- Overall, economies of nearly half of the US states who rely on tourism, such as Hawaii and Louisiana, are flat to slightly down in growth over the last 12 months, another sign rate increases are "working" to curb inflation. It will be important to watch cities that rely on tourism, such as Las Vegas, whose total visors were down 5.90% from January. The DRL Group remains a buyer of credits insured for cities like this, as we see these trading ~10bps cheaper.
- The new production cuts by OPEC might complicate the FED's rate calculus. Many, including me, believe the FED will hike another 25bps to 5.25% at the May meeting. Some are predicting this will be the last hike of the year. I am not on board with that opinion. Considering the tight labor market, China's re-opening adding to demand, and the risk of higher oil prices, the prospects of a pause look less certain.
- Vacancies at US employers dropped in February to the lowest since May of 2021, suggesting cooler labor demand in some industries but still indicative of a job market that is too tight for the FED. The number of available positions decreased to 9.9MM from a downwardly revised 10.6MM a month earlier. Overall, these numbers are headed in the right direction and are a positive sign for the FED. As we see in the High-Grade markets, these numbers are adding fuel to the MUNI rally.
- US banks will likely decrease their investments in MUNIs as the lending institutions face additional regulation following the financial crises sparked by SVB. I suspect banks will continue to buy the asset class for safety and liquidity as we move through the year. The banking sector also sees an opportunity for capital appreciation throughout the year, with yields decreasing.
- With the recent banking turmoil raising uncertainty, oil prices, and the full impact of past monetary tightening yet to hit the economy, it will be hard to avoid a recession this year. If this happens, MUNIs traditionally perform well.
- Bloomberg economists' latest recession probability model sees a downturn unfolding as soon as July, two months earlier than the previous version. They are 100% certain a recession is coming. If this happens, MUNIs typically perform well.
- Long-term MUNI bonds started 2023 at the slowest pace of issuance since 2018, extending a slide that began last year. Sales are down 23% for the 1st Q as state and local governments issues about $74B in long-term debt compared with nearly $100B during the same period last year. This downward trend will continue in April, pushing pricing up in our markets.
- MUNI bond yields have "see-sawed" in the first Q as borrowing costs fell because of the optimism that the FED was nearing the end of the tightening cycle. The tide turned in February as unexpectedly strong jobs data reignited inflation fears sending yields higher. On the other hand, March was the opposite, with the FED signaling it may be near the end of the tightening cycle. Overall prices increased; retail investors viewed this as an opportunity to see some stability in the marketplace. There are several reasons why The DRL Group does not trade higher-yielding securities. 2023 has been the worst start in over a decade for hospital impairments, meaning various hospitals broke their covenants due to a lack of funds. Bonds of 8 hospitals have breached their DSC over the past three months, and I suspect there will be many more throughout the year. The rise in rates makes it difficult to refund an outstanding issue that should be refunded (hospital bonds) under "normal" circumstances. We continue to steer clear of this credit.
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.
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David Loesch
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
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