- This week's article by Fitch Rating Services indicates a multiyear drought hitting CA may pressure the state's public water agencies if the utilities take on too much debt to finance water reliability or other resiliency projects. As the need for more debt grows, this issue could pressure the ratings as we move through 2023. This matter will not impact the day-to-day operations of CA water bonds; however, it is something to keep an eye on.
- The 10-year Treasury concerningly surmounted the psychologically significant level of 4% while trading around 4.15% Tuesday. The FED will need to change its language for this security to move back below 4%. The October low and June high (3.55% and 3.49%, respectively) offer key resistance should yields reverse back below 4%; this represents the rising trendline off the August low. Overall, the 10-yr T should hover around 4.25% to 4.50% until the end of the year.
- IL state and Chicago have been doing better financially over the past year due to rising tax collection and property values. Fitch Ratings upgraded the city of Chicago on Friday of last week, indicating the city is starting to turn its beleaguered finances around. Fitch boosted Chicago's debt ratings to two notches above junk, citing improved financial conditions and increased payments to pensions. Although Fitch is not as respected as the other two rating agencies, this is a start for the windy city.
- If you live in CA, some of you are facing the prospect of billions in new taxes, adding to one of the highest US Tax burdens in a state that's already been losing thousands of people every month to lower-cost locales. Voters in November will decide whether to levy an additional 1.75% tax on income above $2MM to raise money for electric vehicles and prevent wildfires. MUNIs in CA will continue (as they are now) to be sought after as investors seek exemption from CA income tax.
- MUNI yields rose the most on Friday since June as the FED indicated they would continue to raise rates to control inflation. We saw a 13bp move across the curve on Friday in preparation for the rate move in the coming weeks.
- Visible supply remains low as we move through the balance of this year, coming in at $9B for the week, compared to the average of $12.5B+. This lower volume directly results from municipalities not wanting to issue debt at these levels, as many are flush with cash. I suspect supply will remain low as we move through the year's balance, as rates will likely not head down between now and the year's end.
- The demand for financing from Muni issuers will see growth in 2023 while refunding should rise above this year's dismal levels, primarily due to the anticipation of steady rates. Speaking of the demand, BOA indicated Friday they expect a record $500B issuance in 2023 due to rates moving down. We have seen a 17% drop in issuance this year.
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