Broker Check

Market News & Commentary - From the Desk of David Loesch 05.16.2024

May 16, 2024
  • As we trade through different scenarios, over the last 31 years, I have traded MUNIs and seen a lot. Many in our office have seen different markets and how events such as COVID impact our markets. During COVID, convention centers were hurt badly for apparent reasons. No one wanted to buy that paper, and the issuance of this type of paper halted. Now, when it comes to convention centers in the US, bigger is not just better; it is a necessity. The travel business has come roaring back after the pandemic and is putting pressure on local governments to ensure their cities are equipped with the best facilities to attract visitors. Again, markets trade up and down based on events, but we have seen an uptick in convention center bonds due to this issue.  Trading through COVID, we did, on occasion, trade convention centers, which were insured.  As a testament to quality insurance, these never missed a beat and have come back strong.  
  • Fund flows are back to positive as investors added 339MM for the week ended May 8. As we discussed yesterday in my office, yields have dropped ~20 bps in the last two weeks, and we saw moves again yesterday. We do not know when the rates are moving, but we feel confident that the rates "will move" lower over time. Prospects will/are back in the market now, taxes are over (2023, we had a hell of an April, meaning strong), and buyers are coming back in. 
  • Homebuilding, a topic we've touched upon in the past, is worth revisiting. Homebuilder sentiment, a key indicator, declined in May for the first time in 6 months. This was mainly due to mortgage rates above 7%, which deterred buyers and dampened expectations of future rate decreases. However, we anticipate a pickup in homebuilding at the end of this year. For now, this trend reinforces the belief that inflation will continue to weaken, a factor that could benefit the FI markets. 
  • Kashkari (FED bank president) repeated yesterday that rates will have to stay "higher for longer" to keep the economy slowing. Kashkari is your typical hawk, and these types of comments are expected. This should not surprise anyone and should not move our markets.  Some are suggesting these types of comments will last through the balance of this year and perhaps into the 1st Q of the following. 
  • BABs (Build America Bonds) were authorized in 2009 and 2010 as part of a stimulus program during the Obama administration and are taxable paper. Issuers have moved to call many outstanding BABs following a recent US Supreme Court ruling that, according to a February publication from law firm Orrick, supports the conclusion that sequestration "resulted in a materially adverse change to the cash subsidy payment obligation." Bottom line, the government agreed to buy ~56% of the coupon when the issues were brought to market; however, that now seems to be wavering. If you are buying BABs, be aware of this issue, and it is best to understand the dynamics of the issue before paying a premium for this credit. 
  • We have been discussing US debt with our clients and prospects; it is worth mentioning that US household debt has reached a record high, and more borrowers are struggling to keep up. $17.7T is the household debt, an increase of $184B or 1.10% from the 4th quarter. One must consider This crucial fact; we speak about inflation (point one), but what drives this? If it is CC debt, which I suspect it is, how will this impact our economy in a year from now, and what do you think rates will do from that impact? I suspect we will see lower rates to help stabilize this issue.  This comment is reminiscent of 2008. 
  • Over the last two weeks, MUNIs have rallied all through the curve, and I suspect we will see rates steady, as we have discussed. T bills and overall corporates have seemed to be "stuck," but the semi-strong week has helped MUNIs outperform T bills and their type of counterparts. Clients and prospects who are focused on yields should consider buying here, and we have been telegraphing this for the last few weeks. The bottom line, as we have discussed, is that rates overall will be coming down, but the key is that this is a cheap entry point for buyers across the curve. 
  • Looking at historical returns for MUNIs back to 1980, only two of the 11 elections had 4Q losses in their respective years: 8.92% in 1980 and 2.47% in 2008. This will make a case for MUNIs during any election year and should be discussed with clients and prospects. We see the first debate has been set. It will be "fun" to watch both the debates and the markets as we move through the second half of the year. 

Bottom line: 

  • Yields are down, CPI numbers seem steady to "softening," and quality remains strong.  We will continue to strive to update you with relevant data concerning what is moving the markets.  

 

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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