- As many know, we have been buyers of IL paper; yesterday, the state recorded an 8% increase (to $5.28B) in their general fund balances from a year earlier. This change is due to increased collections from sales and personal/corp. income taxes. The rating agencies have taken notice and upgraded the state one notch in the Spring of 2022. As we move through the year, we continue to be buyers of this credit.
- Equity markets appear to have embraced the apparent cognitive dissonance in pricing in a recession and then anticipate a FED rescue. This year's bear market is one of the worst since 1929. S&P made new lows for 2022 last week. Many large Broker/Dealers are calling for a recession, no matter what, and many believe the FED will "ease off" its stance at the end of the 1st Q of 2023.
- MUNIs have rallied over the last two days (Monday and Tuesday of this week); Tuesday was one of the largest one-day rallies since June since traders weighed the odds the FED will moderate the pace of its policy tightening. Goldman Sachs continues to indicate the market “should rebound” from here and feels firm while the rally feels like a “pleasant interruption.” We have been buyers of 5% within 21 years AA insured at par with short calls. We see value on this side of the curve based on previous pricing and the opportunity to have the bonds called within the next five years.
- The San Francisco FED Governor indicated the FED needs to "follow through" with interest rate hikes. Their Tuesday remarks reinforced another 75bps hike later this month or in November. I suspect we will see a 75bps hike, then another 25 or 50bps as we move to the end of the year. However, the key will be "when" will the market "respond," knowing the rate hikes are nearing an end.
- Cracks are widening across global sovereign bond markets, threatening to make the final Q of 2022 dangerous. Remember, inflation is elevated because of real-world supply shocks and the stunning demand boost Central Banks helped set off when they combined with fiscal policymakers to flood the markets with cash. We are now seeing the impact of these decisions and heightened fears by many economists of a global recession.
- Muni bond investors are not the only ones hurt by the bear markets. State and local governments' lack of municipal issuance is poised for a September decline of roughly 40% to about $24B, the lowest monthly volume of debt sales since November 2020. Historically September is a busy month for debt sales. Rising rates make it less attractive for municipalities to borrow for new projects or to refinance existing ones, plus the volatile T Bills add to the complications. Overall, we will continue to see lower debt issuance through the balance of this year, and October will be "exceptionally small."
- To continue with point one - overall underwriting is down 15% this year compared to last; much of this drop is because of a decrease in taxable issuance. Cities will continue to be pinched by the high borrowing costs as we move through this year, and I suspect this will continue into the first Q of 2023.
- Rising revenues from sales tax and property tax increases have improved many cities' revenue streams. Chicago abandoned a property tax increase in the 2023 budget proposal because revenue rose more than expected. This issue is good for MUNIs from a credit quality standpoint and should carry over into 2023.
- Fund flows were negative leading into this week by $3.6B. I believe money market accounts are building while seeking entry into the markets. Insured yields are getting close to 5%, attractive to many buyers who want to take advantage of these levels and lock in these tax-free returns. I suspect we will continue to see fund outflows as we move through the balance of this year.
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