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Market News Commentary - From The Desk of David Loesch 04.30.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on April 30th, 2020
- Powell urged lawmakers to deliver more fiscal stimulus to shield the US economy from the virus as he warned yesterday of a weak recovery as the pandemic passes. Economic activity will likely drop to an unprecedented rate in the second Q, and the economy will need support from all of us, referring to the Treasury and the Government.
- As we know, rates did not change on 4/29, and the decision was unanimous. Powell indicated that the FED would use all tools to act as appropriate to support the economy. Powell's comments are evidence that he believes the economy has a very long way to go until we see signs of material improvement. Unemployment will remain high, and only the best will be hired based on so much competition in the marketplace.
- The prospect of the Fed’s intervention was enough to pull the MUNI markets out of its biggest rout in at least 40 years. With the population limits reduced significantly, 87 cities and 140 counties will be eligible, which is excellent news for munis. I believe this "new" provision about asking the MUNI market to try to raise money in the street "first" before going to the Fed is an exceptional idea for those all concerned. The Fed is not in the business of underwriting; however, this will get many Broker/Dealers back in action with new issues. This process will get our markets moving at a faster pace. "Adequate credit accommodations" will need to be made before going to the Fed - this will also help with "fair and orderly" markets, which have been a challenge as of late.
- The FED is continuing to expand the scope and duration of the MUNI Liquidity Facility from the $500B emergency lending program for state and local governments. The new population criteria to qualify is now 250K for cities and 500K for counties. These numbers are down from 1MM and 2MM, respectively. With these new rules, cities such as Atlanta, Miami, Baltimore, Boston, and New Orleans are now eligible. This broadening of the scope will benefit many cities and counties while bringing stability to the MUNI markets. As we are seeing, Treasury recognizes the importance of a fair and orderly market. While very encouraging, this program has yet to be implemented and is expected to roll out in two weeks.
- McConnell indicated this week that relief legislation must include liability protections for business owners who reopen. Congress plans to convene in Washington on 5/14 with the expectation of an additional response to the pandemic. McConnell also walked back his "comments on states filing bankruptcy," indicating that he was not recommending this action, only that they should have this option.
- NYC indicated this week that their economy would contract 13% in 2020 due to the shutdown. It will eventually come back to normal, the biggest question being how long this will take? The city’s bond yields reflect the risk; however, there will be interest here based on where these bonds are trading. NY paper trades ~10bbps cheaper than other bonds of similar credit quality.
- MTA is now in talks with NYC to access the MUNI Liquidity Facility. They indicated they cannot go directly; however, but can move through the State of NY and NYC as they are not an “eligible” borrow under the rules. I believe they will gain access to the funds through the city. There will be a new bond issue coming to the market over the next couple of weeks; it will be interesting to see the rates on that deal. I do not believe NYC will file for bankruptcy and think MTA will continue to receive government money to continue operations without having to restructure in bankruptcy.
“How this relates to you and your account”
We continue to be buyers here; we have seen yields tick up a bit with everyone focused on the equity markets.FED and Treasury are doing all they can to provide stability, which should generate great returns over the course of a year from now.
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