- MUNIs have been bouncing back from the worst year in decades, and for months now, we have heard from various Broker/Dealer firms recommending bonds at these levels. Vanguard Group was the latest to say that MUNI’s continuing strength will extend well into 2023. These gains are coming amid a solid technical backdrop, with demand outstripping supply and expectations of the FED to slow down (wind down) its tightening policy. I, along with others, believe and have been saying we are closer to the end of the FED hike schedule, and yields are comparable to levels we have not seen in a decade. In addition, credit quality continues to be strong; this has primed MUNIs for what some call the "municipal renaissance," which many see playing out in the first few weeks of January.
- If you look at the market from a long-term perspective, yields are as good as they have been in some time. If you're looking for tax-exempt income, now is a great time to be invested. I have encouraged many to look at the "taxable equivalent" yields that MUNIs produce, keeping safety and liquidity in mind.
- States have used their fiscal windfalls responsibly. Rainy-day funds are up; broadly speaking, states did not pursue aggressive spending plans. We have said this many times before; Muni’s did not have a credit issue; it’s been a pricing issue. The DRL Group continues to reiterate that we do not have a credit issue; we have pricing issues. At this time, it is in the process of being corrected.
- From a technical standpoint, I expect March to have a higher new-issue rate, which could put pressure on our markets. However, the April payments from investments should help offset this, along with principal redemptions. Overall, visible supply, as we have been reporting, has been down. With rates moving down in MUNI land, we expect refinancings to continue through 2023.
- Vanguard said they see value in investment grade credits given the strong fundamentals. The DRL Group has been addressing this point for quite some time. The outflow cycle took evaluations beyond where the fundamentals indicated they should trade. The fundamentals will catch up to these valuations if we slow down the economy. Therefore, we are seeing this rally.
- We have been discussing the high revenues some states have experienced. The Texas oil and natural gas industry paid a record $24.7B in taxes and royalties last year, far exceeding the previous annual high of $16B set in 2019. This point is/was an unprecedented windfall and helped swell government coffers in the second-largest US state. We will see more of this in 2023, and it backs up the fact MUNIs are in a good place both in yield and credit quality.
- Forecasters now expect the US economy to contract over consecutive quarters in the middle of the year as steep rate hikes from the FED cascade more broadly across the economy. GDP is falling at a .06% annualized rate as consumer spending slows. As supply dwindles and demand picks up, you will see continued strength over the next few weeks. Technically this is a recession (I think we are in one now); however, I do not believe this will create "havoc" in our markets; it should help.
- Home prices continued to fall, and December was at the slowest pace in over a decade, capping one of the housing market's worst years on record amid a rapid jump in mortgage rates. Contract closings decreased by 1.5% to an annualized pace of 4.02MM per month, the slowest pace since 2010. This issue will continue to pull down overall numbers, which the FED will pay close attention to for the upcoming meeting. Overall, this could "incentivize" the FED to move only 25bps.
- Supply this week begins at $5.8B and continues to be low compared to the average of $12.5B last year. These numbers will continue to stay low over the next few months, fueling the current rally.
- Some critics say the FED ignores evidence that inflation is in retreat and the economic outlook is softening. However, some believe the FED is simply skeptical of the view that inflation has passed. We all know with the current numbers, inflation continues to be on everyone's mind but with the decline in the CPI. Markets are "cheering" this rapid decline. The next Fed meeting results will be released on February 1st.
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