Broker Check

Market News & Commentary - From The Desk Of David Loesch 07.29.2021

July 29, 2021
  • As we have followed the Infrastructure Bill as it moves through Congress, an agreement seems to be on the table between the White House and a Bipartisan Group of US Senators.  Wall Street was expecting BAB’s (Build America Bonds) to be in the deal, but in the “new” bill, there is no reference to this type of security. In other words, the bill made no mention of MUNI bonds sold for any infrastructure projects. This point had been a critical priority for lobbying groups representing investment banks.  With that said, it falls precisely in line with what we have been discussing; why issue bonds when there will be a flood of capital going to the state and local municipalities.    
  • Under Obama’s economic stimulus plan, governments sold nearly $190B BAB’s, whose interest payments were covered in part by the Federal Government. There appeared to be bipartisan support for reviving such a program as an alternative to issuing tax-exempt paper; however, this will not be the case.  This point will be a huge disappointment for many underwriters while putting pressure on the supply side of our markets.
  • NJ officials have asked residents how the state should spend the unprecedented boon of cash ($6B) from FED Aid. The State Governor said this was a "once in a lifetime" opportunity to figure out how to divide their share of the relief funds.   These points all have one thing in common - cash for many.  MUNI's will continue to experience a boom through this year.  The DRL Group has been very clear to both our shop and our clients that overall spending from the FED is not what we believe in; however, this will continue to be a positive sign for our markets.
  • The City of Chicago is canceling approximately $500MM of debt refinancing planned for 2021.  The city said the reasoning for the cancellation was because they expect to receive FED aid from the package. This example is in line with the "lack of supply" issue discussed for the past year. The DRL Group believes this will be the “norm” for the balance of this year and perhaps next.  There is simply no need for municipalities to issue debt with this massive government stimulus. 
  • Moody's Investors Service indicated yesterday that state and local governments would spend more on Infrastructure as FED aid bolsters their balance sheets and while low-interest rates offer financing to those who choose not to take FED money. This increased spending on Infrastructure will reverse a decade-long trend of lackluster capital investments into each municipality. It will be an overall net positive for the MUNI markets; however, supply will be the issue, as stated in point one. 
  • Some analysts from Barclays and BOA have stated that investors should look for value in the Taxable MUNI markets.  Investors seeking a defense from the outlook of inflation and perhaps higher taxes might consider this asset class.  Taxable MUNI’s have been in high demand for the past two years, and issuance has surged over the past two years. I suspect this will continue. In a report this week, BOA indicated that they favor taxable paper over corporates due to the security and safety they provide, along with the comparable yields.  The DRL is very active in the Taxable MUNI space - should you wish to discuss or see offerings, please let us know.
  • The July FED meeting may be only an incremental step towards tapering of asset purchase. It will be interesting to see how the market reacts moving into August. An early taper could stoke a dollar rally against many currencies, causing import pricing to fall.  JPM said they are net short T bills, one of the few in the street who is net short.  I suspect, along with others, we will hold around the 1.25-1.50% for a while, MUNI's will continue to be firm, and tapering will start 4th Q of 2021 or 1st Q 2022.
  • Senators are aiming to finish the infrastructure package this week. They are under pressure from colleagues to salvage an August recess and allow time for a vote. Completing a bipartisan infrastructure plan also will be pivotal to getting all Democrats on board with a budget outline setting up a $3.5T tax and spending package. This package will impact markets in various ways; obviously, the tax implication will be significant; however, it will be interesting to see which taxes will be the primary focus.  Either way, I continue to view it as a positive for our markets.
  • Visible supply for the week was at $8.2B, well below the average of $10.9B years to date.  This decrease will only continue to remain and will be positive for our market.



David Loesch


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