New York City faces a possible hike in borrowing costs that could wreak havoc on its financial health as Mayor Zohran Mamdani continues to indulge in his socialist spending spree, On The Money has learned.
It’s the consequence of tax revenue projections that don’t appear to cover growing expenditures in the years ahead. Taken together these two forces could, if the market pros are right, lead to what’s known as a bond ratings “downgrade” in the not-so-distant future.
If you’re a regular reader of this column, you know that investors are already increasingly skittish, demanding a larger risk premium to buy city bonds in the form of higher yields and lower prices since Mamdani took over in January.
More recently, some of the city’s debt travails could be attributed to unrest across the bond market as a whole. Yields on benchmark Treasury bonds have been spiking on inflation jitters. (Rising prices tank the value of bonds because the “fixed income” in interest they draw stays the same in dollars.) Treasury debt has also been hit by rising US deficits and competition for investors with the AI buildout.
But to a large degree, municipal bonds are – or at least, historically have been – their own kind of animal. They typically move up and down for reasons of their own.
They are triple-tax free and are repaid based on the “full-faith-and-credit” of the municipal issuer. Given the above, Big Apple residents looking to minimize their tax levies imposed by Mamdani should be flocking to NYC debt as the mayor promises to assess everything that moves in his bid to transform the city into a Marxist paradise.
That is, unless they believe city debt will tank even more as major rating agencies – the firms that estimate the default risk of our bonds – begin slashing the city’s bond ratings over fears that Mandani’s spending will outrun city revenue projections.
Consider the yield on the 10-year bond issued by the city’s Transitional Finance Authority, one of the main issuers of city debt. It’s rated at the highest level, AAA but is now trading at a whopping 3.89% for the week ending Sept. 4, up from 3.70% the week prior and way, way up from the yield of 2.9% at the end of January following the mayor’s first month in office.
Rich Farley, a lawyer at Herbert Smith Freehills Kramer who specializes in debt financings, points out that the yield of NYC so-called TFA debt, issued by the Transitional Finance Authority, should be priced much lower than that of US Treasurys, just like comparable bonds that are similarly rated AAA.
“The fact that the yields are much higher, thus closer to the US Treasury yield (and prices are lower) “indicates that the markets believe the risks are aligned with a downgrade,” he says.
“For triple-A rated bonds like the city’s TFA the yield should be lower by 1% or 1.5%,” Farley said of the spread between the 10-year Treasury and NYC’s TFAs. “But being around 0.9% is signaling downgrade.”
A press official for New York City Comptroller – the Big Apple’s chief fiscal officer – didn’t return a call for comment. Mamdani spokesman Matthew Rauschenbach said: “Despite volatility in the market, demand for the City’s bonds remains strong, demonstrating continued investor confidence in our strong AA rating, which all four major credit rating agencies reaffirmed just last week.”
“That strength is a reflection of the fiscal discipline of the Mamdani administration,” he adds. “Since taking office, we have taken aggressive action to achieve ongoing savings and efficiencies, putting our city on firm fiscal footing. And we are doing so while making critical investments in a more affordable city for all New Yorkers.”
To be fair, none of the three major ratings — Moody’s, S&P or Fitch — have told On The Money that a downgrade is imminent for NYC General Obligation or GO bonds – currently rated at the AA level by all three agencies. Ditto for TFA, rated at AAA by Fitch and S&P. These are the two types of bonds the city sells to repair roads and bridges and pay for Mamdani pipe dreams like rent freezes and free bus rides.
Moody’s and Fitch, though, have city GOs on a negative outlook for a potential downgrade. Yes, the city’s recent issuance of new GO debt weighed on the market for NYC-related paper.
But that’s not what I’m hearing from investors; they say based on the way NYC bonds are trading, Mamdani’s socialism will slam the city’s tax base, hurting the city’s ability to repay its debts down the road and lead to a downgrade. Buyers should nevertheless be bellying up given Mamdani’s plans to continue to tax wealth creators and people who make more than $1 million, which would appear to be right the sweet spot of the municipal-bond investor base.
If history is any guide, the rating agencies are notoriously behind market trends (reps for Moody’s and S&P had no comment about a downgrade and forwarded On The Money their ratings on a large NYC bond issue; Fitch didn’t return a call for comment).
NYC’s debt service, meanwhile, stands at around 10% of its budget or above $8 billion in this fiscal year. It is projected to hit nearly $12 billion by 2030, according to the comptroller’s office. A downgrade could spike those costs even more. And if more wealth creators continue to leave the city in response to Mamdani’s Marxism, or if there’s a Wall Street downturn, the budget numbers will continue to get worse.
Meanwhile, the more Mamdani spends and redistributes, the more he will be spending to convince bond buyers to invest in city debt – until possibly there’s no money left, whether the raters cut their assessments or not.
“I would be really hesitant to be buying long-dated NYC munis with the city run by this ideologue,” said one high-net worth financial adviser who asked not to be named. “There are just better, less risky alternatives.”