- I suspect, along with many others, Powell will address the recent surge in the T markets, particularly longer-term and shorter-term paper. Powell has indicated his belief that higher term premiums have driven the increase; in contrast, Yellen indicated the rise is due to more robust economic data. Either way, the T markets will have difficulty moving above 5% for the 10-year due to the sheer nature of the debt service based on those rates.
- There is much more downside risk to the jobs market than recent robust activity data suggests. Unemployment could easily overshoot the FED's 3.80% forecast for the 4th Q of 2023. The FED should hold for the balance of the year; employment numbers should start to come down slowly, while CPI will most likely remain steady. Should all this happen, we could see cuts in mid-2024, hard to predict, but a possibility.
- Data suggests enrollment in US Higher Education will continue to see an elevated level of mergers and closures. First-year class enrollment for Fall 2023 at 4-year public and private nonprofit schools is down 6.10% and 4%, respectively. A decline in headcount combined with higher costs and higher interest rates will cause many schools to merge as time goes on. With this info, buyers should know what they purchase in this structure. There could be many consolidations as we move through 2024; some might turn out differently than the holder of the bonds would expect.
- Fiscal spending at the state and municipal levels could help steer the economy toward a soft landing and keep credit markets healthy. Should municipalities continue to spend, this will reduce the risk of a recession, as Morgan Stanley commented on 10/30. I agree with this theory and suspect we will see about the same issuance for the first half of 2024 as we did for the first half of 2023; however, should rates go down in the back half of 2024, we might see an increased velocity of paper issued. This point will equate to additional paper to buy, while rates should continue to move down slightly.
- UBS told their clients on 10/31 to buy MUNIs at these levels, specifically state GOs. Strong revenue growth, record-high cash reserves, and billions in pandemic stimulus money have enhanced the credit qualities of many states, including NY, CA, and IL. We have continued to buy these types of credits through the pandemic, and despite the rates going against us, they have performed well. We continue to agree with this and have been buyers of State GOs for many years. Yes, we were early, and yields have risen, but the underlying credit quality has held up well.
- With all the data coming out this week, you would think the 10-yr T would be hitting 5.50%. Data indicated this week the US economy grew at its fastest pace in nearly two years last Q on a burst of consumer spending, which will be tested in the upcoming months. GDP accelerated to a 4.90% annualized rate, more than double the second Q pace. The main growth engine is personal spending, which jumped 4%. I suspect most of this spending went on credit cards and loans. CC debt is at all-time highs at this point. This spending will not be sustainable, but time will tell.
Bottom line - yields continue to move through the 5% level and, in some cases, for lower coupons, touching 5.6% or even higher. We continue to focus on higher coupons with strong current yields. If you are not our client, consider conversing with us now. Yields are at 17-year highs; do they go higher…it is hard to say. If you are buying for the long haul and comfortable with 5% plus on higher credits, we would advise you to have these discussions with us.
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New Edge Securities, Inc. has no affiliation with Bond Desk Trading LLC, Bond Trader Pro, Tradeweb Direct, Bondpoint, TMC, or any other ECN. Yield to call (YTC) does not indicate total return; this yield is valid only if the security is called. Bonds may or may not be called or be callable on multiple dates or, in other cases, called on any date following the first call date, so yield to call is based on the earliest stated call date. Discounted bonds may be subject to capital gains tax. Bonds may be subject to OID (Original Issue Discount). Prices and availability may change at any time without notice. Do not buy discount bonds based on the Yield to Call (YTC). Insured bonds are issued for timely payment of principal and interest only. Insured bonds do not cover potential market loss and are subject to the insurance company's claims-paying ability. Non-rated (NR), With-Drawn (WR), or below investment grade bonds, lower-rated bonds carry a greater potential risk of default & should be considered by sophisticated investors only. Bonds may be subject to capital gains tax. This summary is for informational purposes only and is not an offer or solicitation for the purchase or sale of any security or a recommendation or endorsement of any security or issuer. New Edge Securities, Inc. and DRL Group make no representation about the accuracy, completeness, or timeliness of this information. Bonds could also be subject to the DeMinimis Rule; please consult your tax advisor for further clarification.
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