One of the more remarkable developments last week was that rates did not change very much. Now that the tech sector and equities have hit a bit of a pause button one would be inclined to conclude that municipals should be rallying more. We must acknowledge the role of quarter end in some of the positioning that is taking place at present. Despite some of these forces, the primary market appears to be functioning quite well.
Much is being made of the decline of the bid in the high yield segment. Challenges that the American Dream project is facing are serving as a clarion call. The timing of many projects in high yield is being revisited. Although, energy projects do appear to have a strong support group and following.
Although we are some days away from the Congressional recess, it has become quite clear that there will there is little chance of a stimulus bill before the election. States and localities will need to go it alone that effectively means more state and local layoffs must be anticipated.
The economy is gradually improving, and unemployment is trending down. Yet, further improvements will be hard won. Retail has improved but much of the improvement is taking place on-line. Retail bankruptcies continue apace. Those entities that have filed have a difficult path ahead when they emerge from bankruptcy. Commercial property write downs and adjustments will wend their way towards having an impact on the host communities. It is quite telling that some of the mall operators have been instrumental in the rescue efforts to preserve some of their cash flow. At least Amazon may take up some of the slack in filling space.
The greatest contrast between now and the 2008 crisis is that housing is behaving very differently. In most markets outside of the central cities there is a lack of supply and values are being bid up. It has become a much more frequent phenomenon to secure a sale with a bid over the asking. I would expect the supply dearth to ease as soon as the pandemic is on the wane. At present, we are trying to gauge just how virulent a potential second wave would be. It is a sad day that we should surpass 200,000 deaths due to Covid-19 very soon. Vaccines and other mitigation strategies appear to be some distance away. Early next year is the most likely timeframe despite some hopes that availability of a vaccine may be possible later this year.
Debt levels have garnered a bit more attention than when the pandemic had first begun. Most believe that the Treasury market will not suffer due to consequences of surpassing a debt level of over 100% of GDP. States and localities are certainly subject to more scrutiny on their debt levels. However, most participants are more tolerant of issuers taking on more debt to get through the trough in the near term. The Municipal Liquidity Facility is still in effect, but the rates and the three-year maturity induce most issuers to tap the traditional market if practical and not at egregious rates.
We know that the Fed is on hold at least until 2023 unless something unforeseen takes place. And yet we continue to ponder the language and the commentary as it unfolds. The pleas for more fiscal support have gone unheeded to date. At an effective zero interest rate we are not sure what else may be available for the Fed to use. It is clear we are not inclined to march towards negative rates.
Volatility will increase as we enter the more compressed timeframe for the election. In addition to tax increases, the democratic side is talking about increasing the capital gains tax. If that proposal is evaluated as more of a real possibility, we may see some more movement of funds towards municipals.
This is probably the last week of big supply before the election. Most state and local officials will be too preoccupied to tap the market unless they absolutely need to do so for project requirements or some other compelling reason. In the meantime, spreads should continue to maintain a narrow range. We trust that the federal budget will be managed so as not to create another variable in the consideration of the election.
John Hallacy
John Hallacy Consulting LLC
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