Broker Check

Market News & Commentary - From the Desk of David Loesch 05.02.2024

May 02, 2024
  • States and municipalities borrowed $142.80 billion during the four months of 2024, the most in almost a decade. This is part of what has affected the market this year and what continues to move rates up and keep them there. The need to borrow money is higher than the concern about interest rates. Overall, visible supply is heavier than normal, one would think this would put pressure on yields over time, however the market seems to be absorbing it well.
  • The Fed Meeting went as expected, and rates are unchanged. We continue to see concerns about inflation and debate about lowering rates. What is clear is that we will not have another rate hike to control inflation for the time being. This should not be a surprise for anyone, at this time, we are thinking one or none on rate cuts.
  • The Federal Reserve said it will shrink its balance sheet at a slower pace beginning in June. In the plan unveiled Wednesday, the Fed said it would lower the monthly cap on how many Treasuries it would allow to mature without reinvesting to $25 billion from $60 billion. I believe this will help push yields lower. I think we will see this at the end of May.  
  • There was a recent publication about Build America Bonds (BABs), the associated risks, and whether they should trade higher than 100 cents on the dollar. Paying a BAB premium exposes the investor to potential losses as governments increasingly buy them back at par when refinancing. This type of security was sold in 2009 and 2010 through a federal program aimed at helping pull the economy out of a slump by increasing state and government spending on infrastructure.  This goes back to “know what you are buying” if you are paying premiums on this paper, best to speak to your broker about this or call us. Bottom line, you could be left with a negative yield to call. 
  • Estimates for federal borrowing this quarter are $243B, more than most dealers anticipated.  The Treasury Department said net borrowing from April through June is now $41B.  This heavy borrowing is one reason we have seen the yields on T bills rise in the last few months.  As I write this, the 10-year T has gone from 4.10% to now ~4.60%, dragging all markets down with it. 

Bottom line:

FED is steady and will remain there for a while as they are not in a hurry.  I suspect the closer we get to November with no rate change, the less likely they will move rates.  Supply is decent, and yields are holding overall, we still think yields will be lower in 12 months from now, and paper should be considered at these levels. 

 

 

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.

 

 

David Loesch

dloesch@drlgroup.net

www.drlgroup.net

605-B Park Grove

Katy, TX 77450

866.664.4040 (toll-free)

281.398.8600 (direct)

 

 


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