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Market News Commentary - From The Desk of David Loesch 10.29.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on October 28th, 2020
- From a MUNI perspective and the elections coming up, Biden's tax proposals include capping the value of most deductions at a 28% rate. Any move to limit the tax breaks for MUNI bonds would face resistance from state and local government officials. The exemption boosts demand for bonds in the $3.9T market, lowering the interest that municipalities need to pay for financing. This issue has come up before and has never had any traction. I do not see a 28% cap on the municipal exemption; however, I can see the top rate go from 37% to 39.6% or higher while also increasing the capital gains taxes with limitations on deductions. Should we see a Biden win, I suspect this would be good overall for MUNI’s in the long run as many will be seeking tax breaks.
- I suspect that given Biden’s proposals to increase taxes, the interest exclusion for muni bonds will be left alone. There are plenty of other areas where his administration can raise revenue. As a statistic, 6.1MM investors claimed tax-exempt income of $57.1B in 2017 - this is the most recent data from the IRS on this topic.
- JPM indicated yesterday that there would be $180B taxable muni's sold this year, exceeding the record of $159B in 2010 when the Build America Bond Program was enacted. Several factors drive this, including FED tax reform, that restricted issuers' ability to sell tax-exempt advanced refunding bonds. This increase is overall good for our markets while creating stable flow in this sector. I do not see this going away in 2021
- Home prices rose the most in two years in August as low mortgage rates spurred competition for an increasingly scarce supply of listings. Overall, this does not impact our markets per se; however, it will give the buyers the confidence to put money to work in all markets.
- The FED's MUNI Liquidity Facility is scheduled to "roll-off" on 12/31/20. Many would like to see this Facility be extended for another year to allow municipalities the option to borrow against it in 2021 if needed. This liquidity facility was created under the CARES Act because of the total market freeze and offered short-term lending. The Facility was designed as an emergency vehicle and has not been widely used. The presence of the FED has calmed any hysteria about MUNI credits. I believe the FED should extent the Lending Facility. The reality is that many municipalities will not use this option; however, it is better to have it in place just in case.
- Looking back on borrowing for 10-year paper: it costs the top-rated bond issuers 1.00% to borrow in January and February of this year. That shot up to 2.88% on 3/23/20, and as of this past Monday, the rate is .95%. On another note, muni issuance is up 22.6% this year. I suspect we will have a “banner year” for 2021 for new issuance. I believe even though borrowing costs are at "all-time lows," the FED should continue to keep this lending facility in place for the unexpected.
- MTA was downgraded two notches by Fitch yesterday. The budget gap is $3.2B in 2020 and $5.8B for 2021. I suspect that MTA will receive another loan based on their need from the FED and expect other rating agencies to follow this action course.
- Output strengthened in 39 states in September from a month earlier, with some of the best gains concentrated in NE territories, including MA, NY, and NJ. It continues to be of concern these states will continue to push their residents out due to high-income taxes; however, over the last 30 days per the FED over the weekend, the state’s overall output did indeed grow. Heavy tourism states such as HI had the steepest drop with overall growth and output.
- CITI indicated this week it sees a record year in 2021 for municipal bond bankers. They suggested it expects state and local governments to sell a record $550B of bonds in 2021, 70% coming from public works projects instead of refinancing already issued debt. This forecast reflects an expectation that debt sales will continue to surge as it has for 2020 due to record-low interest rates. State and local governments have sold $384B of long-term bonds so far this year, a 25% increase from 2019; much has been driven by refinancing’s
- 33% of the new issuance for 2021 is expected to be taxable. This kind of volume could eventually rival the corporate bond market. Currently, the muni market is $3.9T, while the corporate market is $10T.
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