- As we previously discussed, tourism is helping various issuers, such as airports, stadiums, and convention centers. It is easy to see why municipalities want to underwrite such paper now; they want to expand their footprint and economies. This fact is a significant turnaround from the COVID period. Many of these new bonds will sell as non-rated, high-yield, with limited market offerings. Eventually, I suspect these issuers will bring rated debt, helping our business bring a new type of bond to the market.
- US households showed signs of increasing financial stress in the first quarter, adding $148B debt to credit card balances. The FED will look at this number and consider it at the next FED meeting.
- As reported earlier, the NYC budget deficit is growing. While facing a $5.8B deficit in the fiscal year beginning July 1st, rating agencies will look at this closely. However, this could result in higher borrowing costs and a slower market for the city. I expect these fiscal budgets for cities like NY to worsen over time. With all this said, I do not anticipate significant rating cuts.
- Inflation shows signs of moderation, but the deceleration is unfolding much slower than some would like. MUNIs will be a safe haven for those seeking liquidity and income, while yields will move lower. The wild card for the short term is the debt ceiling issue.
- California is facing a more profound deficit than projected at the beginning of the year as the fortunes of the wealthiest residents wane due to massive layoffs in the tech sector. With thousands laid off, there is no sign of a turnaround anytime soon. For the first time since California Governor Newsom took office in 2019, the state’s budget will swing into a deficit, projected to be around $32B for the fiscal year starting July 1st. Bond ratings could get cut based on this news, and it is something to be mindful of as we move through the balance of this year.
- If the pricing pressures do not cool off and the job market remains hot (outside tech), the FED will consider raising rates at the next meeting. I suspect the policy rate will remain restrictive to bring inflation down while creating conditions supporting a sustainable, strong labor market.
- According to the State Board of Education, the IRS raised the Texas Permanent School Fund (PSF) debt limit on the bond guarantee program. This change was effective May 10th, allowing the State Board of Education and the Texas Education Agency to guarantee bonds passed in elections earlier this month. Last November, the PSF Insurance Fund had to turn nearly all applicants away because of a lack of capacity.
- Visible supply begins the week at $9.6B above the 2023 average of $8.6B; however, not by much. Overall, issuance should be steady over the next few weeks and will likely increase in June before the summer.
- Yields should trend down over the next few weeks. As the year progresses, yields will fall; that explains why we see the shorter end of the curve yielding higher returns than mid-range paper.
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