Week of 9/30/2019

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Record Inflows To Munis… New Jersey Bond Issue Four Times Oversubscribed… California Fiscal Renaissance Continues, Fitch… MTA Plans A Congestion Tax To Pay Muni Bonds… CPS Talks Could Avert Strike… Vaping Ban Good For Tobacco Bonds… Long Way To Go For Puerto Rico GO Debt Plan… Lower Spending-Lower Growth Outlook…

Record Inflows To Munis…2019 inflows to muni bonds could surpass a peak record set a decade ago. 2019 cash inflows are 20% more than 2009-year to-date levels and only $5 billion less than 2009’s full year record of $72 billion per a muni expert. Over the last 38 weeks, muni bonds have attracted $66 billion cash inflows per Investment Company Institute data. The biggest cash haul in a decade has brought price gains for bondholders. Muni bonds show 6.7% index returns this year. Bank of America muni strategists can foresee that 30-year top-rated tax-free bond yields could potentially dip to 1.6% relative to just over 2% now.

New Jersey Bonds Four Times Oversubscribed…$4 billion total orders for $1 billion bonds issued by a New Jersey transportation authority this week resulted in lower than anticipated bond yields. Strong investor demand led the Garden State issuer to upsize the sale by 25%. A Texas water bond also saw strong investor demand amid a muni bond rally. New Jersey, Pennsylvania and California bonds were most active last week. This week $9 billion of new tax-free bonds including New York City GO ‘AA’ credit and Massachusetts highway revenue bonds ‘A+’ are anticipated by investors.

California Fiscal Renaissance Continues, Fitch…On average, all California government sectors are better prepared to manage through the next downturn than they were to face the Great Recession, Fitch noted. California state finances have materially improved due to the efforts of successive administrations. At this point, the Golden State has repaid all budgetary borrowing that accumulated through two recessions and built a rainy day fund that will equal about 11.3% of revenues by the end of fiscal 2020. The State of California has a structurally balanced (or surplus) budget with surplus revenues being applied to pensions. California school districts tend to be rated lower relative to the state due to lower revenue flexibility. Counties in California experience less cyclical revenues than the state because property tax and service fee revenues are relatively stable. Hard hit by the Great Recession, CA cities have built favorable reserves. Faced with rising pension costs, labor contracts with teachers, police and fire unions are key for local government budget balance. “Fitch-rated cities and counties have increased their financial resilience throughout the economic expansion, increasing available fund balances to 35.5% and 23.5% of spending at the end of fiscal 2018” Through a downturn, higher reserve funding and institutionalized management changes should support more stable operating performance for California and its counties, cities and schools. California GO bonds rated Moody’s ‘Aa3’ S&P ‘AA’ Fitch ‘AA’ yield 2.03% for 30 years, a little lower than “AAA”-rated muni benchmarks.

MTA Plans A Congestion Tax To Pay Muni Bonds…New York’s Metropolitan Transportation Authority (MTA) plans to issue $15 billion muni bonds secured by charging midtown traffic congestion pricing fees and another $10 billion muni bonds against new taxes on internet sales and expensive real estate transfers. New York Mayor Bill de Blasio agreed to a modest increase in the city subsidy to MTA provided the congestion tax is implemented. New York State Governor Andrew Cuomo stated, “We have secured $25 billion during this year’s legislative session that will go directly towards the MTA’s capital needs outlined in this plan, and I support an additional State investment of $3 billion, to be matched by the City.” Referring to the congestion tax, MTA Chairman said, “Much of those funds we’ll receive from the Central Business District Tolling or other revenues lock-boxed for capital projects.” MTA is an issuer of $44 billion muni bonds including special credits. MTA’s $51 billion 5-year spending plan is 70% larger than its current capital budget and could help make up decades-long underfunding.

CPS Talks Could Avert Strike…“We are committed to doing everything we can to finalize a deal that is sustainable for all Chicagoans and for our City’s future,” Chicago Mayor Lightfoot and Chicago Public Schools (CPS) CEO jointly added “The district is continuing to meet with representatives from CTU and we remain confident that a deal can be made that does not disrupt classroom learning.” Chicago Teachers Union (CTU) voted to authorize a strike and CTU’s governing body, the House of Delegates will meet on October 2 to decide next steps. The union wants better pay, benefits, more staffing and also more affordable housing. The union’s contract with CPS ended on June 30. In the last contract showdown, in 2016, a strike was averted in a last-minute deal. At least eight states and dozens of districts have been hit by teacher strikes over the past two years, mostly over salaries and education funding. Talks between the city and union continue, and they could come to terms before a strike is set. Investors and rating firms are monitoring the talks closely.

Vaping Ban Good For Tobacco Bonds…A marked slowdown in U.S. vaping sales could augur well for tax-free tobacco muni bonds. Amid tighter regulations and greater health-awareness, sales of e-cigarettes will likely turn negative in September following growth of 13% in April. Dangers of vaping caused the Trump administration to crack-down on e-cigarettes. Conventional cigarette shipments or sales drive tobacco settlement revenues paid by cigarette makers to U.S. states. Such tobacco revenues secure billions of dollars of muni bonds issued by U.S. states. Any ban or restrictions on e-cigarettes could return smokers to conventional cigarettes accruing towards tobacco settlement revenues paid to U.S. states. Because smoking has declined over the long term, tobacco bonds offer higher tax-free yields. Low Treasury yields, along with negative yields overseas have caused investors to seek high yield tax-free muni bonds. This year, a Tobacco Bond index has returned 10.4%. Long Way To Go For Puerto Rico GO Debt Plan…The first plan of adjustment for GO debt filed by Puerto Rico’s Oversight Board has a long way to go. It proposes to give investors 64% of what they are owed on pre-2012 GO bonds and as little as 35% for those issued in 2014 if bondholders choose to settle rather than litigate. Hedge funds holding about $3 billion of mostly pre-2012 Commonwealth debt agreed in June to such a framework. Aurelius and Autonomy Capital hold the 2014 bonds and haven’t accepted the 35 cents. The proposed 35% offer is far below where the 2014 general obligations are trading. The 2014 debt traded Friday at an average price of nearly 61 cents, Court-ordered mediation, potential litigation and a U.S. Supreme Court review of the Oversight Board’s appointment could be in the mix of developments impacting the progress of the Oversight Board’s proposal in the Title III court.

Lower Spending-Lower Growth Outlook…Consumer spending growth cooled off in August to the slowest pace since February. In August, US jobs growth slowed to its weakest level in three months. Consumer prices measured by the personal consumption expenditures (PCE) price index were unchanged in August as food prices declined for a third straight month and the cost of energy goods and services dropped 2.0%. In the wake of lower spending, a closely watched model for gross domestic product showed growth slowing to 1.7% from 2% GDP growth in the second quarter.

Compare 30-Year taxable U.S. Treasury yield 2.15% to 30-Year tax-exempt muni bond yield “AAA” 2.11%; “AA” 2.30%; “A” 2.41%; “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 99% of comparable taxable U.S. Treasuries.