- CPI numbers were OK, but it will not catapult the FED to indicate they will move rates. Slow progress on the inflationary numbers is the best we can hope for. Overall, we will see a quiet FED until the end of this month.
- This week, I have not seen a dramatic change in the Muni markets regarding the supply pressure caused by Blackrock’s ongoing sale of the SVB portfolio. The bid side of the market has held up very well despite this SVB offload. Most of the paper this week was taxable.
- I suspect there will be sweeping regulatory changes in the banking industry and the type of instruments banks can purchase with borrowed capital. Unused deposits will likely come under the microscope as well. In addition, California financial regulators said they would closely scrutinize banks and increase staffing following the collapse of SVB.
- Convention business is returning post-COVID, helping stabilize MUNIs tied to this type of credit. The City of New Orleans will come to market this week to finance its exhibition hall. Two years ago, the market would have balked at this type of financing. Business is currently on pace for another big year, as there are 103 significant events in New Orleans alone, with an estimated 711K attendees this year. Convention center bonds took a massive hit during 2020 and 2021; however, just like everything else, they have come back strong. Overall, we only buy convention center paper insured by AGM or BAM; even with this, we remain selective.
- Overall, transit systems still face a high gap post-COVID as aid dwindles. Local officials are pressing for help. Bond issues like Metro Transit Auth NY (MTA) have taken a proactive approach with their states seeking financial aid. Most of these systems will be OK in the major cities and, over time, could be a great purchase. For now, we continue to stick with the AA-rated paper and, if uninsured, focus on the MTA-type credit.
- Powell indicated at the May FOMC meeting that rates might already be “sufficiently restrictive," but he needs more time to observe developments before he has confidence in that judgment. I believe yields will stay sideways or grind lower slowly over the next three weeks. With the CPI numbers slightly down on May 10th, this will help the overall thought process of a pause at the next meeting. I am not 100% convinced they will pause; however, they are leaning toward that direction.
- US bank lending increased for a fourth week; sagging credit conditions remain relatively stable despite elevated concerns about regional lenders. Overall commercial bank lending rose $41.6B in the week ended April 26th after increasing $12.4B the prior week. This point is good news for much of the street, as it will carry over into the mortgage and high-yield markets. As banks increase their lending, the money flow for all securities should continue to improve.
- As previously discussed, states have built up record reserve funds over the last two years. However, in some states, we expect tax receipts to slow and federal pandemic aid to dwindle as the economy may head to a recession. CA is already projecting a massive deficit for the next year, while IL posted a 1.84B drop in April receipts from a year ago. Some are calling for some state receipt growth to drop between .10-5% over the next 24 months; it is essential to know what you are buying and the backing of that paper, particularly if we head into a recession.
- S&P published a report on 4/27, which indicated states' reserves should remain very strong and only experience a decline of 1.50% in 2024. This report contradicts other recent statements on the subject. Either way, depending on how bad a recession becomes, there should be some reserve drawdown.
- The bottom line is that yields are flat to slightly down over the week, with no real change, while bid flow is generally light. Paper on the shorter end of the curve is getting more expensive, and on the longer end, it is harder to get 4.25% regularly for AA-rated paper. We remain buyers here.
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David Loesch
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