- US business optimism ticked up to a 5-month high in December, which primarily reflects less pessimism around sales, earnings, trends, and economic expectations. Overall, this is good news and should also help equities and FI.
- The outlook for US states in 2024 is stable according to the S&P rating service, citing reserve positions and strong management controls will allow states to brace for slower economic growth should we see lower revenue in 2024. State fundamentals have been resilient; tax collection rates and sales tax collections have been high over the past three years. This point reinforces our thought that state revenues continue to be strong, strengthening the credit quality of MUNIs. It also further confirms our thoughts; overall, we have never had a credit issue; instead, we have had a rate issue, which has plagued the FI markets across the board.
- The State of CA Teacher's Retirement System may borrow more than $30B to help it maintain liquidly without having to sell assets at a fire sale. If approved, the state could borrow 10% of the $318B portfolio on margin, possibly impacting the credit quality for CA school bonds over time. If you are a CA buyer, I suggest you discuss this with our team and how it could impact CA ratings.
- Visible supply stands at $13.55B this week, significantly higher than the last four weeks and, quite frankly, higher than the previous six months. It will be a significant win if the market can absorb this "without" going down in price. This week and next will be critical, something to watch.
- This week, Federal Reserve Board of Governors Member Michelle Bowman said, “If inflation continues to fall, it will be appropriate to cut rates, as it is our policy not to become overly restrictive.” Ms. Bowman has been historically "for" the hikes, but now she is changing her tune. The bottom line is that she has been a "hawk" and is now turning "dovish."
- Job growth picked up in December, and wage gains exceeded expectations, diminishing the prospect of a March rate cut. The DRL Group has been relatively vocal on rate cuts; I suspect we will see them in the summer. If we are incorrect about the cuts, you should still see yields decrease in March. Call for reasons why.
- To offset the above, FED Reserve Bank of Richmond president Barkin indicated the FOMC should lower rates as the economy normalizes and confidence grows. He indicated he has no objection to toggling rates back down to "normal levels" as the FED builds conviction and confidence that inflation is on a convincing path back to the target rate of 2%. Mind you, he did not say "March".
- Secretary of the Treasury Janet Yellen indicated that extending all the 2017 tax cuts implemented during the Trump administration will lead to "serious concerns" regarding the federal deficit. She has never been a Trump fan; however, I somewhat agree. With all the spending going on in DC, the government will need to increase revenue eventually, which means higher taxes…however, this won’t happen in an election year.
At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.
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New Edge Securities, Inc. has no affiliation with Bond Desk Trading LLC, Bond Trader Pro, Tradeweb Direct, Bondpoint, TMC, or any other ECN. Yield to call (YTC) does not indicate total return; this yield is valid only if the security is called. Bonds may or may not be called or be callable on multiple dates or, in other cases, called on any date following the first call date, so yield to call is based on the earliest stated call date. Discounted bonds may be subject to capital gains tax. Bonds may be subject to OID (Original Issue Discount). Prices and availability may change at any time without notice. Do not buy discount bonds based on the Yield to Call (YTC). Insured bonds are issued for timely payment of principal and interest only. Insured bonds do not cover potential market loss and are subject to the insurance company's claims-paying ability. Non-rated (NR), Withdrawn (WR), or below investment grade bonds, lower-rated bonds carry a greater potential risk of default & should be considered by sophisticated investors only. Bonds may be subject to capital gains tax. This summary is for informational purposes only and is not an offer or solicitation for the purchase or sale of any security or a recommendation or endorsement of any security or issuer. New Edge Securities, Inc. and DRL Group make no representation about the accuracy, completeness, or timeliness of this information. Bonds could also be subject to the DeMinimis Rule; please consult your tax advisor for further clarification.
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Bonds are subject to market and interest rate risk if sold before maturity. Prices and availability may change at any time without notice. Insured bonds are subject to the claims-paying ability of the insurance company.
Bonds could also be subject to the De Minimis Rule; please consult your tax advisor for further clarification.
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