- Issuance for the next two weeks will be heavy. Sales are expected to be about $21B over the next 30 days, most coming over the next two weeks, led by a $4.2B deal from CA on tobacco bonds. This issue is the largest amount of visible supply we have seen to date and typical for this time of year as many dealers are trying to get "deals done" before the new year. This wave of debt coming might cheapen our markets for the next two weeks, however cash on hand in the street is heavy. I suspect investors will welcome these deals.
- There is more opportunity in the new-issue market now positioning ahead of the start of the year when supplies are typically lower. Overall issuance has trailed behind buys ~.90% all year, and this month will be the exception.
- MUNI investors foresee no slowdown in demand for higher-yielding securities, signaling that risker issuers will likely benefit in 2022 from credit spreads near 14-year lows. MUNI Funds have lured a record influx of cash this year, fueling the contraction of spreads as the funds need to buy paper. Some of the best improvements have been in the weaker credits, BBB-rated and below. I think the dynamics fueling this rally will continue as we move into 2022, as the higher-yielding paper will appeal to many.
- The Governor of NY said she would direct $540MM of the American Rescue Plan for homeowners assistance. NY is the first state in the US to win approval from the Homeowner Assistance Fund. I believe you will see other states follow this lead. Overall, the funds will be used for infrastructure; however, states are trying to "peel off" funds to give to those in need, in this case, to assist with mortgage payments.
- The FED is in their blackout period now before the 12/15 meeting. We will see a flatter yield curve as the FED has turned more hawkish. This logic is straightforward; as the Central Bankers contemplate raising rates to cool demand, this will push up shorter-dated T Bills and encourage investors to buy longer-dated paper with the rise in rates. Many suspect the Fed will shorten its bond-buying program to March while possibly raising rates in June 2022. This tapering is an appropriate timeline and will not significantly impact our markets. Overall, MUNI’s should continue to perform well as we move into 2022, supply will be constricted, and yields should be steady.
- The November jobs number confirms the FED's assessment of a tight labor market. CPI data for November will show inflation, however with the hawkish shift by the FED over the last two meetings, many, including me, feel this is under control and will be addressed at the 12/15 FOMC meeting. The Variant complicates monetary policy; there is still much we do not know about it.
- States and cities will be tapping a large war chest of capital as they fight to stop a four-month slide in the public sector of employment. States seek to use some of the funds from the latest bills to pay their government employees extra, especially those on the front line facing the public. The Government has not indicated this is allowable under the documents; however, I suspect this will not be an issue, and the state's request will be granted. States and municipalities have only received a small percentage of these funds thus far.
- With the significant fall in T bill yields last Friday, I was surprised we did not see much action on the sell side of the trade. The 10-year T traded down 9bps to 1.35%, down from a 1.69% not long ago. I expect we will trade in this range for quite some time. I do not believe we will see 2% on the 10-year T this year or the first three-quarters following.
- I believe the risk for 2022 is that tapering continues longer than expected, and we have >2 hikes during the year, driving inflation and a "taper tantrum" to the surface. I suspect that the curve will flatten over time, and the FED will do an excellent job in communicating to the street what to expect in the upcoming months. Growth will remain robust; however, yields will also remain low. Biden and his team will push Yellen/Powell to keep rates low until they figure out the "debt service aspect." I do not expect this to happen anytime soon. The fact of the matter is, rates will need to remain low to service the debt, and if you look at other G7 nations, our debt looks cheap compared to other countries, always creating buyers.
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