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Market News Commentary - From The Desk of David Loesch 03.26.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on March 26th, 2020
- As we expected, the Senate approved the rescue plan last night. This historic 2 trillion plan obviously will be produced to respond to the crises caused but he coronavirus. I was pleased to see the massive legislation passed on a 96-0 vote just before midnight last night after three days of intense negotiations between Republicans and Democrats.
- This package will include an unprecedented injection of loans, tax breaks, direct payments for major corporations and individual taxpayers to help the US economy to get through an abrupt shutdown. I believe that this will improve all markets include the MUNI markets while giving people the confidence they need to invest, spend money, and feel good about where we are in the economy.
- Together with this package and Treasury reserve cash actions, this total action should reach 6 Trillion over the next two months. To put this into perspective, during the Obama administration treasury and congress passed 780 Billion for the 2008 crisis.
- Mass transit agencies throughout the US will get 25 billion from the federal package as of now. MTA’s have been hit the hardest and will receive 4 billion immediately to help them shore up their finances to help make debt service payments to bondholders as well as giving them capital for operations.
- Powell did a rare television interview today at 7.05 AM ET on NBC. Powell will be discussing the tools that Treasury has along with the stimulus package. I believe this will put a calming effect on retail and the general American citizen. He indicated that the FED is NOT out of ammunition and has many tools to support the economy. This issue will most likely cause a recession, but Powell did suggest that we will rebound, and the overall economy will recover. I do agree with this, as well.
- Many economists feel that T bills have not seen their lowest levels in yields as of today. Many, including me, expect economic data will turn out poor as anticipated with the virus, along with other G7 countries as well. With G7yields close to 0.00%, the US T bills should go lower in yield based on the positive yields that we are offering.
- MUNI bonds saw a rally Tuesday, yields on 10-year paper dropped 19bps. This pause is a welcome reprieve from a market deeply battered this month as investors pulled out in record numbers amid concerns about the economic fallout from the virus. Most MUNI's are down 10% this month alone; this is the steepest rate of loss since 1980.
- Last week the FED Expanded its emergency lending program to provide liquidity to money market funds so that it would include purchases of short-term bonds. On Monday it tacked on support for variable rate debt as well. Treasury recognizes that there are cracks in the system and are addressing them with the stimulus package. This package will give MUNI buyers, municipalities, and equally as important, the insurance companies insuring these bonds, confidence.
- MSRB par- amount traded was 35.8B, higher on a day to day basis. Bid Wanted items continue to grow and are reaching records each day.
- Last week mutual funds began to liquidate 75 tender-option bond trusts holding 1.2B worth of state and local MUNI bonds. The trusts issued floating-rate notes to money market funds, and they used the cash to buy higher-yielding long term bonds. Mutual funds use this "float" (borrowing money to buy other bonds) to make the difference in the yields. This strategy backfired because the yields on the short-term debt have skyrocketed as investors pulled cash out of MM funds, and the lenders (banks) struggled to resell the notes. To pay off the short-term notes by funds (think of it as a call or a put) mutual funds were (and still are) selling High-Grade MUNI bonds yield in trust as collateral. This action is one of the reasons we saw and still see pressure on our market. There comes the point where rates get too high, leaving no money left for the fund and the investor, thus creating a "leverage squeeze" for the fund. I believe most of the selling has happened, and this will slow down over the next two weeks. However, this is a significant cause and reason why funds have performed much worse than other MUNI bonds. Most fund pricing declined 15-25% this month as an example.
- The FED has sent an important signal by explicitly making its asset purchase program "unlimited in size." I have never seen this type of language on any FED statement since I have been doing this; they are saying that they will do whatever it takes. Part of the package includes help for municipalities, via expansion of the money market mutual fund liquidity facility (MMLF). This expansion will add commercial paper to the availability to municipalities, which will be available to borrow against if the municipality starts to experience DS payment issues. Policymakers were unanimous in support of this bill. I continue to believe that Treasury will not allow municipalities to fail based on this short- term slowdown.
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