The massive issuance of municipal bonds is continuing apace, as state and local governments ramp up borrowing ahead of expected Fed moves and election-year uncertainty.
So far this year, bond sales have reached $325 billion, the highest in the period since Bloomberg began compiling the data in 2013. Of that amount, $65 billion of the offerings were “mega-deals” – bond deals exceeding $1 billion – the most in at least 10 years.
Issuers looking ahead to Fed, elections
Analysts say issuers are rushing to borrow to take advantage of the bond market rally driven by the Federal Reserve Board’s intention to lower interest rates.
Also, motivating bond sales is uncertainty around this fall’s elections and their effect on taxes and public financing.
For example, under the Tax Cuts and Jobs Act of 2017, the top federal income tax rate was lowered from 39.6% to 37%. However, the tax cut will sunset at the end of 2025. If the measure isn’t extended, tax-free income generated by municipal bonds becomes even more attractive.
Momentum should continue
Despite the scorching pace of issuance, there is no sign of letup. Reports show $20 billion in mega-deals are scheduled so far in September, though that figure is expected to rise.
Last month, $49 billion of municipal bonds were sold, the most for August since 2013 and the biggest supply month since October 2020, the last time issuers borrowed before a presidential election, according to Bloomberg.
What it means for investors
As we have noted (“Bump in Supply Feeding Municipal Bonds Demand”), extraordinary issuance has met the appetite of receptive investors, yet municipal bond yields are still at their highest in years.
Recently, the taxable-equivalent yield of 30-year, A-rated bonds was a juicy 6.78% for taxpayers at the 40.8% rate (including the Medicare Tax) – and even higher when factoring in state and local taxes, when applicable.
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In the normally staid municipal bond market, there happens to be a lot of news investors can chew on right now. But municipals have always been a critical component of tax-efficient investing, regardless of the environment.
Headlines shouldn’t obscure what, in the end, is quite simple: Opportunities abound. There is an array of bonds with attractive yields available for investors to fulfill their financial goals and enhance their steady stream of tax-free income.