New York: Take the AA Train to Income Town

Key takeaways:

• It’s no secret that value has been restored in bond yields and municipal bonds are no exception – particularly for New York residents who can reap the tax–exempt benefits of bonds issued within the state boundaries.
• The BlackRock Municipal Credit and Portfolio Management teams have identified several areas of opportunity and risk for investors considering New York municipal bonds.
• BlackRock New York Municipal products can capitalize on opportunities the team has identified within the market.

While media reports often focus on the struggles facing New York City and other urban areas throughout the United States, overall credit quality in the New York municipal bond market remains strong. In fact, in some cases, it may be the best it’s been in a generation. Improved state and local government revenues, strong post-pandemic economic performance and growing reserves have led to a number of credit rating agency upgrades. Our credit research team has identified several areas of opportunity in the New York municipal bond market while, at the same time, keeping a watchful eye on the risks.

Reports of its Death are Greatly Exaggerated

Advantages:

• New York State’s broad economy: New York is the third largest state economy, with annual GDP of roughly $2 trillion, just behind California and Texas. It’s economy is roughly the same size as Canada which is the world’s tenth largest economy. 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.
• 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.
• 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.
• Regional opportunities provide diversification: New York is not just the city. Our proprietary economic heat map highlights the power of a diverse strategy with opportunities to benefit from a recovery in upstate and suburban growth trends, particularly an influx of new residents to the Hudson Valley and Long Island.

Risks:

• Consistent outmigration of residents from New York to lower cost states: 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.
• 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.
• State job growth trails faster-growing states since 2019 as shown in the chart below

• 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 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.

Sector-Specific Recommendations:

Strong retail demand for New York bonds often results in tight credit spreads which can mask the relative strength of each borrower. Sometimes, this means that investors are not getting paid for the risk they are taking, but other times, it 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 here. We prefer large airports and seaports, such as JFK and Port Authority of NY and NJ, given their prominent position as international gateways to travel and trade.
• Higher Education: While New York has seen several small colleges close, larger flagship public and private universities will continue to benefit from strong student demand. Smaller colleges with stable operations should not be avoided when the price is right.
• 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 will outperform the market over time.
• Healthcare: We seek out hospitals with proactive and disciplined management, multi-state systems, market leading standalones, and children’s hospitals.

New York State and City are not without their risks and budgetary complexities. Our goal is to capture value while avoiding the pitfalls that can come with choosing weak credits. Our dedicated 15-member analyst team remains vigilant in analyzing the risks and opportunities across issuers and credits on behalf of our shareholders to ensure BlackRock portfolios are based on critical thinking and populated with our best ideas.

New York State bond yields remain elevated, giving investors the ability to potentially 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.

Active Management in Municipals allows you to take advantage of opportunities in the New York Municipal Market

The team has opted for a barbell approach – pairing front end yield curve exposure with longer dated maturities while avoiding the inversion along the intermediate portion of the municipal curve. Within the state, the team prefers revenue bonds over GOs to capitalize on market inefficiencies and take advantage of relative value.

With these strategies in mind, active management has paved the way for outperformance in 2025. 

Additionally, 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 and customizable separately managed accounts.

For municipal investors outside of New York, be sure to check out our suite of actively managed municipal products including BlackRock Strategic Municipal Opportunities Fund and BlackRock National Municipal Fund.

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