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Market News Commentary - From The Desk of David Loesch 05.07.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on May 6th, 2020
- Investors withdrew $1.57B from MUNI bonds funds in the week ending 4/29. The prior week saw inflows of $520MM. In my opinion, part of this is due to investors wanting to buy “individual” bonds as compared to funds that might be leveraged. Many investors were severely burned when the funds had to sell securities in March to meet redemption demands and margin calls. This action left a bad taste in investors mouths and should help our markets and overall trading patterns.
- State 10-yr benchmarks as of today: CA 1.59, FL 1.39, IL 5.61, NY 1.23, PA 1.81, TX 1.37. I am surprised IL is trading so high - the standard IL GO paper insured by AGM 4.00% is a ~99.625 bid.
- MTA (Metropolitan Transit Authority - NYC) increased its new deal to $1.1B on Tuesday while reducing the long-term top yield to 5.23% for the 2055's. This issue will be one to watch due to how the market will “absorb” this transaction and the yields that it will produce.
- Nancy Pelosi is pushing Democrats to get out of the gate first with other stimulus packages, geared toward states and municipalities. Her strategy is smart, with elections around the corner, many political "professionals" are trying to make sure their constituents are all set going forward. This effort would be an overall positive for the MUNI markets, and I believe this 4th deal will get done.
- Puerto Rico indicated the current restructuring plan "will not work," and they need to go back to the drawing board. The first deal is no longer feasible in our post-COVID –19 reality. I suspect a new proposed plan of adjustment will be forthcoming over the next couple of months. PR is seeking to reduce $18B of debt backed by the central government and over $50B of unpaid obligations to its pension system. The tentative deal was struck with investors in February and included recovers ranging from 3-77 cents on the dollar, depending on the type of security.
- Moody's revised the outlook for US local governments to negative from stable as the duration and intensity of the pandemic's impact hits the economy. State actions to their balance sheets and fiscal budgets in 2021 will be monitored closely by all rating agencies. I suspect that S&P will follow this downgrade soon.
- The combination of economic weakness and fiscal packages which have been executed by the Treasury will push the debt-to-GDP ratio above the high of 106%; this will be greater than those in WWII. Many believe the deficit will remain above the 2019 levels (4.6% of GDP) even into 2022. Many believe this will create large amounts of inflation, which will depress MUNI's over time (several years) and hurt the equity markets.
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