Government Shutdown & Data Void Complicate Fed’s Path Forward

• A larger tax on Harvard’s $57B endowment will hurt the school’s ability to address the very problems the US government wants it to focus on. This will be damaging to the school and the student population, according to President Alan Garber. “The tax is only going to make it harder to address these issues, not easier.” Overall, we have seen this standoff with the current administration and the school, which has bled into other schools as well. If you are buying higher education, be aware of the underlying issues that could hurt the credit.
• As we have discussed, the FED is no longer receiving data on private sector employment from an independent provider, which will add to the policymakers’ lack of timely info on the economy amid the government shutdown. Payroll services from ADP Research have stopped providing data, which covers about 20% of the US private sector. This will add to the “confusion” in the markets as we approach the FED meeting.
• We reported on the State of IL and the City of Chicago’s plan to “shore up” the balance sheet last week. The Governor of IL assailed the plan by the Chicago Mayor Brandon Johnson to bring back a tax on large corporate payrolls, saying the plan would hurt major employers in the city and the state. The governor stated in a meeting on Tuesday of this week, “It penalizes the very thing we want, which is more employment.” The city of Chicago has a long way to go before achieving financial security. If you are buying the uninsured paper, it would be wise for us to have a discussion.
• Many bond traders are preparing for T-bill yields to drop further, as the 30-year reached its lowest level in six months on Tuesday. Today, 10/23, we are giving back some of that yield; however, many expect yields across the curve to decline. With the US shutdown on track to become the second-longest on record, renewed concerns over the credit market, and heightened US/China trade tensions, traders are moving from a risk trade to a “risk off” trade.
• NY City’s transit network is seeking to raise $230MM in short-term debt to finance the infrastructure needed for its congestion toll plan, implemented earlier this year. The Triborough Bridge and Tunnel Authority plans to set the BANs (Bond Anticipation Notes) the week of 10/21 to raise the much-needed capital. If you are buying NY paper, this should continue to push paper into the marketplace based on swaps.
• The latest run of weaker economic headlines has favored MUNIs; the MTD returns to around 1%. I suspect rates will be the primary driver for the equity markets. We are seeing positioning in MUNIs moving from the front end of the curve towards the middle and back end of the curve, as investors continue to lock in yields at these levels and avoid maturity risk within the next 2-5 years.
• As we saw late last week and this week, the 10T dipped below 4% (as of this writing, 10/23 yields are around the 3.97% on the 10-year), extending a three-week rally, as falling oil prices eased concerns about inflation. Many, including us, believe the FED will cut rates again this month, which is adding to the lower yield of all Fixed Income across the board.

Bottom line:

Rates have been steadily moving down —not as much as last month, but still down. We do expect a 25bps cut this month (next meeting 10/29), and perhaps another in December. It seems the markets are turning as investors move out on the curve to lock in these rates. Furthermore, the government shutdown continues to add complexities to the FED’s plan to cut; however, with that said, we think the FED has been backed into a corner and has already decided to cut, regardless of the data flow (or lack of). Credit quality remains strong; avoid those credits that rely on government spending for now, while also taking stock of what you own in the higher education and hospital sectors, particularly if it is not insured.