Yields Surge After Strong Jobs Report as Fed Concerns and Market Pressures Mount

• T yields are at their highest level since 11/2023 after the jobs data this morning came in stronger than forecasted.  10T added 10bps in a matter of minutes, and the 2-year surged 12bps.  Payrolls are reading much stronger than expected, coming in at 256K for the month; the expectation was 155K.  The 256K was up from 212K in November. The bottom line is that payrolls are strong and will most likely remain strong in the near term.
• The minutes released Wednesday this week reinforced the thought that the Fed remains worried about inflation and the impact of Trump’s policies. I am sure they will move slowly over the next few months. Yields on all Fixed-Income papers will move up on this news, and I suspect (as we see as I am typing this) equities will be hurt by this news.
• Visible supply will start to pick up as it finishes this week at 14B, compared to the average of 11.5b thus far. I suspect that should yields continue to climb, we will see this number slow down over the next few weeks.
• As we have telegraphed several times to our clients, we avoid CCRCs (retirement centers) due to the higher default rates that surround this credit.  S&P dropped its ratings on about 206MM of MUNIs issued for a portfolio of 8 senior living facilities in MI and OH to the lowest rank after the communities failed to make a 1/1 principal payment.  Rating on all these securities have been moved to D, at this time there is no talk of restructuring.  Sticking with higher-grade paper (particularly in this uncertain environment) is prudent in our eyes.
• SALT has been on the radar of many, particularly those in higher-tax states.  A NY Democrat plans to reintroduce legislation this year, giving businesses more time to take advantage of the state’s workaround for the 10K FED deduction limit on individual returns.  I suspect we will hear more about this as we move into the 2nd Q of this year.  This will not impact MUNIs that much; however, with this said, this topic has been on many investors’ minds since the legislation was introduced.
• Overall, as discussed, I believe yields will climb here a bit (~10bps) on MUNIs and I suspect the T bills will also climb in yield.  This will create an opportunity for a great entry point into the markets for both retail accounts and prospects.  I suspect we are in a “no man’s land” right now, as many are waiting for the new administration to come into office.  I am questioning if we move to 4.95% on the long end for MUNIs. I don’t think we will, but I do think we will see continued pressure on yields in the near term.  Issuance has been somewhat light and will remain light for the next few weeks. If you are buying for the long term, we are seeing good entry points at these levels. I suspect we will see yields move up as discussed, but trying to time this is difficult.
• Global central bankers are poised to cut borrowing costs further in 2025 while monitoring policies set by the Fed and Trump.  While many expect all major economies to see monetary easing during the year, I suspect the pace will slow over the course of 2025 including in the US.
• With the resilient US economy and President-elect Trump’s tax cut and tariff policies, I suspect this will keep T bills under pressure for the first half of 2025.  One would question the cut of 100bps by the FED, and in the same stroke, the 10T is trading up ~100 bps.  I would anticipate that the tone of the FED at the last meeting (two cuts in 2025) will fuel slightly higher rates than previously expected.  If you are buying paper for the long haul, and seeking opportunistic buys for call protection, I am thinking 2025 will be a good year to do this.
• Tom Barkin (Bank of Richmond FED President) indicated over the weekend that he feels the current level of the Fed Funds rate is “restrictive enough” to hold off inflation for the time being. Barkin voted in favor of a quarter-point reduction in the benchmark lending rate on 12/18 as a reference.
• Overall, pricing from an evaluation standpoint has seemed yet again to get ahead of itself, meaning IDC values seem to be “lower” than where paper is trading. This is typical in this type of market. As for going back up, that is yet to be seen. I suspect IDC pricing will remain low for the next couple of weeks until we see stability in FED speak.
• It is sad to see the devastating wildfires in LA, and our hearts go out to all those who have been impacted, either directly or indirectly. According to a report, we suspect this will have minimal impact on MUNs as US Officials promise financial support from FEMA. I suspect we will see paper out for the bid due to investors having to sell paper for one reason or another, but defaults will be unlikely.
• As we discuss the CA fires, the potential costs for insurers from the devastation are now expected to surpass $20B, double what we initially thought. Insurance companies continue to remain under pressure, and we are seeing this also in the Gulf Coast region. Many companies are simply pulling out of the markets due to added risk.

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
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www.drlgroup.net
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Katy, TX 77450
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