- Anyone gearing up for bond yields to surge in 2022 should think again. The consensus is that a global buildup of cash has the protentional to restrain an increase in rates even as the Central Banks dial back their asset purchases. The strength of demand for bonds even in the face of deeply negative real returns underpins the broad opinion that 2% may act as the ceiling for the 10T. We have seen time over time; the 10T hits 1.7% then immediately retreats. I suspect this will continue for quite some time.
- Reading about the late '90s and early 2000s while also trading through that period, the housing market today reminds me a little of 1999. West Coast Tech jobs were the rage; everyone wanted to move to CA, housing prices skyrocketed on both sides of our coasts, and college graduates could barely afford to live. Five years later, the tech bubble popped, housing prices dropped, and we saw a migration to cities like Houston, Chicago, and Atlanta instead of the popular cities we all know on both sides of the coast. Today, much of the same thing is happening. Rural areas experienced a 50% increase in population as workers did not need to go into the office due to COVID and moved out of big cities such as NY and LA. I suspect we will see this continue as we move through 2022. This shift will directly impact MUNIs in these small towns by enhancing credit quality. I find it interesting that it is happening again. The old saying, history repeats itself could be indeed true.
- According to Bloomberg, the global economy is expanding at just .7% in the final three months of 2021, half the previous quarter's pace. I suspect that Omicron will have a negative (slow down) impact on inflation as we move into the 1st quarter of 2022, which will help the FI markets overall. I believe we will see CPI slide to ~5% and hover there. I do not think we will see the 6-7% numbers that some have predicted for the simple fact that people are running out of money due to the "overspending" in the last four quarters.
- The FED is poised to hike rates in June, and many expect a total of three hikes in 2022. Regardless of when the first-rate hike occurs, about $1T of excess liquidity in the system will need to be addressed before the balance sheet runoff can be considered. Simply put, the QE or Tapering will continue until this is completed. Should we see shifts in unemployment numbers or rates move on their own, this game plan could change. Overall, I still believe that MUNIs should perform well through these rate moves. With the recent market volatility, muni bond buyers and current holders have weathered the recent volatility well.
- This week, Goldman cut GDP forecasts after Manchin said he would not support the Build back better program that the Biden administration is pushing. Goldman indicated that the failure of this bill, which includes significant spending on climate, infrastructure, and social programs, will slow economic growth in 2022. Goldman projects 2% growth in the 1st Q followed by 3% and 2.75% in the following two periods, down about .25-.50% per Q.
- Wells Fargo indicated that affordable housing will be one of the defining subjects of the next decade in the MUNI market and will impact our markets in ways not known yet. Traveling around the country over the last eight months, I can understand this, housing prices have priced many workers out of the cities. I would agree with this topic.
- As expected, visible supply started the week at $1.9B, well below the $11.6B average in 2021.
David Loesch
dloesch@drlgroup.net
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