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Market News Commentary - From The Desk of David Loesch 05.21.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on May 19th, 2020
- The FED indicated yesterday that the central banks' $500B lending program to states and cities is “working,” and we are seeing signs it is an overall positive for our markets. The mere prospect of such an unprecedented intervention helped halt a liquidity crunch in March that sent pricing tumbling as we all painfully remember. As it stands now, the FED will buy short term debt sold by states and cities to cover cash flow shortages. AAA muni bond yields have fallen closer to where they stood in February with 30 years municipals yielding under 1.90% on Monday. I believe we will not reach the highs as we saw in February; however, we will be close.
- Rates will remain low for several months and perhaps years from now. Borrowing will increase by our citizens and home purchasing should pick up over time. The government cannot afford to have rates move higher at this time due to the unprecedented monies issued. This will help our markets overall and provide liquidity.
- With Powell indicating that the FED has plenty of “tools” in their toolbox many believe that the economy will recover much faster than thought before. With point number two, the FED indicated that they will be a “backstop” for our markets and the high yield corporate markets. With the 4th stimulus package in the works, consumers will continue to gain the confidence that they need to get out and start to spend money and get the economy moving. Until then, the FED will “backstop” our system.
- With US markets stabilizing, purchases of bonds from the FED slowed slightly to 940B. European Central banks continue to step up the pace of purchasing their own securities, specifically in Italy as compared to the US. As Powell indicated this week, the FED will do whatever is needed to add to the economy by injecting funds to promote stability - again a plus for our markets and quite frankly all markets. He acknowledged that the FED stimulus is unlikely to be adequate to ensure a vigorous rebound and there is more to come.
- Banks are buying MUNI’s as of last month - JPM, CITI, BOA, BB&T, MS, and First Republic Bank all indicated that they significantly increased holdings over the last 2 months and will continue through the summer. JPM alone boosted its holdings by 826MM last month alone bringing its portfolio value to 42.2B. This will help our markets, pushing yields down, I foresee yields in this range for quite some time – wildcard will be another “black swan”.
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