MUNI Market Strength Holds Despite Shutdown; Credit Selectivity Remains Key

• We have been discussing Charter Schools for quite some time regarding the credit quality of the underlying.  Bondholders who own MUNI debt sold for a TX charter school did not receive their October coupon payment after the school closed its doors.  Reve Preparatory Inc., which operates the school in the South Houston area, has approximately $25 million of bonds outstanding. We are suspect of this credit, although we do have bonds out on a few charter schools, they are all insured by the two top insurance companies.  If you are purchasing this debt, it is recommended that you consult with your team, which handles your MUNIs, to confirm that you own the correct credits.
• Investors continue to add funds to MUNI bond mutual funds, adding $1.11 billion in the week ended September 24.  The week prior saw a $ 1.14 billion inflow.  This is indicative of the “rate trade” we are seeing now.  As we have discussed at great length, both in our outbound communications and on our webinar last month, rates are expected to continue declining as we approach the end of 2025.
• With the government shutdown in full swing as of 10/1, Republicans are debating how aggressively to leverage this moment to reduce the federal workforce, openly considering a hardball tactic that could force the other party to compromise; however, this approach also carries a risk of backfiring politically. We have seen this before, and I suspect we will see it again. It continues to amaze us how these types of issues (shutdowns) arise frequently, and both sides use them as a bargaining chip. 
• MUNI credits should face minimal risk from the latest government shutdown, but any disruption to key economic data could increase the market uncertainty and complicate monetary policy.  Historically, most shutdowns have been short-lived; even the longest during the previous Trump administration lasted 35 days and was only a partial shutdown.  Looking back at that shutdown, it had minimal impact on credit quality.  
• We have seen a popular bond trade come back into play, with the US Government shutdown serving as the catalyst.  The “steeper” is a bet that the gap between yields on short and longer-dated T-bills will widen, and this time, traders have wagered that yields on the former would fall faster due to interest rate cuts.
• The MTA approved a fare and toll hike, with the base subway and bus fee increasing by 10 cents to $3, as the transit network phases out its decades-old MetroCard for a tap-and-go system.  With this fare increase, the system will be able to help shore up the deficit it has been running for years, but it will not get them where they need to be.
• We have discussed jobs for the last two weeks, and they were little changed for the month of August as hiring was subdued.  This decline continues to suggest a gradual decline in demand for workers, and available positions ticked up to 7.23 million from a revised 7.21 million in July. Openings have decreased from a peak in early 2022 and have stabilized within a narrow range.  Many, including us, believe that we will continue to see openings slightly decline for various reasons, one being AI.  This will also continue to remain one of the FED’s preferred methods of determining rate moves.
• Boston Fed President Susan Collins said further rate cuts may be appropriate, given the “weaker jobs market,” but officials need to remain on guard against the possibility of persistent inflation.  She indicated she sees “modestly restrictive policy stance as appropriate, as monetary policymakers continue to move towards price stability.”  Bottom line, we are seeing more and more FED members move towards cutting rates; this is just another example.

Bottom line: As we have been stating for the past three months, yields have and will continue to decline. Currently, the Fed is split, and it is likely to remain so in its policy-making decisions. The next FOMC meeting is scheduled for 10/29, and most, including us, are calling for another 25-basis-point cut. There will be no meeting in November; therefore, we expect yields to drift lower and remain stable until the December meeting. Markets are heavily dependent, obviously, on economic data, and as we have stated, job numbers at this time will take center stage, replacing concerns about tariffs. MUNIs remain attractive at these levels, and you could expect overall spreads to tighten as we move into the last quarter of this year. September was a strong month; typically, October is weak for MUNIs. However, very few times in the past the FED has been on the “defensive” side of the line as they are now.