- This week's critical question in Jackson Hole will be "what signal will Powell give" as it relates to tapering and rates. The finer details will not matter as much as in the past; the focus is on taper talk and rate moves. I suspect we will see a predictable taper later this year. Inflation will be addressed, but the comments will indicate "it is temporary." Should rates be discussed, I believe the change will take place in late 2022 or early 2023. This timeline is plenty of time for dealers and investors to adjust to these moves.
- Predictable - meaning one that occurs when economic conditions justify it - or better yet, understanding that a trigger causes the "action" is what many in the street call the taper. I participated in a call on 8/25 discussing Jackson Hole; the conclusion was "there should not be any surprises," and the market will react "in a normal way" based on Friday’s discussions.
- The critical question to both points above is, "how will this impact all markets?" GDP - a timed taper should have no impact; however, a poorly timed taper will shave .07% off the 2022 GDP, as many believe. Should this happen, it will take the growth down from 3.1% to 2.40%. Inflation - the impacts of the taper on inflation would have minimal impact. Many, including me, believe that the recent inflation spike is generally subdued based on the "items" that are causing "inflation.
- The US House adopted a $3.50T budget resolution Tuesday after a White House pressure campaign and assurances from Pelosi; this united the fractious Dems to move ahead on the core of Biden agenda. The House has taken significant steps toward making a historic investment that will transform America "per Pelosi," cut taxes for young families, and position America for a strong foothold. The $550B deal, discussed for months, is now rolled into a $1.1T package in the process of getting passed. As the package moves to the Senate, many will question how much of the $3.5T budget will go towards municipalities. All of this will help our markets over the long haul; higher taxes, lower issuance, and lower yields will continue to be the norm.
- Dozens of communities around the US want Yellen to issue rules which direct investment from the latest round of funding (above) towards those communities hardest hit by the pandemic and away from state and local police budgets. These groups are making a public push in response to efforts and comments submitted by municipalities asking for help to assist in infrastructure and "shoring up the balance sheets" for first responders. I do not think this will get anywhere and should not impact our markets.
- NY Transitional Finance Authority plans to issue $1.2B future tax secured subordinate bonds next week to finance capital improvement projects. RBC Capital markets will price $950MM of these bonds slated to institutional investors on 9/1. This deal will be followed closely in the market to determine yield and subscription status. I suspect it will be oversubscribed and priced at 1.25% to the call - planting our market firmly in the 1.50% range for YTC paper.
- As a lookback, the 2013 taper saw the 10-year T nominal yields rise 95 basis points and 118 basis points, respectively, between the "then FED speech" on May 22 and the peak of yields on 9/5/13. Given that the market has been expecting a taper at some point soon, such dramatic moves are unlikely. FED buying allows dealers and others an easy method for "unloading" unwanted positions and permits dealers to hold less inventory. The bottom line, many including me, believe that the taper will be managed, and yields should not spike as we saw in 2013.
- MUNI fund managers are flush with cash and are struggling to find bonds to buy. This situation may persist for the next few years if new muni issues fall short of the demand for paper. According to stats, 21% of outstanding tax-exempt debt will mature or be called in for early redemption by the end of 2024. This percentage rises to 31% by the end of 2026. These figures are higher than historical numbers and exacerbate bondholders' challenge to reinvest their payments from maturities.
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