Broker Check

Market News & Commentary - From The Desk Of David Loesch 03.30.2023

March 30, 2023

The MUNI market is on track for its most robust March performance since 2008…

  • The MUNI market is on track for its most robust March performance since 2008, benefiting from a flight to safety amidst the banking turmoil. This month we saw funds coming into our market and out of money markets. MUNIs have become significantly less volatile than T-Bills and a haven in the "flight to quality," giving investors the confidence to continue buying in this market.
  • Returns have also gotten a price boost from depressed issuance, as visible supply remains low. This supply issue will carry over into April, as I expect we will see more banking volatility ahead. For reference, $69B of longer-term debt was financed this year, down 23% YOY. This decline is due to higher borrowing costs and the lack of need to issue paper.
  • MUNI Mutual Fund outflows have slowed, and inflows have picked up. With Muni issuance low, these funds are finding it difficult to find bonds at the proper levels. This point will contribute to a firmer fixed-income market.
  • Homebuyers continue to flee expensive cities like NY and San Francisco for the sunny skies and cheaper homes in Florida. Miami, Tampa, and Orlando are the top three destinations gaining 50% of these new residents.  
  • The spread between high-yield dollar-denominated corporate bonds and those of investment-grade paper widened to reach 367 BPS this month. This level has been sufficient to trigger the world's most significant economic contraction. The average differential coinciding with the onset of the December 2007 recession was 354bps and 276bps in February 2020. I am not suggesting a recession will happen; however, the odds are high. Should this happen, it will help munis and all high-grade securities.
  • Swap pricing linked to interest rate moves by the FED now suggest that a quarter-point hike is more likely than not at the May FOMC meeting. Rates on the contract tied to that gathering rose to around 4.96% Monday, around 13bps above the current effective rate on FED Funds. The market had suggested more rate hikes, but those expectations were largely wiped-out last week after the FED.s comments and rate decision.
  • The FED continues to clarify that troubles buffeting the banking sector will not deter their focus on the battle against inflation. Blackrock indicated they do not see rate cuts this year; some, however, do. Based on the data I am reading, I would be shocked if we see any cuts. I see "less fighting inflation by rate hikes" but no reductions for this year.
  • Controlling inflation without triggering a recession will be hard for the FED. Accomplishing this task without stressing the banking sector is a delicate balancing act. Powell hopes tighter financial conditions will do some of the inflation-fighting for them. However, this will be challenging. Something will have to give. As the shorter-term bond yields indicate, we could see a recession in the next few months.
  • Many incurring me believe the broader contagion from the banking turmoil has eased. Powell did an excellent job with his language last week, reducing the concerns of many—however, over $108B in deposits transferred out of the smaller into larger banks. If we have another flare-up, it will likely cause our markets to fall again, with bonds moving up in price based on a flight to quality.
  • From a pricing standpoint, March was a decent month. We've been actively buying high-grade medium-term paper with a secondary focus on 2–4-year maturities. An example of this month's price move is; long, AA-rated, and higher bonds have gained about 20bps, with shorter maturities gaining around 15bps. With no FOMC meeting in April, we expect this trend to continue for about six months.

At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.

We would love the opportunity to visit with you further. Please click here to schedule a call with one of our specialists or contact us at 281-398-8600.

David Loesch

605-B Park Grove

Katy, TX 77450

866.664.4040 (toll-free)

281.398.8600 (direct)


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