Prepa Inches Toward Litigation
By Maxwell Adler
Municipal bonds slid this week, selling off with other areas of fixed income markets on speculation that the Federal Reserve will continue raising interest rates.
Short-term, top-rated municipal bond yields jumped as much as 26 basis points since Monday’s market open, with those on six-month securities topping 3%, the highest since early March, according to data compiled by Bloomberg. On Thursday, two-year yields jumped 11 basis points to 2.91%, the biggest one-day gain in a month, the data shows.
Treasury yields also increased after Fed Bank of Dallas President Lorie Logan said the case for a pause next month is not clear. On Thursday, yields on two-year Treasury notes climbed about 10 basis points.
“We’re witnessing a bout of volatility here,” said Kathleen McNamara, senior municipal strategist at UBS. She said that sales of new bond deals have started to pick up after ultra-low issuance in the first quarter which combined with macro-market headwinds created a “perfect storm.”
The pressures have started to hit the primary market. The Triborough Bridge and Tunnel Authority postponed a $700 million sale initially scheduled for this week to allow New York’s Metropolitan Transportation Authority to refine the structure of its refunding plans.
The timing of refinancing sales are sensitive to changes in the market so the issuer can reap optimal savings. When yields tick up, like they did this week, it’s harder to achieve those gains.
“Treasuries have moved higher and the tax-exempt market has caught up to follow suit,” said Charles Stavitski, executive vice president at Roosevelt & Cross Inc. He said there seems to be more demand from investors in the longer-part of the curve, mainly for bonds that mature in more than 10 years. For those with maturities inside of a decade, subscriptions have been “light,” he said.
Short-dated securities have been materially underperforming the broader market in 2023 as the muni-yield curve remains inverted.
Municipals that mature between two- and four-years from now have gained just 0.69% since the start of the year, compared to a 2.5% jump in the Bloomberg Municipal Bond Index and a more than 4% return for long bonds.
The volatility comes as municipal bond funds have reported consistent outflows. Investors pulled about $187 million from municipal-bond funds during the week ended Wednesday, according to Refinitiv Lipper US Fund Flows data. The loss follows last week’s $102 million outflow and marks the 14th consecutive week of outflows.
New York is closer to making the city and its hospitals more accountable for soaring health care costs. A new proposed local law would create a committee to monitor the city’s employee-related health care expenses and disclose prices for hospital procedures. The measure could come to a vote as early as next week and save New York $2 billion a year, according to its main sponsor, City Council member Julie Menin. The Office of Healthcare Accountability would be the first of its kind for a US municipality, said Menin, noting that the city’s annual health-care costs for its employees and retirees have ballooned to an expected $11 billion this year from $6.3 billion in 2017 — accounting for more than 10% of its budget.
Florida Governor Ron DeSantis is fighting a losing battle against Walt Disney Co., and a backlash against the Republican’s culture crusade is galvanizing Democrats across the state, Orlando Mayor Buddy Dyer said. “DeSantis is going to be gone one way or the other from Florida in four years. Disney’s gonna be here forever,” Dyer, a Democrat running for his sixth term, said. “The pendulum has swung on some of these cultural issues.”
Retail investors eager to dive into one of the US’s most volatile municipal bond markets have a new on-ramp. The X-Square Municipal Income Tax Free ETF, an exchange traded fund comprised primarily of Puerto Rico’s restructured municipal bonds, will begin trading on the NYSE Arca Friday under the ticker ZTAX. ZTAX will give investors with as little as $25 access to a pool of bonds that pay no federal, state or local taxes, Puerto Rico-based X-Square Capital said
Primary market: Visible supply finishes the week at $10 billion,
Fund flows: Investors pulled about $187 million from municipal-bond funds during the week ended Wednesday, according to Refinitiv Lipper US Fund Flows data. The loss follows last week’s $102 million outflow and marks the 14th consecutive week of outflows.
Secondary market: MSRB par amount traded: $13.5 billion; PICK par value offered: $8.4 billion.
Most active: The most-traded issue on Thursday was the Stanford University via the California Educational Facilities Authority bond due in 2033 with a 5% coupon with 30 trades totaling $84 million
In the pipeline: San Antonio Electric and Gas System is expected to sell $590 million of bonds in a negotiated sale.
AAA Callable Yields
*assumes 5% coupon, 10-year par call.
Benchmark States 10-Year Yields
California Outlook Revised to Negative
By Martin Z. Braun
California’s bond rating outlook was revised to negative by Moody’s Investors Service as plummeting tax revenue in the most populous US state has left it facing a projected $32 billion deficit.
California’s tax collections, which rely heavily on capital gains revenue from high earners, could drop by $11 billion more than projected by Governor Gavin Newsom in the event of an economic downturn. Newsom has proposed scaling back or delaying spending in order to retain budget reserves.
“The negative outlook reflects a weakened and uncertain revenue environment in California that raises the possibility of extended pressure on the state’s budget,” Moody’s said. Moody’s rates the state’s general obligation bonds Aa2, its third-highest rating.
Thousands of workers have been laid off from California-based giants including Alphabet Inc., Meta Platforms Inc. and Twitter, while regional lenders, including PacWest Bancorp. continue to struggle. A key lender on the venture capital scene, Silicon Valley Bank, collapsed in March, and in southern California, a writers’ strike has crippled Hollywood studios.
California has been hit by two consecutive quarters of sinking sales tax revenue, conditions not seen since the dot-com bubble in the early 2000s and the Great Recession, according to the state’s Legislative Analyst’s Office.
HD Palmer, spokesperson for Newsom’s Finance Department, noted that the state’s principal general fund revenue is projected to be nearly 40% higher next year than before the Covid-19 recession. He said that the federally driven shift in tax deadline is the reason the state is holding fast to its reserves so it can respond to changing fiscal conditions when needed.
“This revised outlook reflects no change in the state’s core credit rating — which Moody’s has affirmed – so there’s no change whatsoever to the state’s bond costs or its ability to sell bonds,” Palmer said.
Like New York, California has long been prone to revenue booms and busts because of the sensitivity of collections to the financial markets and its highly progressive income structure. The state has a top marginal tax of 13.3% rate on households making more than $1 million.
In the aftermath of the bursting of the Internet bubble in 2003 and the Great Recession in 2009, Moody’s lowered California’s bond rating to Baa1, its third-lowest investment grade.
In 2019, the rating company raised the state to Aa2, its highest since 2001, as low interest rates boosted the tech sector and initial public offerings minted new millionaires. California boasted a record surplus of almost $100 billion just last year.
The state didn’t anticipate a recession when announcing its May budget revision. In the unexpected scenario of a moderate recession, revenue could decrease by as much as $40 billion in the fiscal year starting July 1, largely driven by loses in personal income taxes, according to the budget documents.