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Market News Commentary - From The Desk of David Loesch 07.16.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on July 16th, 2020
- With the recent business closures racing through America, sales tax collections have tumbled 21%. Bonds issued based on sales tax collections have typically been very safe due to the promise and ability to collect tax revenue. This current pandemic environment has severely affected those collections in states such as NY, IL, and PR who have issued significant debt based on this type of payment structure.
- $167B of the state and local bonds sold this year were issued via the negotiation processes rather than by competitive bid. This trend is a 37% jump from a year ago and accounts for more than 80% of new issues this year. The shift towards more negotiated sales comes just as the bond business is picking up with new issues. I suspect we will continue to see this trend through the end of this year.
- Fund flows continue to be heavy, $1.38B up to this week. Funds are buyers of some lower-yielding paper as they are trying to keep up with the inflows. Retail remains cash-heavy.
- The FED is being pressured to loosen the Municipal Lending Facility rules, which charges penalties so steep that most governments are unwilling to borrow from it. With the new-issue market so hot right now, I do not see why a municipality should borrow from this entity. Advocacy groups requested that the government cut the borrowing rates to make the program more affordable for municipalities. I suspect this will get done, and many will take the money. However, again, with the new-issue markets strong and demand outpacing the overall supply, it will be interesting to see how this resolves itself.
- Rates have fallen so low that America's states and cities are embracing a refinancing boom. This year's taxable municipal bond sales are forecast to increase to as much as $115B up from $90B. Taxable Muni's have jumped +380% this year as compared to last.
- Requests for CUSIP’S rose for the 3rd consecutive month in June. This increase, of 23.1%, is one of the most significant increases I’ve seen in a very long time. Most new issues are being priced very aggressively at this time, many have < 3.00% coupons and yield 2% to the call - and they are oversubscribed at least 5x. I expect this to continue through the summer the fall.
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