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Market News Commentary - From The Desk of David Loesch 03.11.2021Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on March 11th, 2021
- As we all know, the $1.9T deal has passed; it will be sent to the President’s desk today or Friday to be signed. States and Local governments are poised to receive at least $360B from the stimulus bill. This amount is enough to virtually assure that the budget cutbacks will not weigh on the economic rebound for any state. For example, CA is eligible for $21.6B, and TX stands to receive $17B. The big difference between Mnuchin’s relief stimulus compared to this one is that the states will have “no choice”; they will get the money, and it will be structured like a PPP loan. This transaction reminds me of TARP; the recovery was swift while our government bailed out the banks. The money in 2021 will be more than enough to cover any tax loss for any state caused by the pandemic. Be prepared - the government will seek ways to service this debt by raising revenue.
- With the above, traders are betting on a “low supply” for the balance of the year in MUNI debt issuance. States and municipalities will not “need” to access the primary markets to get deals done. Most issuance will come from the private sector and schools, as they are not eligible for funds at this time. This "lack" of issuance will create a "lack of product" over the next several months and should push pricing up in our markets.
- MUNI investors withdrew $568MM from MUNI bond funds in the week ended 3/3/21. However, the prior week showed inflows of $846MM. These numbers are small in value compared to the markets; however, it is evident that investors were "spooked" last week with the market selloff; I suspect you will see a reversal this week with a positive inflow of funds.
- Treasury Secretary Janet Yellen dismissed fears that the $1.9B plan will cause inflation as she seeks to push the recovery deeper into the US labor markets. She indicated in an interview this week; the FED has tools to deal with inflation should it present itself. As discussed before, Yellen is a “super dove” and has the attitude of “tax and spend” like our current administration. Yellen has learned from her predecessors' past mistakes in the '80s and will keep inflation in check during the next four years. The Biden team knows they cannot afford to have inflation much above 2.125%, and I suspect this will be the case for the foreseeable future.
- If you have not been following the yields on debt paper outside the US, I encourage you to compare. Our 10T this morning is trading at 1.52%.; we are, by far, the most attractive return on investment compared to The Bund -.36%, Japan- .109%, UK .694%, and France -.125%. If you are a large fund, or a large investor, or anyone else for that matter who has a wheelbarrow of cash, where would you put it? Our T markets have sold off too much; compared to other countries; we look cheap. Yes, we will need to issue $1.9T of bonds to pay for the package this week; however, once the market absorbs this, I think the T markets move back down in yield. The market is "pricing in" a flood of paper hitting the street; everyone knew that the deal was going to get done, and here it is. What happens after this deal? MUNI's should move up.
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