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Market News Commentary - From The Desk of David Loesch 08.20.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on August 20th, 2020
- The minutes of the July FOMC meeting confirmed that the FED is gearing up to release the policy framework review results while enhancing the traditional tools they have in their "toolbox." The FED also indicated that many market participants would have to wait until the end of this year to have 2021 guidance, the situation is "just too fluid" to make any predictions. Many believe, including me, that the FED will not change rates until the end of 2021 if that. With the virus continuing and with no vaccine, it is not likely the FED will act.
- In the minutes, the FED signaled concern over the pandemic weighing on the world's biggest economy. Declines in industrial companies led most global markets lower this week. Also, most currencies slipped as well; this typically is good for MUNI bonds.
- As discussed in the past, MTA becomes the second municipality lending institution to tap the fed for $451MM through the FED buying notes. The FED charged a cost of 1.92%, resulting in a savings of over 85bps compared to the public market levels. The transit agency is bleeding cash because ridership is down; this is a much-needed boost of money to their system.
- The FED is ensuring that issuers like IL and MTA, hit hardest by the pandemic, can have access to reasonable rates when borrowing, I believe the entire allocation of monies will eventually be used for municipalities. Like everything else, it is hard to be the "first"; however, once other municipalities see how the system is working, they will request to borrow. This financing underscores the need for cities and states to access capital and confirms the FED’s willingness to assist. These are all positives in our markets and will help move pricing up over the next several months.
- As many as 18MM Americans may put off looking for a job if schools are closed, limiting the labor market recovery. This calculation, based on the employment rate for the 47MM parents with children under 12, assumes at least one parent must stay off work to provide childcare. Getting schools back open is a national priority, I believe if they are closed, a full economic recovery will not happen.
- As we know, the price run-up has been fueled by the Treasury pumping money into our markets or setting monies aside. The FED's stance is "we will be there if you need us," which has given a tremendous amount of confidence to buyers in our market.
- Over the weekend, Vanguard commented on a potential "doomsday scenario" in the MUNI markets. "Ultimately, a muni doomsday scenario is next to a zero probability," they indicated. Our markets provide funding for essential services that are an absolute must for economic recovery at the national level. Congress and the Treasury recognize this and will act as we have seen, to keep from nullifying the work done to date. However, I believe that we will see a pickup in defaults both in the high yield and the non-rated sectors of the markets.
- The second quarter had more state and local government debt downgraded by Moody's than upgraded on lower-rated securities only. I suspect you will continue to see this trend over the next several months. This issue will not impact our markets, as we focus solely on A+ rated paper and higher.
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