According to the Investment Company Institute, investors added $1.33 billion from municipal bond mutual funds in the week ending Aug. 28. The prior week saw a $1.32 billion inflow. We should continue to see an inflow of funds while everyone expects the FED to cut rates.
For the last week of August, upgrades and positive outlooks on our ratings tracker totaled $13.5 billion, outpacing downgrades and negative outlooks, which amounted to $8.66 billion. The most significant adverse action came from Fitch, which downgraded Denver School District No. 1’s general obligation bonds from AA+ to AA and its certificates of participation from AA to AA-, impacting $3.6 billion in debt. On the upgrade side, the biggest move was Moody’s raising the City of San Antonio Water System’s junior-lien bonds to Aa1 from Aa2 and its subordinate lien bonds to Aa2 from Aa3, affecting $2.46 billion in debt. We have seen highly rated school bonds perform well over the past few years; I would not be concerned about these downgrades; however, they could present a buying opportunity.
Even with the shortened Labor holiday week, over $9.6 billion is set to hit the muni primary market. One of the largest deals we expect is $1.1 billion in first-tier and second-tier system revenue refunding bonds from the North Texas Tollway Authority. As we have been reporting, supply for all of 2024 has been strong. This has not, however, had any negative impact on yields.
Chicago is facing a budget deficit for 2025, close to $1B due to higher pension and labor costs. The city will need to close the gap somehow after taking measures in 2023 for this year’s budget; the mayor closed a $538M gap for 2024 but is now projecting a $223M deficit for this year. Chicago and Illinois, in total, have been performing great over the past few years. I am interested in seeing the mayor’s proposals for this issue. We have been buyers of Chicago Paper for several years; we understand some might not like how the city has been run. However, these securities have returned at an above rate of return.
August bond sales totaled almost $50B, one of the largest since October 2020, as we headed for the last presidential election. If we take elections as the main contributing factor to large sales, it suggests that we would see similar patterns until November. However, I believe FED rates will affect this for the September meeting as everyone is expecting and preparing for them to lower their rates.
The Bottom line:
Yields are down across the board. With the anticipated rate cut this month, the biggest question now is whether it will be 25 or 50bps. With the ADP Employment change 9/5/24 much lower than expected (145K expected 99K actual) adds fuel to the fire. Yields should continue to grind lower over the next few months, regardless of any cut.
At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.
David Loesch
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www.drlgroup.net
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Katy, TX 77450
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Do not buy discount bonds based on the Yield-to-Call (YTC). YTC does not indicate total return; this yield is valid only if the security is called. Bonds may be callable on multiple dates or any date following the first call date, so yield to call is based on the earliest stated call date. Discounted bonds may be subject to capital gains tax. Bonds may be subject to OID (Original Issue Discount). Bonds could also be subject to the DeMinimis Rule; please consult your tax advisor for further clarification. Insured bonds are issued for timely principal and interest payment only, do not cover potential market loss, and are subject to the insurance company’s claims-paying ability. Municipal income may be subject to state, local, and Alternative Minimum Tax (AMT) taxation. Corporate and Municipal securities are subject to gains/losses based on the level of interest rates, market conditions, and credit quality of the issuer. Non-rated (NR), With-Drawn (WR), or below investment grade bonds, lower-rated bonds carry a greater potential risk of default & should be considered by sophisticated investors only.
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