- BlackRock, the world’s largest asset manager with $187B under management, sees opportunity in MUNI bonds at these levels after the considerable decline and the worst start to a year on record. These recent declines have restored value to this asset class, with MUNI and T- Bill ratios now on par with their 5-year averages. While the market will likely face additional volatility with the March moves, many, including BlackRock, anticipate buying on weakness. I suspect we will see a small amount of buying at these levels; however, I do not see aggressive buying until after the rate move.
- BOA said yesterday that the worst of this year’s selloff in the MUNI market might already be over. They added that there might be additional pain in March after the FED increases the rates. With the timing of the rate increase coming next month, the 1st Q should absorb most of the bearish price action. The more the FED lifts rates at the next meeting, the more precise the path for rates in 2022.
- MUNIs have lost over 3% in 2022; the result is that benchmark muni yields have risen against T bills making them cheaper on a relative basis. Benchmark MUNI yields have already priced in a 10-year T bill at a 2.50%, and unless T bills unexpectedly move beyond that, the risk of higher-grade MUNI's is minimal at this point. Investors should enter the market at these levels, considering the possibility of further yield spikes as news presents itself.
- Retail participation has increased as current levels are more attractive than two months ago. When you view them in ratio terms, these yields are higher than we have seen since COVID two years ago. I suspect we will see yields move up slightly from here. I also expect MUNIs to taper off once we get past the rate move.
- The White House is considering reworking President Biden’s economic plan to emphasize deficit reduction to secure support from Democratic Senator Joe Manchin. Many top Democratic leaders have also discussed adding deficit reduction measures to win over the holdout Democrat to pass this bill. Such a shift would have the added benefit for Democrats of heading off an expected Republican charge of fiscal irresponsibility in the midterms. I believe this is a great move; understanding the government cannot simply continue to spend is something everyone wants to see, especially with the inflation numbers we are seeing now.
- Money flowed into MUNI bond funds last week; however, I would not suggest this is a sign that the tides are turning. Investors added $216MM to Muni bond funds in the week ended last Wednesday. This change breaks a three-week streak of outflows. I will be curious to see if this trend continues with the tensions between Russia and the US.
- Visible supply begins the week again at $8.8B; this should not come as a surprise as the issuance of paper will continue to be light for the next few weeks. Overall, this will help our markets as we move through the balance of this month.
- Airport bonds, which total around $120B of our market, have largely emerged from a period of tumult caused by the virus-fueled travel disruptions and look pointed to benefit as Omicron starts to fade out. The extra yield investors demand for this credit is shrinking and have dropped .05bps over the last month compared to all other securities that have risen. Toll roads also continue to perform better than expected as America gets back on the road and starts to see the country. I suspect we will see a continued smooth recovery for these sectors. We have been buyers of this credit all along through the pandemic.
David Loesch
dloesch@drlgroup.net
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Katy, TX 77450
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