- On May 2nd, Blackrock began selling MUNI securities of the failed banks, with an auction of about $50MM taxable bonds. It will be interesting to see how this will impact the market. Last month the FDIC said that this asset manager would conduct the sale of $27B in securities from Signature Bank and $87B from SVB. Overall, this paper should be absorbed by the street over time, and based on the size and structure of these bonds, it will not likely crush the market.
- The SVB portfolio is the rough equivalent of an average week of issuance this year in the new-issue market. Again, IMO, these low coupon bonds (sub 2%) will be challenging to offload, and the bids on this paper will be in the low 70s and high 60s, but I suspect dealers will absorb these trades within their books due to light inventories. Again, to point one, it should not crush this market.
- As we know, investors are eager to bet on a rapid shift to a looser Fed policy. Wagers on this bet have made the dollar and bond yields look weak and low unless the economy tumbles into a recession. There is a palpable sense of anticipation in the market that the FEDs decision will indicate we are "there" in rates, and many expect a pause. The FED should raise 25bps and then signal a halt. I do not believe the banking issues are over. With the recent Republic Bank problems and banking concerns in general, equities are under pressure.
- If we have a rate pause, it does not mean we will see rate cuts anytime soon. I do not think there will be a cut this year. Again, +25bps should be the "right" move, then a pause. The one wildcard in all the volatility will be the banking concerns that have been recently unfolding.
- As previously reported, we do not believe Metro Transit Authority (MTA) will file for bankruptcy. Yes, ridership is down, but the transit system is too vital to the NY area. A tentative deal between NY Governor Hochul and legislative leaders will help fix the MTA budget gaps as the cash-strapped agency is slowly luring back riders from the pandemic era. The assistance deal calls for an increase in the payroll tax on the largest businesses within NYC to .6%. This tax increase will bring an additional $1.1B to the system. Overall, this is good for MTA and should help the credit over time; we continue to buy this credit for these reasons.
- With inflation as high as 9% this past year, Powell’s colleagues have been "all in" on the fight to curb inflation, and some think Wednesday's rate move will be the last. I am confident we will see one more hike after this; however, either way, I suspect the FED will let the street know they are getting close to the end.MUNIs should have modest gains in May. History shows that MUNIs perform well after a recession, which many suspect; we will see. I suggest legging into the market here if you seek an entry point.
- Overall, we are buyers of mid-range paper (around 10-15 years). The short end continues to get "hit" as yields move up, albeit small due to the duration. We continue to stick with quality, trying to stay above AA.
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