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Market News Commentary - From The Desk of David Loesch 12.03.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on December 3rd, 2020
- As we have been discussing, MUNI’s have been defying the Treasury Markets. Supply/demand technicals are in full force; with the hefty cash payments 12/1, investors are looking for debt. $26.1B new bonds are on the calendar for December; this is $20B less than a 3-year average for the month. For December, new issues will fall short of the $28.6B investors will get from debt maturing or being called. In addition to this, investors will get another $15.8B in coupon payments. Therefore, the market is running along with all these factors, supporting confidence. I expect this trend to continue through the end of the month.
- In his testimony this week, Secretary Powell indicated to Congress that the "risk of overdoing it is less than the risk of undoing it," meaning, get the package done as the economy is still in a fragile state. I tend to agree with this statement; it should drive equities perhaps higher overall in 2021 and yields on MUNI’s slightly lower from here.
- By law, Treasury Secretary Steven Mnuchin contends that he must move the $455B unspent MLF funds. The Treasury would place the unused money in the department's general fund, which can only be tapped with congressional approval. Many think this might be a ploy from Trump against Biden to make it hard for him to get something done; the fact is, this money can be moved. I do not expect this to impact our markets, as many are betting on a 4th deal.
- Federal Reserve Chairman Powell is cautioning lawmakers that the US economy remains in a damaged and uncertain state despite the progress made since COVID. News on the vaccine gives everyone hope that this will be behind us in a matter of months; however, I am a firm believer that the recovery will take several months "post" vaccine to establish a solid baseline for all securities. There continue to be significant challenges and uncertainties in front of us, including timing, production, and vaccine distribution. There is also how many people will be “open” to the idea of taking the vaccine once available.
- As previously discussed, MUNI’s are not trading with Treasury Bills. Many in the MUNI sector, including me, believe that as we see "movement" in our economy in the hopes of the vaccine, you will see overall revenues for municipalities continue to move up. As we move closer to the vaccine distribution, I expect MUNI's and equities to perform well while the "safe trade" of T bills will be flat to slightly down.
- Long term MUNI sales totaled $422.5B through Friday of last week; the record was the $423.9B sold in 2016. Many think that 2021 will be not as large, however still topping out at over $350B. Many municipalities refinanced what they could this year, with lower rates predicted; you will see this trend continue; however, as stated, many are expecting it to be lower in 2021.
- Former Federal Reserve Chairman Janet Yellen expects to champion what she calls "extraordinary fiscal support" to bolster the pandemic-ridden economy. I anticipate additional relief spending to go directly to states and municipalities while taking the place of the expiring Liquidity Facility. Nine months into the pandemic, over 6MM people are still claiming unemployment; this will be at the top of everyone's priority list. I do expect low rates, high government spending, and focus on getting people back to work, all good for MUNI's
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