- I suspect an overseas flight to quality has driven the recent T Bill rally, which will continue due to the pandemic concerns with the new Delta Variant. Most of this rally in the last three weeks has come after the opening of European trading, while recently released data shows foreign inflows have been strong. It is hard to believe that a 1.30% for ten years would be a "good deal"; however, if you look at other 10-year debt with the G7 countries, you will see why investors are buying our paper. It is the cheapest on the street.
- A surge of cash is about to hit the MUNI market, despite valuations at highs. Investors will receive nearly $46B of principal payments in August. This amount is the biggest payout of the year, with another $13.7B coming from interest payments. In addition, payments next month will exceed supply again, and the mismatch between supply and demand should continue to push our pricing up even further. As municipalities do not need to issue debt with the free cash being shoved their way by our government, this situation will be a common occurrence, again positive for our markets. We continue to remain buyers in this market on any pullback. We anticipate the ten-year trading between 1.375-1.75% for quite some time.
- MTA indicated yesterday they may put off a planned increase to fees for all public transportation this year. The MTA in January already delayed the planned 4% fare increase due to the pandemic. Now several board members want to postpone the hike until 2022. This delay is a direct result of the Authority receiving monies from the government twice. Currently, MTA has plenty of cash to make it through the balance of this year and the 1st Q of 2022. We have been buyers of this credit for the past year.
- With Monday’s market move, we saw “globally” the worst markets in months. Fears were driven by some combination of worrying headlines about COVID and the news of intensifying rancor in the economic relationship between China and the US. The shift in the bond markets, in my opinion, is the most important. Bond markets make the most direct judgments on inflation, and those judgments in my career can be self-fulfilling. We've seen this move over the last five days; the bond market says that inflation is not an issue. If we were to study this market, it is no more of a concern now than in the last ten years. I suspect we will see slight inflation; however, "hyper” inflation, in my opinion, will not happen—all good news for the MUNI markets.
- State and local governments continue to be flush with cash, all municipalities, including the risker issues, are in better shape than before the pandemic. There have been defaults in 2020 and 2021, primarily on hospitals and CCRC's. Our markets should continue to perform with the "gluttonous" Federal Aid distributed to state and local governments under the American Rescue plan. With this info, MUNI buyers/holders should have comfort in the FI markets.
- NY State collected $4.8B more in taxes in the first three months of the fiscal year than the budget enacted in April. This increase will allow the state to boost reserves and use cash instead of debt to fund infrastructure projects. I suspect the rating services will upgrade the State of NY this year.
- Cities and states are now receiving $350B in relief from Washington. Two dozen local governments and lobbying groups are pushing the Biden Administration to allow the Federal Funds for something the T has not envisioned; paying down debt or socking it away. This push shows a small rift opening as the economy surges back from the pandemic. The purpose is to save governments from facing the type of crippling budget deficits that lingered for years after the last recession.
- I agree with the FED that inflation worries will be temporary; we see "pent up" demand that should subside over the next six months. Therefore, I believe the FED has been correct in its monetary policy assessments and patience to date. Many are calling for inflation; we do not see this happening anytime soon.
605-B Park Grove
Katy, TX 77450
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