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Market News Commentary - From The Desk of David Loesch 12.17.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on December 17th, 2020
- With the FED indicating yesterday that rates will stay “the same for many years," they refined their communication on the time horizon of asset purchases. The FED signaled a very long-term "dovish" signal and indicated that the asset purchase program would continue until the FED sees "substantial further progress" on the economy. This comment means: The FED did not alter the stance of policy via interest rates; they will stay low for a very long period (at least two years). The FED will continue to buy T bills and did not comment on how long this will last; however, many believe at least for another year. The FED does see more robust growth in 2021 and 2022; however, it does not see unemployment getting back to where it was before the virus until 2023. They also indicated that the first FED Funds rate increase could be in 2025. Rates will stay the same or move lower; I think we will continue to see a small sell-off in T bills, and muni's move down ten basis points.
- Financial forecasts for some states and municipalities have improved considerably in the recent month. They expected to have a total budget shortfall of $650B through 2020, now that number has been forecasted at about $400B. The muni bond market has been buoyed by rock bottom rates, which shows investors are not concerned about a looming financial crisis. States including PA, MI, CA can all borrow for ten years at rates well below 1.00%. With the confidence levels moving up based on our population getting out and doing things over the next six months, I believe we will continue to see MUNI's perform based on this news. Yields continue to move lower, and they feel like they are going to zero; however, we all know that is not going to be the case. In the meantime, we continue to be buyers.
- With the vaccine prospects coming, the muni dealer consensus is that we will continue to see a rate decrease along with increased income FED taxes in 2021. Overall, MUNI yields will move down, as many predict that lack of product, heavy cash positions and those seeking tax-free income will persist throughout the year. I feel that rates will move down another 15 basis points and hold.
- Many cities and states are shoveling monies into civic projects to keep them from defaulting. Issues like the San Antonio Hotel Occupancy Tax bond funds a Hyatt Hotel connected to their convention center. WA Convention Center has tapped reserves, which is why the bonds started to trade cheap yesterday. I suspect that cities will not default on the larger issues; however, when you have lower-rated issuers like Las Vegas struggling to keep the lights on, buying uninsured convention centers might not be the way to approach investing.
- With the record year of issuing paper, I would not be surprised if 2021 will be a record year of muni defaults. This year defaults total 75; this was the most since 2012 when there were 108. Some of the muni market's distress in 2021 will be due to a slow recovery, with hospitals, nursing homes, and the like continuing to struggle as they come back online. Also, there were too many uninsured junk bonds issued in 2020. Many of these issuers are “project facilities” that need to be built and are betting things will work out with minimal funds to support the credit. Retirement homes make up 40% of the defaults, while land deals and Industrial Development Revenue issues make up the balance. This fact is a prime example of why our shop chooses not to trade in this type of credit.
- MTA approved a $17.1B budget for 2021, which requires federal funding of $4.5B to stop the layoffs. The MTA held off voting for toll hikes during the virus; however, the agency indicated they would need to increase fares eventually to make up for the lost revenue. I continue to believe MTA will make it, and the insured bonds offer value in this market.
- Puerto Rico seems to be nearing the end of the road on its restructuring. PR securities consistently rank as the top 3 securities traded daily, and all are moving down a handful of basis points each day. I suspect we will see something at the first of next year with a confirmation hearing in February. Insured PR’s non-callable are trading around a 3.00-3.50% YTW. All the “callable now” paper is trading around 101.50.
- The PA State Treasurer suggested they will (and other states are following) seize low rates by selling bonds to bolster its underfunded retirement accounts. Many states have less than 60% of the funding needed to pay their workers at this time. In the current low-rate environment, you will see many states issue muni bonds to help shore this gap. Many municipalities issued bonds in October of this year; however, states sat on the sidelines hoping for a relief package that never came.
- Securities dealer's holdings of MUNI's dropped to $7.6B as of 12/2; this is the lowest since 2013. Limited dealer positions are a concern; limiting dealers' holdings impacts the overall market liquidity and thus price/evaluations by pricing services. IMO, there is simply not enough to go around to satisfy the demand at this time.
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