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Market News Commentary - From The Desk of David Loesch 07.02.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on July 2nd, 2020
- Fund flows continue to be healthy, investors added $2.61B to MUNI bonds funds the week ending 6/24. The prior week saw inflows of $2.43B.
- Sales tax collections continue to sink. States without an income tax (like Texas) have been struck hard, as many people are "not doing anything," causing overall sales tax collections to decrease rapidly. An interesting question to consider here is, will states like TX implement a state income tax to offset this issue? I suspect not, but with tax collections dropping 6.50% in one month, this is a considerable hit for Texas and many other states.
- New issues continue to be firm, oversubscribed 8x on average, and in some cases, 14x. With borrowing costs holding near the lowest in more than six decades, debt sales jumped to $45.4B this month.
- State 10-yr - CA .99, FL .95, IL 3.91, NY 1.04, PA 1.31, TX 1.09 - all down .05-.07 bps over the week - paper will continue to move down in yield.
- Powell indicated that the Central Bank remains very concerned about the risks to the economy over the medium term, reiterating the message from policymakers over the last three months. Overall, Powell was upbeat and encouraged about the data; however, unemployment numbers will be a pivotal data- point and should move markets a bit.
- Powell also expressed the importance of keeping the virus contained as the US economy bounces back from its deepest contraction in decades. He acknowledged that we had entered a critical new phase sooner than expected, referencing the bounce-back in both the equity and fixed-income markets. With this bounce, the new challenge, in my opinion, is to curtail overconfidence in the event the virus gets out of hand again, which could result in a rapid and painful fall. Although I do not foresee this happening, it is a risk and will need addressing as our markets continue to rally over the next month.
- CA Governor signed a $133.9B budget for the year, which counts on FED monies coming through by October. The Legislature passed a budget that defers $11B in payments to schools and borrows $9.3B from other state funds. This point is a bit concerning, as we see this budget passed betting on the "hopes" that FED monies will come through, a significant sign of poor planning. I expect the funding to come, however, not sound fiscal responsibility.
- CITI indicated they see the MUNI markets continue to recover as we move into the fall. They do not believe we will see a V-shaped recovery but foresee a continued improvement as we shore up financings from the stimulus packages. I agree with CITI on this call.
- PR’s oversight board presented a certified fiscal plan for the Commonwealth’s 78 municipalities, asking them to adopt a series of measures to boost revenue by $1.6B over the next five years. This plan is excellent news for PR and the overall outlook for the Commonwealth. It is a big step towards moving out of restructuring and getting on a positive path to fiscal responsibility, explaining why the bonds jumped in pricing over the last two weeks.
605-B Park Grove
Katy, TX 77450
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