- As we saw on 6/16, the FED sped up their expected pace of policy, tightening amid optimism about the labor market and heightened inflation concerns. There was no timeline disclosed for any moves by the FED. However, Powell indicated that FED officials would begin discussions about scaling back bond purchases to support the financial markets. This tapering discussion is what the market wanted to see; however, the markets took this as negative news and traded off on both T bills and equities. Munis held nicely, being cut 1bps on the longer end of the curve. Powell's remarks should not be a surprise, with the economy moving at full steam ahead, tapering talks and rate hike talks is a natural course of action at this time,
- The FED also released forecasts that show they anticipate two rate hikes by the end of 2023, which is sooner than anyone thought. The DRL Group has continuously indicated we see a hike in 1st Q 2023 and a second 3rd Q of 2023. The net result of the meeting was the Central Bank left the rates unchanged where it has been since March of 2020 and will maintain its buyback program of $120B securities each month. The Central Bank vote was unanimous through the committee.
- The FED increased its inflation forecasts through the end of 2023; officials see their preferred measure of price pressure rising 3.40% up 2021 compared to the March projection of 2.40%. The 2022 forecast rose to 2.10% from 2.00%, and the 2023 estimate was raised to 2.20% from 2.1%. These figures boil down to what everyone has been expecting; inflation might heat up in 2021 as the economy reopens; however, it will taper off in 2022 and 2023 back to normalized levels.
- State borrowing climbed in 2020 by the most in a decade. Governments used Munis to clean up the balance sheets and fill the gaps caused by the pandemic. The bulk of the issuance came from the largest states taking advantage of borrowing costs at record lows. Net tax-supported debt rose 2.50% in 2020 to a record $535B; this is the most significant increase since the 8.20% number in 2010.
- The 2010 issuance mentioned above was fueled by states and municipalities rushing to take advantage of the Build America Bond Program. This program offered 35% interest payment subsidies on taxable municipal issuance. Last year, much of the surge was out of “need” to issue debt to clean up/improve balance sheets – if there was ever a time to borrow, that was it. Bottom line, I expect issuance to reduce, yields to hold, credits to improve, and returns to be solid for 2021 in our markets.
- A bipartisan group of 10 senators are trying to reach a compromise in the $1.2T 8-year infrastructure spending bill. This bill is part of Biden’s "big plan" to keep America moving and should get done. With the money continuing to flow to the citizens in stimulus and infrastructure build, this will only enhance our markets as we move through this year. I suspect yields will continue to remain low through the balance of 2021 until the tapering talks/action take place.
- Paul Tudor Jones indicated on 6/15 to go all-in on inflation trades should the FED continue to ignore higher pricing. The FED will be meeting this Thursday and not expected to make any policy moves. However, I suspect the FED will indicate they are considering changing their bond-buying policy with the first-rate hike in 2023. I do not expect much detail on the tapering talks, but I believe they will discuss, and the market will take that language in stride. Based on the rhetoric we heard from the FED Chairman on 6/16, it seems like we have "marked to market" based on when the tapering should/would occur. The 10-year went to 1.56% from 1.47% after the meeting; we continue to expect a range of 1.50-1.75%.
- After the longest rally in a year, the T markets are ill-positioned for any surprises from the FED. Bond investors have been abandoning short bets and anticipating FED officials will reaffirm that it is way too soon to discuss tapering. Any hint such discussions are in the works would spook the markets after the 10T touched 1.427% last week. I do not think we will see tapering this year; however, the 1st Q of 2022 would be appropriate. If this is the case, our markets should continue to be firm as we move through the summer and fall.
- The high job openings and two disappointing payroll reports show labor demand is recovering faster than supply. As the augmented jobless benefits, set to expire in half of the US over June and July, many anticipate that people will be returning to the workforce. This increased worker participation will continue to add fuel to our economy from a spending aspect. However, as we move into the winter, the CPI will cool, creating stability in all markets.
David Loesch
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www.drlgroup.net
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