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Market News Commentary - From The Desk of David Loesch 11/05/2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on November 5th, 2020
- Citizens in the State of IL rejected raising taxes on the wealthiest residents, striking down a plan for shoring- up the state’s finances. I suspect the rating agencies will view this as a negative and consider a downgrade on the state GO rating. I also expect you will see an increase in volume on this credit for the bid resulting in slightly cheaper values and yield opportunity on insured credits. We are buyers of the insured IL State GO’s.
- About the point above, citizens of states such as IL have sent a clear message to our political leaders that Americans will not stand for additional tax due to their success. This vote is a fundamental issue that will need to be addressed for many states, not just IL.
- Puerto Rico residents voted to request “statehood” in this last election. The vote was a "local vote," expressing the citizens' desire to become the 51st state. However, it is up to Washington, and I suspect they will not budge on this issue. I do not think this would be a negative for the bonds. If statehood is granted, I think the bonds will rally. I do not see statehood as a current reality.
- Chairman Powell will be holding an FOMC meeting today 11/5/2020; no one, including me, anticipates he will discuss election results. I expect him to address the recent surge in COVID cases while also staying very conservative about any rate moves anytime soon. As we move into 2021, the FED policy will continue to be driven by developments regarding the virus, with the Central Banks staying in “crisis mode” support. I also expect the FED to shift asset buying to the longer end of the curve over the next Q.
- Benchmark state 10-year yields: CA 1.15, FL .96, IL 3.71 (seems high) NY 1.00, PA 1.29, and TX 1.07. Yields, I believe, will continue to stay steady and perhaps move lower. With the "uncertainty" of the election in the near term, you could see a move into MUNI's and T bills as a flight to safety to wait it out, considering cash is paying .05% at best.
- States and municipalities may have a record of short-term borrowing in 2021, due to their economies' external shock. The amount of issuance has been hefty over the last three months. Most municipal governments were doing very well before the pandemic; now, they are looking at a collective $467B decline in revenue between 2020 and 2022.
- Currently, some state’s reserves are coming in better than expected. Many states and municipalities have preserved their credit ratings while not tapping the insurance with deep cuts across the board and record low-interest rates. The points above are all positives for our markets. As we move through this year's balance and into 2021, I suspect we will see very few actual defaults. Insurance company's "claims-paying ability" will continue to gain traction as few municipalities tap them. The biggest unknown is the pandemic; with the virus picking up, it seems like the country is heading into an uncertain winter. I feel that 2021 will be another record year of issuance, while overall corporate profits will decline.
- As we move into November, MUNI sales will slow down, as many issuers "rushed" to the marketplace to sell their securities. This decrease in issuance will cause an “updraft” in pricing through the balance of the year once we get past 11/4.
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