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
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
866.664.4040 (toll-free)
281.398.8600 (direct)
This report has no regard for the specific investment objectives, financial situation, or needs of any particular recipient. This report is based on information obtained from sources believed to be reliable, but no independent verification has been made, nor is its accuracy or completeness guaranteed. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Opinions expressed herein are subject to change without notice. The division, group, subsidiary, or affiliate of NewEdge Securities, Inc., is under no obligation to update or keep the information current. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. NewEdge Securities, Inc. accepts no liability for any loss or damage of any kind arising out of the use of this report. Please contact your tax advisor regarding the suitability of tax-exempt investments in your portfolio. Income from municipals may be subject to state and local taxes and the Alternative Minimum Tax. Corporate and Municipal securities are subject to gains/losses based on the level of interest rates, market conditions, and credit quality of the issuer. As with any security, there is an inherent market risk possibility as to principal if the security is not held to maturity. The non-rated bonds (NR) should be considered for investment by knowledgeable and sophisticated investors. Additional information will be made available upon request.
Securities are offered through NewEdge Securities, Inc., a registered Broker-Dealer, Member FINRA/SIPC.
The DRL Group is not a registered entity or a subsidiary or control affiliate of NewEdge Securities, Inc.
Bonds are subject to market and interest rate risk if sold prior to maturity. Prices and availability may change at any time without notice. Insured bonds are subject to the claims-paying ability of the insurance company.
Reminder: E-mail sent through the Internet is not secure. Do not use e-mail to send us confidential information such as credit card numbers, change of address, PIN numbers, passwords, or other important information. Do not e-mail orders to buy or sell securities, transfer funds, or send time-sensitive instructions. We will not accept such orders or instructions. This e-mail is not an official trade confirmation for transactions executed for your account. Your e-mail message is not private in that it is subject to review by the firm, its officers, agents, and employees. Unless expressly stated in this e-mail, nothing in this message should be construed as a digital or electronic signature.