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Market News Commentary - From The Desk of David Loesch 05.28.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on May 28th, 2020
- Rates have fallen so quickly and steeply in our market that states and cities can now borrow near February’s all-time lows. This change marks a dramatic shift from two months ago when yields surged on Wall Street's waves of selling. MUNI's are headed towards their biggest one month gain since 2009, a considerable shift from March.
- The drop in yields in our markets will be a test of just how low short-term rates can go and if they can flip to negative. BOA dismissed this likelihood since it would erase MUNI's tax advantages; I agree with them on this point. However, many banks believe the Treasury markets could indeed go negative for the short term, which will be positive for the equity markets.
- Gov. Cuomo indicated that his administration would focus on reopening its economic engine NYC - the only state region still on lockdown. He noted that they "need" to get the city going again, with many projects put on holds such as Penn Station and La Guardia renovations. MTA commented that they have plenty of cash with the last bond issue but will be requesting additional funds from the government.
- As to the point above, NYC indicated they would seek to borrow $7B if needed to make up for the revenue lost because of the pandemic. They will lose at least $7.4B in revenue through 6/2021. More than 930K city residents have filed for unemployment since Mid-March.
- JPM purchased $1B of cash-flow notes issued by NY Dorms in a private placement. This issue is a personal income tax backed note, with a 2.05% rate maturing 12/15/2020. NY Dorms indicated they did not want to come to the MUNI markets at this time, which tells me they think rates are going lower. NY Dorms have many bonds that are callable now or will be callable in the 4th Q of this year, and I suspect they will tap the muni market then.
- IL lawmakers approved a budget of about $40B for the year starting in July, which relies on FED loans to close the revenue shortfall that is exacerbated by the pandemic. The new budget will address the financial issues that plague the state and will force IL to save and make "hard choices" as it relates to their overall cash flow. Having a budget that "might work" will be a positive for this state in our markets, I suspect that it will take time to push their paper up in price (however it has already moved ~10 bps).
- Visible supply began the week at $10.6B, below the 2020 average of $14.7B. Overall new issues were brisk. There were bumps on yields for ~50% of these issues. I do expect this market to continue to increase in volume over the next several weeks.
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