- The Treasury Department began laying out the groundwork for submitting applications for the $350B in relief funds for states and municipalities. This framework will set up rules to ensure the money quickly flows toward COVID relief and other programs to support the economy, such as infrastructure. The first step will trigger the release of funds to governments within days, which will significantly boost these municipal credit qualities. Some guidelines include rehiring workers or supporting industries affected by COVID 19 issues. These states and territories cannot use the funds to pay for tax cuts and are prohibited from using the aid to fund debt payments, legal settlements, or deposits into rainy-day reserves.
- Some states were surprised they could not use funds for debt service. The details get tricky when it comes to paying back loans “from” the government with the funds. The State of IL wanted to use the funds to pay back loans it took out from the Lending Program under the Trump Administration; however, the current administration has indicated this is not the proper method of utilizing the funds. It will be interesting to watch as our government guides the states during this process. I also suspect S&P will be watching this as well to determine any upgrades/downgrades.
- Alabama will end its participation in all federally funded pandemic unemployment compensation programs starting June 19. The Governor indicated that the state is having trouble finding workers to fill vacant positions within certain businesses, and the "increased unemployment benefit" is contributing to this issue. I suspect more states will follow this pattern. This issue was one of the reasons why unemployment numbers were “off” on the last report.
- In March, Vegas welcomed 2.23MM visitors, the most since the February 2020 last month before the COVID shutdown. I suspect these numbers in places like Vegas and NY will continue to climb as Americans continue to receive their vaccinations. Fitch and Moody's have commented that as occupancy rises, upgrades will happen; however, it is too soon to make that call.
- The City of Chicago indicated it would divide its $1.9B shares of President Biden’s rescue plan by paying down debt and softening the economic impact the pandemic had on its residents. $965MM will go to pay down debt and new infrastructure. As the money filters to municipalities, you will see more large cities go this route. This process will take bonds out of the system as they won’t need the money.
- Judson College, a 183-year-old women's college in Alabama, will file for Chapter 11 and shut down amid declining enrollments. It will be interesting to see how many other smaller universities like this will close due to the pandemic and these issues. Small institutions will not withstand the lack of funds if they have small, poorly managed endowments.
- Visible supply begins the week at $9.7B, below the average of $10.5B. This trend should be consistent as we move through the summer. In addition, interest payments and redemptions will be high from June through August; therefore, demand should continue to outstrip supply.
- Barclays cited risks in low coupon munis due to the possibility of increased capital gains tax. They noted should rates go higher, and if capital gains taxes increase, it could trigger a selloff in low coupon type paper (below 3%). Bonds with coupons below the "standard" 5% have become a significant market share in recent years. More than 2/3rds of bonds issued this year have coupons below 5%, up from 39% in 2018. With investors hunting for yields, the prices of the lower coupon bonds have risen more than, the broader market, sparking perhaps a selloff when cap gains taxes move up.
David Loesch
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