Capitalizing on New York’s investment potential

Key takeaways:

• Recent policy headlines could widen New York spreads and present a buying opportunity given the underlying strength of the NY economy and bondholder legal safeguards.
• The BlackRock Municipal Credit Analyst team has identified several areas of opportunities and risks for investors when investing in New York municipal bonds.
• BlackRock New York Municipal products identified within the market.

Policy implications for the municipal market

The One, Big, Beautiful Bill Act leaves municipal issuer exemptions untouched with few provisions with widespread negative impacts to the municipal market.

While New York City mayors have the authority to implement local policy initiatives that can influence the municipal market, such efforts are likely to encounter significant obstacles due to entrenched fiscal safeguards at both the city and state levels.

Potential proposals:

• Affordable housing and free public transportation
• Minimum wage increases
• Expanded healthcare access and childcare

Funding sources:

• Corporate tax increases
• Introduction of a city income tax on higher earning individuals
• Improved fee and fine collection

Guardrails:

• Balanced budget requirement: NYC is legally required to balance its budget annually.
• Revenue-raising limitations: Income and corporate tax hikes require state legislative and gubernatorial approval.
• Capped property tax: NYC’s property tax for general purposes are capped to 2.5% of the property’s taxable market value.
• Rent Guidelines Board: Independently evaluates landlord costs when setting rent increases.
• Transit policy: The MTA is a state-controlled entity.
• Pledged revenues: Most NYC, state, and MTA bonds are backed by pledged revenues, segregated from general operations.

NYC overall continues to be viewed favorably by the agencies since it has additional revenue-raising flexibility compared to other municipalities in the state. Although the Mayor’s office is accountable for revenue forecasts, agencies point to multiple fiscal oversight bodies that help maintain a cautious approach. Our Credit Research team sees strategic advantages in New York credits while continuing to monitor potential risks.

Advantages of NY munis

• Broad economy: New York is the third largest state economy, with annual GDP of roughly $2 trillion. GDP per capita, a good measure of productivity and wealth, is ranked #1 among the fifty states.
• The Big Apple: New York City, an international center of business and culture with a population of ~8.3 million sits at the heart of America’s largest metropolitan area where financial services, healthcare, technology, real estate, fashion, and tourism all contribute to vibrant employment opportunities.
• Diverse tax base: New York City benefits from a diverse tax base, strong financial reserves, and consistent state oversight: the city’s $1.5 trillion tax base continues to grow while liquidity provides a buffer against potential budgetary challenges. The city has strong financial controls with detailed five-year plans.
• Strong tax revenue: New York State’s revenue performance has exceeded expectations over the past few fiscal years. The State has used budget surpluses to reduce long-term liabilities and add nearly $22 billion to reserves for rainy day funds, pay-go capital projects and debt reduction.

Risks of NY munis

• Shrinking population (tax base): The US Census estimates that over 480,000 residents left New York for other states in 2023. Anecdotal measures such as the number of one-way U-Haul rentals support this data and cost is often cited as the underlying driver.
• Commercial real estate pressures: Areas such as New York City have large exposures to commercial real estate, particularly office buildings that have struggled to regain occupancy post-pandemic.
• Significant liabilities: Large infrastructure spending needs, including for NY Metropolitan Transportation Authority (MTA) will constrain debt reduction efforts. When considering the state, city and various overlapping authorities, the debt, pension and Other Post-Employment Benefits (OPEB) burden placed on New York City residents is well above other similar cities.

• Reliance on high income earners: Due to a heavy reliance on personal income taxes and the financial services sector, New York exhibits above-average revenue volatility compared to other states.
• Sluggish employment recovery: State job growth trails faster-growing states since 2019 as shown in the chart below.

State job growth from pre-pandemic levels

Areas of opportunity

Strong retail demand for New York bonds often results in tight credit spreads, which traditionally do not reflect the fundamental picture. While this could mean that investors are not getting properly compensated for the risk they are taking, it also presents an opportunity to capitalize on mis-pricings. BlackRock currently sees opportunities in various sectors of the New York municipal bond market.

• Tax-backed: New York State Sales and Income Tax Bonds and New York City Transitional Finance Authority dedicated tax bonds continue to show strong margins of debt service coverage and attractive spreads, providing some defensive protection against the next downturn.
• Transportation: There are several opportunities including the Port Authority of NY and NJ, JFK terminal facilities and tolling authorities in the regional given their position as international gateways and monopolistic corridors of travel and trade.
• Essential service providers: Water and sewer and public power entities are monopoly providers that offer stability and diversification to any portfolio. Those with strong liquidity and manageable capital needs have potential to outperform the market over time.
• Healthcare: We seek out hospitals with lower Medicaid dependency, as well as proactive and disciplined management, market leading standalones, and children’s hospitals.

New York State and City are not without their risks and budgetary complexities. We are somewhat cautious on New York City GO bonds reflecting concern about the city’s large debt burden, including unfunded OPEBs, as well as our preference to diversify into higher yielding revenue sectors. If spreads on NYC were to widen as a result of market pricing in additional policy risk, we could become buyers.

Our goal is to capture value while avoiding the pitfalls that can come with choosing weak credits. Our dedicated 18-member analyst team remains vigilant in analyzing the risks and opportunities across issuers and credits.

Sector specific opportunities exist

New York State bond yields near recent highs, giving investors the ability to lock in yields at the highest level in a generation

New York investors may have the most to gain from the tax-exempt nature of municipal bonds

An active advantage

Active management in municipals allows you to take advantage of opportunities in the New York muni market. The team has opted for a barbell approach – pairing front end yield curve exposure with longer dated maturities to take advantage of the relative steepness of the municipal curve compared to the Treasury curve. Within the state, the team prefers revenue bonds over GOs to capitalize on market inefficiencies and take advantage of relative value.

Historical performance of New York Municipal Opportunities Fund (MANKX)

BlackRock offers a wide variety of actively managed New York specific products including BlackRock New York Municipal Opportunities Fund, along with several managed closed-end funds. Additionally, investors can find the iShares New York Muni Bond ETF (NYF) and customizable separately managed accounts to tailor their New York municipal exposure. For investors seeking to potentially enhance their municipal portfolios with additional high-yield exposure, you could consider the iShares High Yield Muni Active ETF (HIMU). For those prioritizing a short maturity alternative with limited duration exposure, the iShares Short Maturity Municipal Bond Active ETF (MEAR) may offer a solution. Both ETFs seek to provide targeted exposure and income flexibility in the municipal market.