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Market News Commentary - From The Desk of David Loesch 11.19.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on November 19th, 2020
- CA will see a $26B windfall to help balance next year's budget; this is an unexpected cushion against the pandemic led recession and a stark contrast to the doom predicted earlier this year, when the world’s 5th largest economy ground to a halt. CA indicated that this "windfall is a one-time" occurrence and will undoubtedly help the budget as they move into 2021. The additional capital came from higher than anticipated sales and property taxes; I suspect that this will eventually help their ratings while improving the munis from a pricing standpoint.
- For some of the most cash strapped municipalities, borrowing from the primary markets continues to be cheaper than borrowing from the FED. For example, Suffolk County, NY, which had considered tapping the FED Lending Facility, instead sold $100MM in short-term debt to BOA and Morgan Stanley at yields of .91%.
- MTA approved issuing as much as $2.9B of debt; this will be backed by payroll tax to cover lost revenue during the virus. I do not see MTA filing bankruptcy, and this will be a winner, in my opinion, as we move out of COVID and into 2021.
- Fund flows continue to be firm; investors added $1.32B in muni funds last week, compared to an outflow of $254MM the week before.
- The Municipal Lending Facility expires year-end; however, many, including CITI, call for the facility to be extended through 2021. Many, including CITI, note that prices could cheapen "quite irrationally" if investors pull back funds and move to cash. As we know, this facility has had only two borrowers, the State of IL and MTA. It has served as a "safety net," and the FED should consider extending. If not, we could see weakness in the market, but it would be short-lived. The primary market is a much better "place" for municipalities to issue debt with far fewer restrictions. I believe the facility did what it set out to do and provided liquidity and confidence in the marketplace, thus igniting the primary market issuance.
- The State of NJ secured enough demand for its $3.7B budget deficit bonds that it decided to drop its plan to sell some taxable debt. Bonds maturing in 2032 came at a top yield of 2.25%. This level is above the benchmark; however, 30bps lower than expected.
- NYC collected $834MM more in revenue in the first quarter of its fiscal year than projected, boosted by personal income taxes. I am not a big believer in states increasing taxes on their constituents, but this kind of news is an overall positive for the MUNI markets.
- MUNI dealers indicate that the US economic growth trajectory in 2021 will be shaped by three factors: COVID, the effectiveness of a vaccine, and the fading probability of a meaningful fiscal stimulus. The new President, along with a divided Congress, may struggle to reach a fiscal stimulus package in the range of $500-$750B; this is a downside risk to the equity markets. Overall, with the excellent vaccine news coming out of two drug companies, this will help all markets. I believe the muni market will benefit under any circumstance, and we are seeing this now as the "divide" between Treasury markets and MUNI's continues to grow.
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