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Market News Commentary - From The Desk of David Loesch 08.13.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on August 13th, 2020
- Many in our business believe that government lifelines have merely deferred a likely surge in unemployment, which could bring about labor market scars that will leave a mark on the recovery and pin yields down for the near future. Over the last four days, our yields in all markets have gone up too far too fast. A FED study of 15 pandemics concluded that real rates were substantially depressed in the aftermath, and this time is unlikely to be different. I continue to believe rates have gotten ahead of themselves. However, I do not foresee +/-15bps in the near-term future.
- The FED indicated this week that it would reduce borrowing costs in its MUNI Liquidity Facility for state and local governments. This reduction is in response to pushbacks from many municipalities balking at the idea of borrowing money at higher rates than what they can refinance for in the open market. The revised pricing will reduce the interest rate spread on the tax-exempt notes for each credit rating category by 50bps. It also reduces the amount by which the interest rate for taxable notes is adjusted to relative value to exiting notes of this classification. Since the program was announced in April, it has only made one loan so far, which has been to the state of IL. With new issuance cost cheap and the market "ripe" for buying that product, I felt the FED had to do something to spur lending; this is their answer.
- Overall, state tax revenues have declined 12.8% in June from a year earlier due to the virus-induced recession. Personal income taxes have fallen 17.9%, and corporate income taxes decreased by 37.2%. Oddly, sales taxes have increased by 4.5% due to the re-opening of some economies and potentially reflecting a delay in payments or pent up demand by consumers. All of these factors will result in a lower GDP for 2020, pushing our markets up over a more extended period as investors continue to seek safe liquid investments.
- I was on a call yesterday discussing "cycles in the economy," and the question was, “What type of cycle are we in?" My response is that the last five months' developments are non-cyclical and not subject to the usual cycle analysis. No one has traded through this type of market, down 250-300bps in February and up 175-300bps now, hard to trade, but looking back, it is hard to quantify a cycle.
- Markets continue to plow ahead with lower yields, and lack of product. The comatose patient – the economy - required significant life support from the FED and Treasury, which we all know supplied it. Trillions of dollars poured into our system, giving our investors the confidence, they needed to make decisions to enter into the marketplace. Alongside this, many view the MUNI markets right now the safest in the world, and when you compare the yields against other yields such as T bills or foreign bonds, our returns continue to outpace others. What does this mean? I continue to believe we are top-heavy, however with yields moving lower each day; I suspect we will continue to stay in this trading range for quite some time.
- This week, S&P placed 99 airports on CreditWatch with negative implications, indicating they may slash ratings on US airports and related debt. This decision impacts 63 different obligators.
- BOA indicated that the muni bond market rally is about to face a crucial hurdle: to see what happens if the 10-year benchmark yields hit .50% for T bills. The low is .54, and it is currently trading at .55 - as we move through the week, it will be interesting to see if this overall "pivot point" will be reached and how MUNI's will act relative to this move.
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