The municipal bond market isn’t panicking over Zohran Mamdani — and it’s a bet by investors that his pricey socialist agenda faces a steep uphill climb, On The Money has learned.
New York City’s new mayor, an avowed Marxist with plans to tax and spend Gotham into oblivion, has been in office just under a month, but investors are taking it in stride. In fact, there are signs they are buyers of city debt despite the new mayor’s commie impulses.
Prices of New York City municipal debt – the stuff Mamdani’s fiscal mismanagement could obliterate – are slightly higher both since he took office and from the minute he was elected in November.
According to the firm Municipal Market Analytics, the benchmark NYC “general obligation bond” with a maturity of 10 years, is actually trading over a buck higher since Mamdani took office on Jan. 1, and 59 cents higher since the day he was elected in November.
Pretty much ditto for bonds issued by the so-called “Transitional Finance Authority,” an agency that began issuing debt after Gotham tapped out of its constitutionally imposed limit on GOs.
These aren’t big moves, but the relative stability of city debt prices says something about how Wall Street looks at the Mamdani mayoralty. Bonds are paid off from tax dollars that usually go up when you have a business friendly mayor in charge and down when someone like Mamdani occupies City Hall and promises to tax and regulate the job creators down to Florida.
Yet for all his grandiose socialist talk of city-run supermarkets, free bus rides, free housing, free everything, and a $12 billion budget deficit left from Eric Adams, the smart money is betting he either won’t or can’t blow up city coffers.
It’s a scenario On The Money first laid out in the summer, when Mamdani was still a candidate, and it’s based on some unique safeguards investors can lean on – byproducts of the 1970s fiscal crisis and how public officials, like former Gov. High Carey and civic leaders like the investment banker Felix Rohatyn helped restore fiscal sanity.
They knew they needed willing buyers of city debt to keep Gotham running; they knew city bonds are held in large part by city residents looking to avoid taxes (they are triple tax free) and earn a decent return (the 10-year has a tax free return of nearly 3%) unless they default.
To prevent that from happening, they created a situation where city debt has a “lien” or first dibs on certain tax revenues.
Both liens are mandated by state law, so if Mamdani wants to open up supermarkets across the city, he must pay bond holders first before spending the money. In fact, the law stipulates he must pay bondholders first before spending any money.
That’s why rich people (or what’s left of them) who live in the city buy munis; they can escape New York’s high taxes on their returns, they can keep clipping “coupons” (fixed income investments dole out quarterly or semi-annual payments) and hold their bonds to maturity when they get their money back, tax free of course.
Seems like a win-win, but there are some caveats. First, Mamdani could try and change the state law to get his hands on all that money that goes first to bondholders and redirect to the city’s already bloated welfare state that he wants to make larger.
Difficult, but not impossible.
He could raise taxes even more than the insanely high levels they are now, as he is promising on the top 1%, those who earn more than $900,000 and pay the vast majority of the levies. That could cause another large, tax-base eroding exodus of rich people from the city, leading to what’s known as mass “downgrades” from the so-called rating agencies that warn investors about the soundness of city debt.
That would also mean lower bond prices, though in this scenario, if you can hold to maturity, you would get your money back, the so-called principal you plunked down when you bought the bond plus all those interest payments.
Mamdani could go full-on Bolshevik, run up tremendous deficits and just default, telling bond holders to pound sand. In that case, something known as “The Financial Emergency Act” of 1975 kicks in, which stipulates that mayoral control of the budget is transferred to a state commission, headed by Governor Hochul.
Yes, lots of protection out there – which is why for all Mamdani’s socialist sound and fury, investors are still betting it will signify nothing.
