ago.

Opioid Settlement To Benefit Govts…More than $10 billion could flow to 24 states and thousands of local governments from a tentative agreement with Purdue Pharma. Purdue Pharma is a defendant in a broader class action suit against multiple opioid manufacturers, distributors and pharma companies. Governments have argued that drug makers misrepresented health risks driving up safety net costs and a staggering economic cost of $78 billion. The Purdue settlement could be a precursor to a wave of settlements on opioid litigation that brings states and local governments closer to a funding stream. States receive recurring revenues from tobacco settlement paid by cigarette manufacturers. The settlement, which is subject to court action and other developments, would benefit local and state governments. Global Growth To Hit Decade Low…The world economy is expected to grow by 2.9% this year, the smallest annual rise since the Great Recession, per the Organization for Economic Cooperation and Development (OECD). The OECD cut its growth forecasts for the U.S. to 2.4% this year and 2% the next year down from 2.8% and 2.3% forecasted in May. Lingering trade disputes between the U.S. and China, Japan and Korea along with imminent battles with European Union on auto import tariffs cloud the outlook. Worldwide, uncertainty has taken a toll on trade flows and business spending. Across G20 leading economies, investment spending rose 1% in the first half of this year, compared with 5% in 2018.

Compare 30-Year taxable U.S. Treasury yield 2.13% to 30-Year tax-exempt muni bond yield “AAA” 2.19%; “AA” 2.32%; “A” 2.43%; “BBB” 2.9%. For investors in the 35% tax-bracket, a 2.9% tax-exempt yield is equivalent to a 4.46% taxable yield. Top rated tax-free bonds yield 103% of comparable taxable U.S. Treasuries.