Broker Check

Market News & Commentary - From The Desk Of David Loesch 09.16.2021

September 16, 2021
  • NY State raised its estimate for personal income tax collections by $2.1B annually through fiscal 2025 and slashed projections of future budget gaps. NY and other states are in a solid financial position based on many items, particularly sales and income tax.
  • Blackrock indicated it would keep a "defensive" posture on municipal bonds in place into the Fall months when the market is typically weaker because of new debt sales. Blackrock did indicate they are concerned about the rich valuations and tight credit spreads, which we are seeing, and a less historically favorable supply/demand and interest rate cycles in the Fall.   I suspect we will see valuations move down a bit based on this news.
  • One of the most consequential items in the Biden package moving through Congress is the reinstatement of the Advanced Refunding Option, eliminated initially as part of the Republicans 2017 tax overhaul. This option allowed cities to cut their debt costs and, at one point, accounted for nearly 1/3rd of all issuances in the state and local bond market. And, if passed, it is beneficial for the MUNI bond market.  The Advanced Refunding is the most material change in the bill and could unlock over $100B in new issues as we move into 2022.
  • House Democrats indicated that they will "undue" the SALT cap based on the new bill going through Congress. This bill was enacted in 2017 and viewed as "short-sighted" at the time, and this issue may become a bargaining chip to get the Biden bill passed through Congress.
  • The hiring of Timothy Little as a Municipal Specialist for a position in the FED Market Division is an interesting hire. The job was advertised early this year, calling for someone to monitor and analyze the Muni market and procure and contribute to policy analyses.  I believe this is the first time the FED has hired someone to study our markets specifically. This hire is a good thing.  The team will analyze developments across domestic capital markets to help the FED deal with the implementation and transmission of monetary policy.  They will also analyze risks associated with events such as 9/11 or the pandemic to gauge better how MUNI debt reacts.  I think this is a net positive for all markets.
  • The spread of the COVID 19 Delta Variant, higher inflation, and persistent supply challenges have prompted economists to downgrade US growth prospects for the remainder of the year. Many forecasters lowered their economic growth projections for the 3rd Q to 5.00% from 6.8% and trimmed their 4Q estimate to 5.3% from 5.6%.  As these numbers are revised down, I suspect you will see added pressure on the MUNI markets. 
  • The surprisingly weak payroll growth in August should keep taxable MUNIs attractive to foreign investors. BOA indicated that the current environment should, in principle, be a reasonable period for foreign investors to buy taxable MUNIs in anticipation of the dollar rallying over the following Q.  This fact will be a positive impact on our markets as we move through the balance of this year
  • Tax increases are now starting to be discussed in Congress to pay for these large stimulus packages. The latest Democratic proposal will raise the Corporate Tax to 26.5%, less than the 28% Biden sought. The top rate for cap gains tax will move to 25% instead of the proposed 39.6%. I suspect you will see much debate on these subjects over the next several months.  



David Loesch


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