- Over the last several weeks, liquidity remains an issue; bids in the secondary trading market on bonds out for the bid/auction are points lower than values. Investors have enjoyed a nice "run-up" over the past several years. Investors should keep in mind that bonds with a higher credit rating, such as what DRL sells, will mature or get called (likely). The valuations they see are only temporary and perhaps create a buying opportunity.
- Over the past 27 years, there have been a handful of opportunities to buy paper cheap while keeping quality at the forefront. We could be seeing another buying opportunity as we move into the summer and early Fall. The FED recognizes the current inflationary pressures and is determined to get it back to 2%, which will be very difficult without creating a recession. Investors should keep in mind MUNIs are one of the safest investments on the planet. We see a pricing issue with these yield changes, not a quality issue. The pricing will be solved; it will just take time. Again, the question is when and how high we go in yield.
- Kicker bonds are very attractive in this rate move. Finding one-year callable paper (or 1.5 years) is helpful to hedge against inflation, rising rates, and the fear of loss in value. This rate move has spooked many; some have stopped buying, while some have piled money into this market. Others have indicated that this is a "nonevent" as their bond positions are insured and will mature at one point in time. MUNIs will not stabilize until we see T bills stabilize along with crude and inflation. Lower crude prices, as seen over the last couple of days, will help; however, we need a "string" of back-to-back positive days to give investors confidence that the markets are stable or moving in a positive direction.
- We see insured paper: long maturities getting to a 4.10%, mid-range around a 3.25%, short term paper less than 2 years around a 2%. We are selectively buying here at these levels.
- Mutual fund outflows remain an issue; however, over the last week, they have slowed. I suspect we will continue to see these fund outflows slow over time as all the "sellers" have exited the markets.
- We see bid wanted/auction flow to continue to be strong (high); however, the reality is bonds are "not trading" into bids that are 50bps higher than last trades. While the volume of bonds out for the bid is high, the amount that actually "trades into that bid" has declined over the past few weeks.
605-B Park Grove
Katy, TX 77450
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