- With last week's US debt rating cuts, 12 US states now have higher credit ratings than the US government. These states are: TX, FL,TN, GA, UT, NC, VA, MD, DE, MN, MO, AND SC. All these states are AAA rated by Moody's, S&P, and Fitch. The US Debt is AAA Moody's, and AA+ from S&P and Fitch.
- State and local governments are increasingly seeking capital from banks. According to a working paper from the Federal Reserve Bank of Chicago, outstanding municipal bank loans are approaching a 2022 record high of $210 billion. Instead of opting for public market debt issuance to raise funds, US governments are directly turning to banks, a strategy they have employed in times of economic hardship, such as the Great Recession and the more recent Covid-19 pandemic. This information is interesting because we see so much new paper in our market.
- S&P Global Ratings has cautioned that the decreasing population in California could worsen because of increasing home insurance premiums, potentially worsening the exodus and putting additional strain on state and local finances. The rating agency anticipates that insurance companies might withdraw due to factors like wildfires, sharply escalating costs for reconstruction, and restrictions on raising rates as per regulations. This withdrawal could contribute to elevating the already high costs of homeownership in the state. This point is a concern all around. We have been cautious with CA bonds for quite a while, given there are so many outstanding bonds and the current situation for the state. I believe the exodus will continue, and S&P will downgrade some credits in the future.
- New research suggests we will continue to see inflation drop well into 2024, even suggesting deflation by mid-2024. I feel that will be too aggressive, and not sure we will see that in a year, but I believe we will stay in that direction, and we will see yields reflect that change.
- MUNIs continued a painful drop moving up 19bps in a week based on the economic numbers we saw last week. The yield on the shorter-dated MUNIs jumped 11 bps, the most since May. MUNIs will always be a lagging indicator and are now catching up with T bills.
- Fitch will likely lower the ratings next week on several muni issues that are "escrowed to maturity" in US Government Securities, in the aftermath of the Treasury debt rating downgrade. This change will include a $3.5B position within our markets, $2.4B in student loans, and $1.3B in the housing sector. An escrowed to maturity bond refers to a situation where the funds to repay a bond are set aside in a separate account or escrow, sothat the bondholder is guaranteed to receive their principal and interest payments as the bond matures. Bonds are typically pre-refunded or escrowed-to-maturity as part of bond issues which refinance muni debt. The funds in this account are typically invested in US Treasuries until the money is needed to pay off the bonds. This matter should only be an issue if the government had problems paying off the Treasuries in the escrow account. Overall, the Fitch rating move on US. Treasuries have spooked some investors and funds and is having a ripple effect in many areas of the marketplace; however, we are seeing more market changes due to the economic numbers coming in hotter than expected rather than this issue.
David Loesch
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
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Market News & Commentary - From The Desk Of David Loesch 08.10.2023
