Thoughts on NYC Bonds Amid Potential Political Changes

So, there’s this enormous concern with a certain political figure who, you might say, doesn’t have a strong grip on private sector employment. It raises questions about who’s really running New York City. If you’re one of those folks holding “tax-free” city bonds, you might want to think about how this affects your investments.

Even if, say, Zohran Mamdani finds himself in the mayor’s office, there are definitely reasons to adopt a long-term view when it comes to investing.

Just to be upfront, I’ve done a bit of digging into this because, well, I own some NYC bonds myself. There’s a tendency among investment advisors to overlook municipal bonds, as they tend to fixate on the stock market and trending tech companies.

But here’s the thing: these bonds can be incredibly beneficial. If you’ve got a little money to spare, buying bonds from your local city comes with impressive tax perks. They’re tax-free at the city, state, and federal levels, which is not something to dismiss, especially in a high-tax environment like New York.

Given the tax situation in New York City and the state, it’s understandable why these bonds are appealing. If you just let them mature, you won’t have to fret over market fluctuations. You simply sit back and collect your interest payments. Sure, the returns might seem lower compared to stocks, but keep in mind they’re not subject to taxes.

Now, being a Muni bondholder isn’t without its risks. Local governments can face bankruptcy, which can leave bondholders in a tough spot. We’ve seen it happen before—Puerto Rico, Detroit, and Orange County in the 1990s all faced dire financial issues. NYC nearly fell into a similar crisis during the financial turmoil of the 1970s but managed to stave off disaster.

At present, NYC’s budget looks relatively stable, thanks to the efforts of Eric Adams. Still, one must remember that overspending could lead to defaults down the line.

If Mamdani were to push a spending agenda similar to what he’s hinted at, he could intimidate wealthier citizens and businesses into moving elsewhere. That could really shake things up for bond ratings, which are already under scrutiny from agencies like Fitch and Moody’s.

In the end, if bondholders stick to their investment strategy, they’ll get paid back—provided there’s money left after funding extravagant plans.

Fortunately for buyers of NYC Munis, the mayor’s popularity isn’t as crucial as it seems. The city has two main types of debt: general obligations and Transitional Finance Office (TFA) obligations. The latter was created so cities could navigate state-imposed limits to raise additional funds for essential infrastructure and services.

Both types of debt have a sort of “first claim” on tax revenues, which is designed to build investor confidence. The TFA takes precedence over personal income and sales taxes before funds make their way into the mayor’s hands.

Because these arrangements are dictated by state law, altering the order of payments isn’t easy; it would require significant legislative changes, which is unlikely. After all, cities and states need stable access to markets, and tampering with these agreements would be unwise.

This situation could become more intriguing if Mamdani takes over as mayor. Should his spending proposals gain traction, Munis might decline in value as people and businesses exit, causing bond ratings to plummet. Traders would likely anticipate reduced funds flowing in, leading to a decrease in prices.

Yet, it’s crucial to remember to hold on to your maturing Muni bonds during this time and continue collecting those interest payments. And in NYC, Muni owners typically get priority for payments. Given the high tax environment, these bonds often see consistent demand. So, you could argue that now might be a good time to consider buying more.

One cautionary note: Albany holds a fair amount of power concerning Mamdani’s plans, which could result in a revision or removal of bondholder protections.

Regardless of the outlook, if you currently hold NYC debt, it’s probably not a moment to panic.