- With the low default rate in the MUNI markets (about .034%), investors are starting to realize their value compared to other asset classes. MUNIs will be a good investment option if the country moves toward a recession. The DRL Group focus on higher-grade paper for this reason. Rarely do we trade bonds below AA rated, as our clients find comfort in buying this type of paper.
- Many analysts expect the FOMC to hike rates 75bps today, 7/27/22, for the second straight month. Gerome Powell will likely acknowledge that downside risks to growth have increased since June but will reiterate the FED's commitment to control inflation. I suspect overall, Powell will not offer support for an imminent FED put to backstop markets.
- Overall sentiment these past few weeks has been somewhat bullish towards Munis. I find it interesting the Treasury and MUNI’s markets have been holding firm considering a FED hike today and another in September.
- Visible supply remains low, as expected; however, significantly lower than the previous weeks, sitting at $8.1B for this week, well below the 2022 average of $11.3B. The DRL Group has been monitoring this for the year; as we have been saying, supply will remain low for the year's balance, putting positive pricing pressure on these securities.
- Powell must affirm the FED's determination to combat inflation while not further spooking the markets, which have priced in a pessimistic failure. Given the shaky faith in the Central Banks' forecasting abilities, he does not sound as optimistic about growth as he did before. Many are now calling for a 75bps hike this week and 50bps in September while underscoring the significance of policy rates reaching the committee's neutral rate.
- There should be a discussion in the upcoming FOMC meeting about the housing sector's rapid cooling and perhaps inflation cooling early next year. A hallmark of recession is a drop in investment, often driven by a slowdown in inventory building or outright destocking.
- Some call for the beaten down 4% coupons to benefit from the latest rally where the 1st half of 2022 did the most damage. Numbers show that with the 2nd half rally, 4% coupons will likely be the most sensitive coupons and benefit more than other coupon brackets.
- BOA is recommending that their clients extend the maturity ranges on high-grade investments as expectations that the Muni curve is poised to flatten. You should see better returns in the larger coupons and capital moved out longer in the curve over the next 30 days.
- History shows there has been a total of 14 halves since 1989 with negative total returns. Over the ensuing 12 months, returns have proven very strong and averaged around 9%. I suspect we will see a solid second half of 2022 and into 2023. Markets are too cheap, and analysts are discussing a possible rate cut as we move into 2023.
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