“This supply will create opportunities, particularly in TX paper” …(read more below)
- Markets are sideways. MUNIs are at a disconnect to T-Bills and equities and will stay there for a couple more days. Overall, trades are up, dealer-to-dealer, and transactions are running higher than usual; there is an opportunity with this disconnect. With the FED's comments on 3/7, equities are down; however, FI markets are stable, and MUNIs are down in yield a touch based on the news. This point might be the classic "getting too cheap" case like last year.
- Visible supply is higher than the average for the next couple of weeks, with two large TX deals totaling $4B coming to market. This supply will create opportunities, particularly in TX paper. There will be two more weeks of heavy supply then it will taper off. I am impressed with how well the markets absorb this additional supply knowing what is coming. We recommend taking advantage of any price move down on these issues.
- Some are predicting a March layoff and discharge rate due in May to rise to almost 1.30% compared to the three-month average. The takeaway is that the labor market is softening if these numbers are correct. However, like everything else, it will take a while to "work" through the system….and it should help our markets over time.
- T-Bills held below the critical level of 4% yesterday, as many anticipate a rate move on 3/21 and 3/22. MUNIs should remain disconnected from T- Bills until we have solid numbers; as I write this 3/08/21, the 10yr is @ 3.97%
- The US service sector expanded in February by more than forecast as hiring increased and orders climbed to a one-year high. The purchasing managers The measure of new orders by purchasing managers rose more than 2 points to 62.6, the highest since 11/2021, which signals a healthy demand. I expect this number to continue to climb over the next few months while perhaps putting pressure on the FI markets. This gauge is not a significant attribute of the FOMC; however, they watch it closely.
- The FED will likely head into the March meeting with two strong job and inflation reports. Many, including me, think Powell will strike a balance highlighting progress thus far in slowing inflation without job losses. Markets have now fully priced in a 5.50% terminal rate; therefore, you saw fixed-income securities trade down over the last month.
- Overall, MUNIs are holding and seem to be trading in their own "ball field." We continue to buy mid-range paper AA rated or better, and yields are up ~20bps over the last month…and holding. Staying with quality will pay off, in my opinion.
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