- One of the questions for the Webinar is: “FED Funds rates are down 100 bps; however, MUNI paper is up ~100 bps since that move – why?” This is a difficult question, as there is no single answer. One would think that with the Fed Funds rates down, borrowing costs will be impacted, but many other factors will impact the Fixed Income markets. This is an attempt to answer some of these questions, which will be expanded on during the Webinar today.
- With the numbers today, 2/27/25, the US economy advanced at a healthy pace in the 4th quarter of 2024, with GDP increasing at an unrevised 2.30% annualized pace and consumer spending advancing at a 4.20% pace. Overall, both data points are in line with expectations; markets are steady on this news.
- According to a new FED Reserve Bank of Philadelphia survey, almost one-third of US workers are concerned about getting laid off by their employers, a share that has risen significantly over the past six months. I suspect this will not influence the Fed’s thinking; however, it is an interesting data point.
- Bond Traders are starting to hedge for a possible economic slowdown, which is why we saw the markets move on 02/25/25. Yields fell to YTD lows Tuesday, dropping to 4.28% from as high as 4.75% a week ago. Many are starting to see the US economy showing weakness, primarily due to point number 3 above (tariffs).
- The labor market is steady, but it is starting to show signs of slowing down. Many expect to see labor markets cool this year, which will influence the FED’s policy decisions regarding a rate cut.
- US consumer confidence fell this month by the most since August 2021 amid concerns about the outlook for the broader economy and uncertainty about the impact of the Trump administration’s policies. The FED will not look at this number closely but will consider it when making policy decisions.
- Initial jobless claims rose to the highest level this year. Investors want lower rates from the FED, but they do not want to achieve this by seeing a notable deterioration in the underlying economy. At the very least, if the economy slows, inflation will also need to slow.
- According to Bloomberg, if existing tax cuts and Jobs Act provisions expire, CA tax rates may soar to mid-50 %, causing further spread compression and higher premiums for CA tax-exempt paper. This shift could impact other high-tax states such as NY and NJ; buying this paper due to your location could affect your overall portfolio over the next few years.
Bottom line
Rates will likely be on pause for the next few months, giving buyers the opportunity to buy at these elevated levels. If the buyer is seeking quality income and wants to build a solid income stream that has tax advantages from a federal level and perhaps state, this should be a good long-term entry point. No one can predict where rates are going; however, it is clear the FED is not done cutting. What is not clear is the timing of those cuts.
At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.
David Loesch
[email protected]
www.drlgroup.net
605-B Park Grove
Katy, TX 77450
866.664.4040 (toll-free)
281.398.8600 (direct)
Securities offered through NewEdge Securities, LLC, member FINRA and SIPC. The DRL Group is not a subsidiary or control affiliate of NewEdge Securities, LLC. NewEdge Securities, LLC. has no affiliation to BondDesk Trading LLC or BondTrader Pro, or Tradeweb Direct, Bondpoint, TMC, Market Axess or any ECN.
Yield to call (YTC) is not indicative of 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 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 anytime without notice.
Do not buy 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 claims paying ability of the insurance company.
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.
This document is for informational purposes only and does not replace or serve as a substitute for your official monthly statement generated by NFS. Please refer to your official statement for accurate and comprehensive account details.
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. NewEdge Securities, LLC. 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 with your tax advisor for further clarification.
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