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Market News Commentary - From The Desk of David Loesch 01.14.2021

January 14, 2021
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  • President-elect Biden will unveil today a COVID Relief Package rivaled in size only by last year’s $2Trillion Cares Act. Transition officials developed a proposal with Democratic lawmakers in recent days; the package is expected to be at least $900B, with Schumer pressing for $1.3T. Although these packages will be favorable for many, including most likely states and municipalities, one wonders how our government will continue to service the debt should rates move higher? I would think that Yellen and her team will push for ultra-low rates for the simple fact of debt service issues.
  • The overall default rate for MUNI's is .36%. While this number is still incredibility low, concerns mount that the number will move up in 2021 and 2022 due to MUNI's abnormal issuance in 2020. The sectors in danger of default are CCRC's, hospitals, project facilities, land deals, and golf courses. Often municipal governments will back deals such as these, however with the recent "hunt for yield," some of these issues have come to market without government backing. I suspect that retail will have a rude awakening over the next two years if they bought the unsecured and uninsured debt, as mentioned above.
  • The spread between the two and the ten-year Treasury is growing and being watched very closely by many traders. As mentioned previously, the FED will need to clarify its potions on tapering, which I believe they will do. The current buyback is $120B per month, consisting of $80B in T bills and $40B in mortgaged back securities. This program meets the goals of unemployment and inflation at this time; however, should the FED decide to move these numbers, they should and most likely will give a "heads up" to the street to prevent yields from surging. Many FED officials have indicated that tapering will not happen in 2021; some officials have not made this very clear. With the spread widening and the 10-yr T markets wanting to move towards 1.50%, it will be interesting to see how the FED reacts in their next meeting.
  • President-elect Biden is gearing up to pass a multi-trillion-dollar economic stimulus package early in his administration. This bill amount is unknown. However, they will target the stimulus checks and expand unemployment benefits and funding for vaccine distribution, school reopening, tax credits, rental relief, and aid to small businesses. The $900B, which passed last month, will run out mid-March and may not prove enough to forestall an economic contraction. This proposal will also help states and municipalities assist our markets, as discussed before. On Friday, Biden cited record low rates, which allows for acting now to bolster both the short term and long-term growth outlook. I believe this bill will pass and be received well by the street; however, this will continue to fuel the discussions around inflation.
  • CA Governor Gavin Newsom unveiled a $164.5B budget for the next fiscal year, detailing how he plans to spend a $15B surplus that the state has accumulated despite the pandemic. CA has done well from a credit standpoint over the last two years, with their bonds doing well overall. I suspect you will continue to see CA and other states improve through the next 12 months, creating value in munis and other credits that depend on state revenues. The primary issue will be government assistance during this time.
  • Biden has started to discuss his tax plans. Cap Gains Tax up to 40%, top marginal rate to 39.7%, payroll tax increase, personal income tax up (undisclosed) and real-estate transactions reviewed. No discussions about MUNI income; this will not be touched, in my opinion.

David Loesch

dloesch@drlgroup.net

www.drlgroup.net

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