(Banking Jitters Send Investors to Muni's as Flight to Quality Moves Yields at Unprecedented Speed.)
- The SVB collapse created quite a bit of fear this week. In addition, investment losses in Signature Bank and First Republic Bank are starting to impact teachers' and state troopers' retirement accounts at a time when their pension funds are trying to recover from last year's market. A tally of the holdings of some of the largest US public pension funds shows at least $180MM of exposure to these regional lenders, which have been or will be taken over by Federal Regulators. This direct impact so far appears limited because these holdings represent a tiny part of around $5T in US pension funds.
- Globally investors are on edge after the collapse of 3 regionals and the growing concerns with Credit Suisse. However, as of this AM, the Swiss Bank has extended a loan, which helps instill public confidence. All these factors are causing a move or “flight to quality” to safer asset classes, such as Municipal and Treasury Bonds, causing bond yields to decrease at unprecedented speeds. Yields on 1-5-yr Muni’s moved down 20-25bps, and the longer end is down 18-20bps since 3/13/23. Yesterday alone, yields were down 12bps. Moves like this indicate that investors seek this asset class for security, liquidity, and reliability.
- The current banking issue is not just a problem where depositors cannot get funds (solved with the FED's backstop) but has impacted other areas where the FED cannot or will not help. IMO the FED could have come in sooner to ease the minds of many.
- Funds such as the NY State Teachers Retirement System owned 166K shares of SVB, Colorado Public Employees Retirement Association owned 115K of SCCV, among many others. As The DRL Group has repeatedly indicated, high-grade securities will always be suitable in a portfolio at times like this.
- Overall, inflation numbers continue to come down. The US Producers’ Price Index unexpectedly declined in February, easing cost pressures in corners of companies still battling inflation. The PPI fell .1% from the prior month and increased 4.6% from a year earlier. I believe these current banking issues will “rein in pocketbook spending” out of fear as we move through the next few months. Some are saying the FED will take a pause next week; I am not so sure.
- Inflation is "fading," sitting at 6% in the US last month and has been running higher in Europe. The interest rate futures suggest a diminishing chance of the FED raising its benchmark by .25 next week, pointing to cuts as early as this summer. I think this is too aggressive, considering the issues at hand. Should we see "hints" of this, you will see our markets rally and yields on the longer end drop below 4%. After next week's FOMC meetings, pay attention to the comments, dovish or hawkish - the market will move based on this.
- Last week BOA said they are calling for a MUNI Rally "reboot" and see a rally reigniting the $4T state and local government debt. They "believe the MUNI rally has resumed." According to the report, the 10-year AAA yields should drop to 2% and reach 1.65% by year-end. Rates on benchmark MUNI securities hovered around 2.56% on Friday to put it into perspective. This week alone, we are down ~20bps across the board.
- A significant market bullish reversal occurred in early November of 2022, and the ensuing rally was strong enough to call it a bull market. The more than 50bps move in February should be seen as a "normal retracement in a bull market." Friday, with the SVB issue, yields headed for their most significant two-day drop since 2008, falling as much as 29bps.
- The FDIC and the FED are creating a fund allowing regulators to "backstop" more bank deposits that run into trouble following the SVB issue. In conversations with banking executives, regulators discussed the new vehicle to reassure depositors and help contain any panic.
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