DWS Group
Harvard University’s gilt-edged tax-exempt bonds have cheapened in recent weeks as investors, spooked by an escalating political clash with the Trump administration, limit their headline risk. However, many buyers remain bullish on the credit and see it as a buying opportunity.
Harvard filed a lawsuit Monday after the Trump administration froze $2.2 billion in federal grants and issued a list of demands for changes at the university. The suit marked the latest escalation of a rising political standoff sparked by President Donald Trump’s pressure on select universities to shift their policies amid what the administration paints as an effort to fight antisemitism on campuses.
Among the many potential policies that could nibble at the credit of top-tier universities like Harvard, such as raising the endowment tax, one that would terminate their tax-exempt status carries the highest stakes for the municipal bond market. Bond buyers said they think the odds of that happening are low but are closely following the story.
“As an investor, you have to just kind of say this is an unusual set of circumstances, but if anyone can handle it, it’s this university,” said Adam Stern, co-head of research at Boston-based Breckinridge Capital Advisors. “In terms of how the [bond] spreads are moving, it does seem to be distinct to Harvard over the last couple of weeks, but it seems plausible that it could spread to other universities.”
The negative headlines have sparked selling pressure from jittery retail investors and institutional holders looking to limit their headline risk, according to market participants, with separately managed accounts and mutual funds dumping millions. They have found willing buyers, but bid spreads have widened by double digits over the past week, said a portfolio manager.
“Part of it could be there is a lot of supply this week and a lot of fluidity in what’s going on, but it could also be buyers are expecting more sellers,” said Matt Caggiano, co-head of municipal bond investment strategy at DWS Investments, which holds Harvard’s tax-exempt and taxable debt. “That’s not because of a fundamental problem, but because [sellers] don’t want to hold anything with headline risk.”
A chunk of Series 2025 bonds due in 2055 with a 5% coupon that priced in the primary market on March 18 at 113.9 with a 2.83% yield traded on Tuesday for 106.7.
A Series 2024 bond with a 4% coupon due in 2036 traded last Thursday at 102.1, down from 106.4 on March 19 and down from 108.3 on Nov. 4. The same bond was trading up ahead of the November election that ushered in Trump, reflecting the belief among many market participants that
With triple-A ratings from Moody’s Investors Service and S&P Global Ratings, Harvard typically enjoys strong demand as it issues in the specialty state of Massachusetts with its high income tax rate, Caggiano said.
“One interesting dynamic is [separately managed accounts] would be big holders of it because it’s such high quality, and a lot of them want higher allocation to Massachusetts. But when there’s a lot of headline risk around a name, we see selling pressure,” he said.
“We definitely see this as an opportunity” to buy the bonds, Caggiano said. “We’d like to add it at an adjusted level from where they typically trade, because of the headline risk,” he said.
Harvard has $8.2 billion of municipal debt outstanding, including $3.3 billion of tax-exempt and $4.9 of taxable bonds, according to J.P. Morgan, which highlighted the university this week in its Municipal Morning Intelligence briefs.
“In a scenario where the IRS does move to revoke Harvard’s tax-exempt status, we would expect immediate legal action, that could take years to resolve, extending beyond the current administration’s term in 2028,” the firm noted. “In turn, with the limited information we and the market have, we would generally feel comfortable with exposure to Harvard’s tax-exempt debt, conservatively in maturities within 5-years and at spreads that reflect the risk to their exempt status.”
Including universities with similar profiles that also face the potential loss of their tax exemption, the total tax-exempt debt rises to $70.3 billion, or 37% of tax-exempt debt outstanding in the higher education sector, J.P. Morgan found. “While headwinds abound, it is at least encouraging that this is not instead an overwhelming majority,” the bank said.
Despite recent selling pressure on Harvard’s paper, neither liquidity nor market access will likely become a problem for one of the market’s most prominent issuers, market participants said.
Harvard’s bonds trade so tightly that it will not going to impact its ability to access the market, said Jennifer Johnston, senior vice president and director of research, municipal bonds, for Franklin Templeton Fixed Income. And “people who own their debt have no trouble selling if they wanted to,” Johnston said.
Chris Brigati, managing director and CIO at SWBC, said he was surprised by the bonds’ decline in the secondary market.
“I’m honestly shocked that the paper seems to have cheapened up. I get the initial thought or concern or reaction being, ‘Oh wow, they might have some difficulties and they might lose their tax-exempt status.’ To me, that means there’s less of it; therefore, it shouldn’t get cheaper. But the fact that it kind of cheapened up recently seems like a buying opportunity,” Brigati said.
SWBC has owned and traded some Harvard paper and has had some clients still willing to buy it, so it’s just a matter of “getting over the hump,” he said. “Harvard has a great endowment and is fairly well run, so the university will come out of this.”
It’s unlikely that the Trump administration undermines Harvard to the point where the credit significantly erodes, said Breckinridge’s Stern.
“You’re dealing with a several hundred-year-old organization with one of the largest endowments in the country, if not the world, and with enormous access to very talented, very connected and very powerful people through its alumni and employee base,” he said. “If the U.S. government punishes Harvard to such a degree that it becomes a shell of itself or something that is unrecognizable, then we’ve got a whole host of problems across the country.”