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Market News Commentary - From The Desk of David Loesch 06.04.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on June 4th, 2020
- The FED is expanding a $500B emergency lending program for state and local governments to include smaller borrowers following the concerns that some needed communities might miss out on funds. Under the new terms, all US states will be able to have at least two cities or counties eligible to issue notes "regardless of the population directly". The Municipal Liquidity Facility, backed by funds from Treasury, can support up to $500B in credit in the first tranche and another $508B in the second, which will significantly help many municipalities. This move will give retail the confidence which it needs and will continue to push pricing up.
- MTA sold $545MM insured revenue bonds with a top yield of 2.17% in 2045. - This deal was 4-times oversubscribed.
- State 10 yields - CA 1.03, FL .89, IL 4.44 (down), NY 1.12, PA 10.33, TX 1.00
- The recent stock rally, fueled by injected enthusiasm due to the FED, is based on the hope of recovery. I believe the job landscape will be changed forever; more than one in five jobs in the US are at risk of permanent destruction led by food services and travel. The FED has indicated it will be a very long time until we return to "normal" if that happens.
- IL is tapping the FED for a 12-month loan of $1.2B; closing will be 6/5. This loan is the first borrowing from relief package #2.
- Since the inception of the above program, retail accounts have viewed municipals as one of the safest securities. However, as mentioned a week ago, the street is not discussing the tax implication in 2021 as to "how" these facilities will pay. With taxes on the rise, I would expect this to push MUNI's up more due to the taxable equivalent yields.
- The State of OH is considering issuing up to $800MM in GO's to refund bonds sold for higher education and schools. With the current low rates, I would expect this trend to continue as we move through the balance of the year. Although the new issuance for the next two months will be lower than the overall cash payout to retail, I expect the new issue market to be fully ramped up by 8/2020.
- The FED feels that a “second wave” of layoffs is coming as states gradually lift lockdowns. The first wave created 20MM unemployed, the most I have ever seen. Many economists indicate that the second wave could produce 2-6MM more job losses as the demand for products has not come back as expected. The transportation and hospitality business has been particularly hard- hit. Forecasts for the May job numbers in this sector are a loss of 7MM jobs.
- The MUNI market has rallied so much since March that some bonds are yielding next to nothing and closing in on the February highs. There are pricing indicators that suggest prices may still have room to run, as investors receive more cashback in coupons and redemptions as compared to new issues. The surplus of cash will pump nearly $3B into the MUNI markets over the next three months. It seems like markets are pushing for negative interest rates as MUNI's continue to strengthen.
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