FOMC meeting next week - markets should be firm over the next few weeks based on the meeting results.
Supply is slightly lower; investible assets should be marginally higher, while a "pause" could be in order.
Are you seeing a paper that meets your objectives?
- Texas' economic growth has positioned local governments for a "soft landing," assuming we have a recession. With little or no dependence on state aid or income tax, the state's local governments rely heavily on sales and property tax, which are steadily increasing. Texas currently has a historic $32.7B surplus in its coffers due to rapid economic growth and sustained inflation, which continues to boost sales tax. We have always been bullish on our state and do not see anything slowing the state down from a credit quality standpoint at this time.
- The improved fiscal picture will help municipal governments weather an economic downturn. Nuveen projects we will likely have a short and shallow recession amid restrictive monetary policy in the second half of this year.
- Vanguard indicated yesterday, 4/25/23 they are "digging deeper" into investment grade debt for 2023, given the attractive spreads, solid fundamentals, and supportive technical factors. We continue to buy this credit structure while focusing on AA-rated paper or higher.
- Charter schools and higher education debt should be near the top of investors' lists for those willing to inch down the credit spectrum. Charter schools are "publicly funded but privately run," so they will take on a bit more risk; however, as mentioned, for those seeking a bit more risk with a higher yield, this asset class is worth considering. Certain states have a "moral obligation" towards this type of debt; we are comfortable with this credit if the underlying is > A rated.
- Goldman Sachs is standing firm on their bullish outlook for US credit, saying companies can withstand tighter lending standards triggered by the March banking failures. The US is less reliant than elsewhere on banks for capital, meaning tightening lending conditions may have a minor impact on issuers.
- We remain cautiously bullish on the MUNI sector, focusing on the higher-grade paper. A steady outflow from funds, a T selloff, and the calendar pushed yields up last week. Once the T Bill selloff stops, yields on MUNIs will decline again; BOA indicated this as well Friday. Credit spreads may widen should the economy weaken; however, MUNI yields should trade sideways to slightly down in that scenario.
- Visible supply is slightly lower, at $9.4B, slightly above the $8.8B average. I suspect we will see an uptick this week, then a slow move down as we finish out this month.
- Higher hospital costs are not decreasing and could squeeze access to care while putting pressure on that debt. Over half of all US hospitals ended 2022 operating at a financial loss, which is unsustainable for any organization in any sector. Hospitals are just now catching up with the elective surgery backlog; however, many will continue to have staffing shortages and slow pay issues. We have previously reported that the hospital sector would sustain a negative financial impact and said to steer clear of the lower-rated, smaller systems.
- Overall, MUNI yields have been steady over the past week to slightly lower. May is typically a good month for MUNIs, with the FOMC meeting coming up next week, and should they pause, we expect a small rally in pricing in the high-grade market.
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