- We have seen a significant move in all credits over the last 45 days; sustainability is the question now posing the markets. The 5yr T yield rose above the rate on the 30yr T this week for the first time since 2006. Historically, these types of inversions happen before a recession. However, the inversion considered more important by traders is between the 2ryT and 10yrT, which is currently flat.
- Several banks and dealers have indicated there are buying opportunities in this market. Yield has come back into the marketplace, attracting buyers on the sidelines. Yields, on average, are up 100bps ten years and out. One-year paper yielding ~1.20% at the time of this writing.
- UBS said in an interview that yields on MUNIs had risen so much over the past three months, it is likely to attract institutional buyers into this asset class. Another catalyst could come from President Biden's tax proposal, which seeks a minimum of 20% tax rate on income and unrealized gains of US households worth more than 100MM. This tax increase is far from being approved. However, with the Democrats controlling both the House and the Senate, this getting passed is optimistic.
- Biden unveiled a $5.8T budget request to appease moderate Democrats on Monday. The proposal emphasized debt reduction, additional funding for police, veterans, and the flexibility to negotiate new social spending programs. This proposal adds 20% min on unrealized capital gains for households worth > 100MM. Biden called to raise the corporate rate to 28% from 21% and hoist rates on the highest earners in the US to 39.6%. Should this bill be passed (which I think it will), this should help the MUNI markets.
- High housing costs created a surge of people moving out of the second-largest city in the US. LA county lost 160K residents during the last 12 months, the most significant population drop of any US county. This change accounted for almost 2/3rds of the declines in CA. Housing costs across the board have been increasing significantly. With the recent rate move, the 30-year mortgage has now touched 5%; this should start to cool things off from a buying perspective.
- Many cities are betting on convention center business. As you could imagine, cities compete with one another as conventions typically bring in an enormous annual economic impact to the various regions. There are 35 projects currently underway to expand or build new convention centers. Many of these improvements are financed with cash on hand, some with county-backed bonds. For now, municipalities are betting coast to coast that these expansions and new builds will pay off, and the convention business will emerge from the pandemic better than ever.
- MUNI exchange-traded funds have attracted about $3.40B to date. This inflow shows investors have used short-term MUNI ETFs to park cash to ride out the volatility the fixed income markets are seeing. Interest in broader ETFs is returning as yields have increased sharply over the past few weeks. I suspect the buying into these funds will continue to happen as yields move.
- Many economists expect March jobs and inflation data to harden the FED's resolve further and pull in those still skeptical of the need for a 50bps hike in May. Economists also believe the labor data will be robust, and the market supply chain issues are sparking up again due to the surge in China's COVID cases.
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