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Market News Commentary - From The Desk of David Loesch 04.08.2021Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on April 8th, 2021
- President Biden indicated he is seeking an additional $571B in transportation spending over the current federal and requested levels. These documents, shared with Congress, are an add-on to the $2.25T infrastructure plan announced last week. This new money calls for $115B to be spent on roads and bridges, which MUNI bonds typically fund, an additional $5B for community transportation, and $85B on mass transit for larger cities such as NYC and LA. I suspect this plan will have headwinds in Congress, however with a Democratic-run Senate and House, I do not expect there to be an issue getting it passed. The availability of these funds for these projects will reduce new issue bond deals being thorough 2023. The lack of supply should push pricing up, with yields going lower.
- President Biden indicated he plans to have states compete for a slice of the $2.25T deal related to infrastructure. The administration said it would have a competitive grant process to determine which states get funding. It will be interesting to see how this plan is executed over the next year.
- The state of IL said that it would use some of the last bill's aid to reduce unpaid bills and short-term debt racked up during the pandemic. The state’s unpaid bills stand at $5.48B, and they still have to pay back $3B of the $3.2B it borrowed last year. Many states like IL, NY, and NJ will find themselves in this position and asking to use this money in this capacity. I suspect this will be approved along with other funds to use for HOT and tourism and infrastructure. Again, funding coming from our government should be a net positive for MUNI’s.
- MTA's credit rating outlook was boosted to "stable" by Moody's, indicating no risk of an imminent downgrade. The Transit Authority will receive $14.5B of Fed aid from the last round of stimulus. We have been discussing this for weeks with the anticipation of these types of rating moves. I am surprised we have not heard much from S&P, but I foresee these rating actions continuing on the COVID type trade like MTA's, Stadiums, and Airports.
- US yields look cheap compared to the other G7 countries. If we are at a peak, this would confirm the top for the dollar given the long-term ties to the US dollar and yields. Again, I suspect we will hover here for a while within this yield range on T bills.
- Some in the fixed income arena feel that as Americans file their taxes across the country, they may turn to sell MUNI bonds to pay the government's amount. Should that happen, I expect MUNI's would have a tougher time performing over the next 60 days than the first of the year. MUNI's have outpaced T bills for the first Q losing .4% compared to the 4.3% drop in T bills.
- Investment firms such as Bel Aire Advisors indicated they are advising their accounts to take advantage of any MUNI weakness due to any outflows caused by the above point. Other broker-dealers, such as Ramirez and Co, indicated strong demand for MUNIs this year for all the reasons we have discussed before this note.
- NYC is seeking to move the top tax rate to 14.8% for wage earners making over $1MM per year. This tax compares to $13.3% in CA, which is currently the highest in the nation. As states and municipalities such as NYC continue to see budget shortfalls, they will increase the top wage earners' taxes. Along with the Biden tax proposals, I suspect these moves will impact states' overall population negatively. If you recall, Jamie Dimon indicated that the bank is seeking to relocate to a "more favorable" tax rate state. This type of change will negatively impact MUNI’s in these states and cities should these laws be passed.
- Biden's infrastructure plan would revitalize the FED bond program for schools by extending large subsidies for as much as $50B in debt sales. Under the program, the government would offer tax credits to investors or direct support to issuers that would be large enough to offset the bonds' annual interest payments, making the borrowing effectively "free." This idea accounts for half of Biden's plan to spend $100B to spur construction work on schools, with the rest coming from direct grants.
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