Muni Yields Set to Move Lower as Fed Signals Cut and Fiscal Risks Rise

• NY Mayoral front runner Zohran Mamdani’s pledge to fund free childcare and bus rides by taxing the rich faces steep odds in Albany NY. But tax hikes may be coming for New Yorkers anyway, regardless of who wins. Several lawmakers say higher taxes are inevitable as the state braces for billions in federal cuts to health and food aid under the Presidents new budget law. If you are buying NY paper with solid credit, we suspect yields on that paper will move lower.

• FED President Stephen Miran said recent trade tensions have increased the uncertainty in the outlook for growth, making it more important for policy makers to lower rates quickly. Bottom line here, the higher uncertainty around trade policies between China and the US have introduced a new tail risk – and with this, Miran is suggesting to continue to lower rates.

• Boston FED President Susan Collins said the US Central bank should continue to lower rates this year to support the labor market, while keeping them “high enough” to keep inflation in check. She indicated, inflation risks seem somewhat “contained” but right now there is a greater downside risk to employment.

• Powell indicated the US central bank is on track to delivery another .25% cut in October, even as the government shutdown significantly reduces the read on the economy. Policy makers will go on “gut feel” IMO this month, as the data will not be published if the government does not get back to work. The question will be – is this baked into the pricing now? We thought that last rate move, and it was not, hence the >25bps move down post rate cut. Should we have a cut, I suspect we will see a 10bps move down on the longer end of the curve.

• Powell also indicated the central bank may stop shrinking its balance sheet in the coming months to preserve liquidity in overnight funding markets. He also stated this week the labor market seems to be worsening, which supports investors’ expectations of another rate cut.

• Meanwhile, a range of views on the economic outlook has left officials divided about the appropriate policy path. Some have placed more emphasis on the labor market. That includes Waller, who has signaled he would support additional cuts this year, while cautioning officials shouldn’t take an aggressive or quick approach to reductions. Stephen Miran, a new member of the Fed’s Board of Governors appointed by President Donald Trump, has called for a rapid series of outsize cuts, arguing the current level of rates is having a very restrictive effect on the US economy.

• Today 10/16 Federal Reserve Governor Christopher Waller said officials can keep lowering interest rates in quarter-percentage-point increments to support a faltering labor market. While Stephen Miran continued to advocate a larger reduction, saying a recent flare-up in US-China trade tensions creates more downside risk for the economy and calls for rapid monetary policy easing, he is suggesting a 50bps cut this month. We think 50bps is not going to happen, if so, MUNIs will most likely fall 25bps.

• We have reported on the City of Chicago for quite some time. The city faces a 1B budget gap next year, and has just increased their credit line with RBC Capital Markets by 100MM and extended the maturity date for more than two years. The total credit line is 325MMJ with a maturity date of 6/1/28, this will help the short-term budget gap, however if you are buying uninsured paper on the city, we would recommend you speak to us.

Bottom line:

Rates have been somewhat steady for the month of October if not down about 5bps across the curve. We expect a min of 25bps cut this month no matter if the data is available for the FED to review. Longer term paper should continue to move down in yield, while the shorter end of the curve should remain steady or move up slightly in yield. Quality on MUNIs continue to stay strong, if you are buying for the long haul, we feel this continues to be a good entry point.