Harvard muni bonds a buy amid battle with Trump White House, Barclays says

Concerns about the Trump administration’s fight with Harvard University have caused the school’s municipal bonds to cheapen, creating a buying opportunity, according to a Barclays Plc strategist.

Harvard’s tax-exempt bonds have faced a selloff since Trump threatened the university in mid-April, strategist Mikhail Foux said in a report on Friday. The spreads on the university’s debt widened more than 30 basis points as almost $200 billion of its bonds traded, compared to $80 billion at the start of the month, according to the report.

However, Foux said, there is a relatively low risk that Harvard actually loses its 501(c)(3) tax exemption, making the recent price drop a good break for investors with a “longer time horizon.”

“If the Trump Administration decides to forego this case given the current pushback, spreads should tighten right away,” Foux wrote. “If not, spreads will remain wide for a period of time but to us it is an opportunity as the risk of permanently losing of its 501(c)(3) status is rather small.”

President Donald Trump has gone after several elite universities that he has said have not done enough to deal with antisemitism on their campuses. But he has particularly targeted Harvard since the university said it would not make a number of wide-ranging changes put forward by the Trump administration, and then sued the government. 

Harvard issues taxable and tax-exempt bonds and both types of debt have been hit as the fight with the White House has heated up, particularly after the Trump administration said it would halt more than $2 billion of grants to Harvard and is reviewing billions more.

Still, the municipal bonds issued by Harvard face particular risk as a result of Trump’s push to get the Internal Revenue Service to rescind Harvard’s tax exempt status. 

“Perhaps Harvard should lose its Tax Exempt Status and be Taxed as a Political Entity if it keeps pushing political, ideological, and terrorist inspired/supporting “Sickness?” Trump posted on Truth Social on April 15. “Remember, Tax Exempt Status is totally contingent on acting in the PUBLIC INTEREST!”

Stripping Harvard’s exemption would deal a painful financial blow to the university. Its tax status affords the school a variety of benefits, such as allowing alumni to deduct donations from their taxes and making it possible to issue bonds as a state or local government would.

In early January, municipal debt sold by Harvard maturing in 2034 traded at yields that were less than other AAA debt, a sign of Harvard’s strong finances and demand for the bonds. But more recently, spreads on the debt have widened, a sign that investors want more compensation to account for what they see as additional credit risk. The debt this week traded at a spread of 35 basis points over other AAA muni bonds.

However, the Barclays report says that while the IRS has the power to remove organizations like Harvard’s tax-exempt status, doing so would contradict historical precedent, and legal challenges would take a very long time to resolve.

“Even if the IRS tries to revoke its nonprofit status, the university will likely sue in which case the matter would be tied up in court for years, potentially four-plus years or more,” Foux wrote. “By then, the IRS may be subject to a new administration.”