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Market News Commentary - From The Desk of David Loesch 06/25/2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on June 24th, 2020
- As mentioned before, stimulus packages 2 and 3 have funds that will go directly to cities and states. In a survey of 1100 municipalities, 65% had to delay or cancel infrastructure projects and capital expenditures because of the pandemic's toll on local governments. This delay will have a ripple impact through the already battered down economy by stalling tens of billions of dollars in spending and halting job growth.
- To reflect on the above point, 61% of the cities are delaying or canceling equipment purchases, and 24% are making significant cuts to their community and economic programs. With unemployment already at all-time highs, this issue could produce another 1.5MM job losses in the public sector. This delay in spending will impact our markets from the standpoint of "new issues" and lack of supply. The bottom line is strong pricing through the summer.
- The State of CA (along with other states) will rely on FED Aid – CA will ask for $14B in additional monies from Fed aid and only triggers cuts in the CA budget in October of this year if the money does not materialize. Like other states, CA indicated that they need to make compromises across the spectrum during a briefing strategy and need a "multi-year" framework to make the budget work. I predict that many states and local government officials are urging Trump and Congress to help ease the crippling economic losses from the pandemic. I predict that the 4th stimulus package will get passed will be used for these types of funding, which will significantly help our markets.
- MTA indicated that it would run out of money in August if the US Senate does not approve the economic stimulus measure, which would provide about $3.9B to the agency. MTA just indicated they are in a "dire situation" and will need funding - I am surprised this news broke with the recent $849MM new issue which came to market this month. MTA is preparing for the second phase of opening with about 300M more workers expected to "go back to work," This is what they indicated this money is needed.
- Trump indicated on 6/21 that phase one trade deal with China was "fully intact" after his adviser Navarro created confusion and spurred futures last night to move down significantly. Trump indicated that, hopefully, China would continue to live up to the terms of the agreement, and the deal was "never over."
- The FED is buying Corp debt and currently on a buying spree, which is fueling a rally in the taxable MUNI market. Sales of taxable bonds by states, cities, colleges, and hospitals have surged this year because rates have fallen so low. These taxables are a viable alternative to MUNI's, which also carry fed regulations limiting how funds are spent. This activity has opened a disconnect between the two fixed income markets, with the taxable MUNI markets moving up in price significantly. I believe taxable munis will stick out as an asset class, and depending on how the FED buys bonds, it will keep yields relatively depressed throughout the summer.
- The FED’s pledge in March to buy Corp debt started with buying ETF’s and indicated they would be purchasing "individual" Corp bonds as they move through the program. This decision will continue to pump money into that market. I believe we will see all Fixed-Income markets rally with this news. As these programs "get started," it will push the confidence levels up for both the street and retail.
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