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Market News & Commentary - From The Desk Of David Loesch 05.27.2021

Market News & Commentary - From The Desk Of David Loesch 05.27.2021

May 27, 2021
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  • CA’s governor indicated that he wants to “raid the reserves” of their unprecedented budget surplus.  Facing a likely recall election later this year, Newsome crafted a budget that spends the most money in the state’s history siphoning $12B from reserves and internal funds. Touting a $100B economic recovery plan, the Governor aims to spread the state's massive windfall and federal aid through about 400 proposals including $8B for rebate checks for lower-income CA residents. This should not come as any surprise and I will be interested to see how the rating agencies react to this news, effectively blowing the wad in one year.
  • Cash flowing back to investors in June and July will outstrip any new issues which should continue to keep pricing pressure high. There will be $122B "new" investment monies hitting the street from investors June through August.  This will hold the bid side up of MUNI’s as investors seek to reinvest these funds.  MUNIs are poised to perform well through the next two months.
  • President Biden indicated that he will not let “inaction” be the final answer from the GOP and will change courses if it becomes clear that a bipartisan outcome will not happen.  Republicans on Friday trimmed down the $1.7T proposal from the White House, saying the revised offer suggested the two sides were even further apart than one thought. As we expected, Republicans want to keep the spending under control; however, with Biden controlling both House and Senate, having a clear shot of doing this (controlling spending) is a long shot.  There is about a week to decide if this deal will get done by both parties; if not, I suspect we will see something pushed through over the next two weeks.  This will result in increased taxes - which will help MUNIs over the long run. 
  • Visible supply begins the week at $8.9B, below the 2021 average of 10.50B. As we have been discussing, this will continue to grind lower as we move into the late summer and early fall, creating a lack of supply.  MUNIs should hold for various reasons; capital moving into funds should also hold steady as we move into the summer.
  • Earlier this year, many thought municipalities would have to issue bonds to fund deficits. As we know, the recovery has been stronger than what people anticipated, therefore along with the stimulus and strong recovery, many (including me) believe that supply will remain skimpy as mentioned in previous notes.  This supply drop comes at a time where issuance is typically strong. Dealers do not see this changing anytime soon creating firmer bids.
  • The T department has moved $105.3B to state and municipalities from the $350B relief package set to go out under the American Rescue Plan.  Thirty percent of the monies have been allocated, and more than 1500 entities have received it since its launch on May 10. This massive infusion of funds will help states with their budgets and lost revenue, continuing to assist states while improving overall credit qualities.  As this continues, I believe we will see continued improvements in our markets from a pricing standpoint and credit quality enhancements.

 

David Loesch

dloesch@drlgroup.net

www.drlgroup.net

605-B Park Grove

Katy, TX 77450

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