- The minutes from the FED meeting suggested that they might start to taper in September or October, provided the jobs numbers remain on track in the interim. This timeline has moved up slightly as many saw a reduction at the beginning of 2022. FED officials generally expect to see inflation ease, pointing to a few categories dominating the recent rise. Given the support within the FED for a 2021 taper, I expect to see this happen in the last Q of 2021. I initially thought it could happen in December; however, now it will be 1-2 months sooner.
- With the above point, it is interesting to note that as Global markets tumbled across the board, including the US market - many fled to the T markets pushing the yield down to ~1.25%, where it hovers this morning. One would think that the taper would have the exact opposite impact; however, it did not. This could be good for our markets as we move into the "taper" mode over the next 60 days.
- The American Rescue plan provided $350B for states and municipalities to boost our economy; however, with sales tax dollars and real estate taxes increasing, states gained traction on revenue collection on their own. Many states, including Texas, have not spent their money or even tapped the FED for the cash. Ultimately this will be a net positive for MUNIs.
- With President Biden’s bill, tens of billions of dollars that states got as a lifeline in the past are still sitting in local coffers. As an example, MI budgeted just 7% of its $6.5B allocations and has not spent any as of last week. SD officials have not even gotten around to asking for their $977MM allotted under the White House resecure plan legislation. Many states are grappling with realizing that they will need to start spending the monies sent to them by our government, as additional funds are coming from this latest package. All of this is good for the Muni markets while shoring up any credit issue that might exist.
- Congressional Democrat's $3.5T reconciliation bill could be a "more likely vehicle" for the return of Build America Bond style (taxable) after the latest bipartisan infrastructure bill did not include such a financing program for this type of security. I suspect the next bill passed (at the end of this year, the first of 2022) will include provisions for issuing more taxable MUNI debt to compete with the low-interest-rate environment.
- Visible supply rose to $13.9B; this is the highest since 7/16 when it was $14.9B. Overall new issues are oversubscribed ~3x. However, many buyers are starting to balk at the 2.00% type coupons being issued and demanding >3% to offset any decrease in value caused by higher FED rates in the future.
- A summer surge in COVID is complicating the Fall return to many schools, including colleges. Schools will face the delicate task of updating pandemic-related protocols amid the spread of the Delta Variant. This problem will weaken MUNI's debt issued to colleges and universities. With the younger people being relatively slow to take up vaccines (only 45% between the ages of 18 and 24 are vaccinated), this will continue to be an issue. We are cautious with higher education smaller institutions.
- I find it interesting that almost half of all lumber dealers and manufacturers reported excess inventories last month, a sharp turnaround from a few months ago. This issue goes back to inflation and sustainability we wrote about 30 days ago. Many of these items are not sustainable, the FED has reported this, and I believe it is the reason they are not "quick" to change monetary policy.
- In stark contrast to 2020, more issuers are underwriting deals through the competitive process (a 32% increase from last year) rather than negotiated. (See our latest article in The Houston Business Journal, on The Underwriting Process).
David Loesch
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
866.664.4040 (toll-free)
281.398.8600 (direct)
281.398.8607 fax
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