- Some economists suggest we will see an increase in bond sales as we move through the balance of the year. They attribute their forecast to lower bond issuances throughout 2023 and the above-average cash positions with investors. I suspect we will see a slight pickup; however, nothing drastic. This year's average visible supply is $9.5B compared to $12.5B last year. Even if we see a pickup, it should be slightly over average.
- The State of PA’s rating outlook has been raised by Moody's, indicating a possible upgrade after the state said it had bolstered its reserves. We will continue to see upgrades like this throughout the states as available cash remains high. IL, CA, NJ, and now PA (all historically poorly run states) are either on positive credit watch or have already been upgraded by the rating services due to increased tax collections and bolstering reserves. As we discussed a year ago, this will continue to happen, and as we have said many times before, we do not have a "credit issue; we have a rate issue" that continues to stand true today.
- Many bond buyers rely on insurance companies to make their investments whole should there be any issue. Insurers are re-evaluating their exposures to geographic areas with elevated risks. This means raising premiums and reducing homeowners' property insurance availability, which could drag the housing markets. Overall, I expect this to seep into the MUNI markets over time; with bonds currently insured, it will not have any impact as they are under contract with the municipality and the bondholders. However, I expect the insurance component to change with new issues as we move into 2024.
- We are seeing outflows from MUNI funds, as investors withdrew $738MM last week; however, I suspect much of that is going into individual bonds. The yield on unleveraged paper is pushing 4.65% out long and, in some cases, 4.70%. SMA's are buyers in this market and are intrigued with where the market is going and the current yields. Currently, the new issue paper is 4.75% out long, while the shorter end of the curve is around 3.35%. We are trading across the curve. If going out longer, we are trying to keep the call dates around 5-9 years.
- Based on a model of US consumption factors in sentiment along with income, wealth, and interest rates suggests that spending should have already put the US into a recession. Many factors could touch off a recession, labor and wages, spending, and company expansion. I suspect consumer spending will stay somewhat steady, but you will see job growth, wage growth, and company expansion start to slow. I am not convinced we will see a recession; however, a slowdown, which should help MUNIs, will likely happen. Overall, MUNIs perform well in these scenarios. The last half of this year and into 2024 should be the same.
Bottom line: Yields are touching yearly highs, while CPI numbers are steady. Paper is moving, while new issuance is a bit heavy. Values are out there if you know where to look. Locking in 4.60% is a 7.36% taxable equivalent for a 37.50% tax bracket. We and other economists (news we sent on 9/13) see yields moving down over time. We have seen resistance at the 4.55% level, which is about where we are now.
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