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Market News Commentary - From The Desk of David Loesch 09.24.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on September 24th, 2020
- States and municipalities are headed toward a blowout year for bond sales, despite taking a few months off for the pandemic. So far, in 2020, local governments have sold $315B in long-term MUNI's. The current pace 2020 will wind up at $411B, the third most significant year for muni bond sales ever, the largest being $423.96B sold in 2016.
- This volume is a remarkable turnaround because municipalities usually curtail borrowing in times of distress. One-third of this year's sales were refinancings due to the rates being so incredibly low. Very few thought the 10-year Treasury would go below 1.00% this year, particularly with the pandemic. Many things came together to produce this movement. However, the most significant, in my opinion, was the low rates from the FED and the promise to keep them low until a recovery is well underway.
- Our market meltdown in March was sharp but looking back was very short-lived. Yields on the callable benchmark 10-year muni rose sharply for nine days in March, from 0.798% to 2.865%. The FED short-circuited the crises by pouring money into our systems giving investors the confidence to make suitable decisions. As we look back, this is almost a socialistic move, markets got creamed, and the government came to the rescue. I believe this pattern will continue until we are back on solid footing with the economy. However, I expect to see some volatility as we move into October, not another wave of massive selling as we had in March.
- NJ officials indicated yesterday that the state would receive a rate of 2.19% if it borrows through the FED new lending program to cover the lost revenue of COVID-19. Admin officials Tuesday approved a GO debt sale of up to $4.5B to help fill the state’s fiscal 2021 budget gap. The Treasury took heat from Congress on 9/22 because of the tight lending requirements they have placed on this lending program.
- The Federal Reserve Lending Facility allows states and certain issuers to borrow for a maximum of 3 years, with a net interest cost of around 2.20%. With the capital markets financing items with a net interest cost of 2.50% out long, I can see why municipalities are not too keen to borrow from the FED.
- Moody’s analytics indicated that state and local governments face a combined shortfall of $450B through fiscal 2022; this is less than a prior estimate of $500B. Moody's analytics has changed its forecast, considering an improving economy and clarity around the aid that municipalities have received so far. This information is good news for our markets and will give buyers the confidence to make good choices. High- grade paper will continue to perform well. Several rating agencies indicated they would "hold off" on downgrading some municipalities. This delay will take the strain off insurance companies as we move through the next quarter.
- State tax revenues in some US parts are rebounding as the economy emerges from the virus lockdown, a positive sign for governors and mayors who had been bracing for the most significant fiscal crisis in decades. This change is another sign the economy is improving along with our markets.
- Banks and Broker-Dealers are losing confidence that Congress will soon rescue states and cities that have seen tax collections tumble. BOA predicted earlier the FED would extend $400B in aid by the end of Sept; they now say their expectations of a package coming by November is fading.
- Analysts and investors in the MUNI bond market had broadly expected that a new stimulus plan would include aid for states and local governments. With this thought, the FED reiterated last week that there is money in the "bank" for many munis that have not accessed the funds. I do not see the FED extending additional relief to municipalities if they do not tap what is currently there.
- The Governor of NJ agreed on a budget deal, which will raise taxes on millionaires to fund rebates for about 800M middle-class households. This deal will push the tax rate to 10.75% from 8.97% for the estimated 35M with incomes above 1MM. I do not think this will work over the long term; people will move out of the state and become disenchanted with the tax system, particularly this one.
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