- States are continuing to slash their deficit forecasts due to the increased revenue stream and unexpected tax flow dollars from our economic recovery. IL is the latest state moving its deficit numbers down to $3B from $5.5B. The Governor attributes this change to the “economy performing stronger than expected." I find it ironic in a market where there seems to be no stopping equities, T bills trading off in general, and our market continues to strengthen.
- Beyond NY and SF, real estate demand is booming in downtowns across America. Families are upgrading to larger suburban homes, taking advantage of record-low mortgage rates. Home prices in the urban US rose 15% in the three months through late January, slightly ahead of the suburbs' annual pace. I suspect this will continue to grow.
- President Biden and White House officials are letting others know about the $1.9T “fast track stimulus” plan they are pushing through both the House and Senate. This deal should positively impact our markets, but not on the Treasury Market due to inflation worries.
- I feel yields will hold steady, but T Bills will move up; it would not surprise me to see the 10T at a 1.25% soon. The disconnect on the MUNI markets and its relation to the T markets directly result from higher taxes and government stimulus. MUNI's should continue to hold +/- 10bps for the near term.
- About 5MM Americans did not make their rent or mortgage payments in December, which translates to 5% of the total US renters and mortgage holders. This fact is one of the most significant shadows hanging over the US economic recovery. One would think this will negatively impact our equity markets and REITS that buy single-family housing units; however, I feel there is currently not enough attention to these significant numbers.
- The average yield on US junk paper dropped below 4% for the first time as investors continue to seek a haven from ultra-low interest rates. For those who did not trade through the 2009–2010-time frames, junk paper was strong in the years leading up, as we are now, in an “ultra-low” rate environment. That market eventually imploded upon itself along with the equity markets. I am not predicting a "crash"; however, it looks very similar. Demand for the high-yield debt has outweighed the supply by so much, that word has it, money managers are calling companies encouraging them to “issue debt.”
- New Issuance continues to be light, putting pressure on yields to move down. Overall, deal-flow seems to be very light for the foreseeable future while funds are seeking paper along with retail investors. With the lack of supply and taxes inevitably going up, we believe yields will continue to grind lower.
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