We have all been dealing with a lot of incoming news over the last week. While our form of government was being severely tested, there were many other factors to focus on from a municipal standpoint.
One of the first items that comes to mind is the necessity for an enhanced level of security at state capitols across the nation for inauguration day and beyond. Most of the costs that will be incurred will be at time and a half or more. I am not clear as to whether there are enough reserves in budgets to accommodate the additional costs.
Another more central factor to our business is that rates are on the move. As of this writing, the ten-year Treasury is at 1.10% or significantly higher that where it has been previously since March of last year. The ten-year AAA municipal is at 0.77% and the thirty year stands at 1.55%. These levels have not been a hindrance to issuance so far this year. More importantly is the relationship of taxable municipals to tax exempt levels. The outlook for taxable refunding activity could change appreciably if the taxable level spreads much wider to the municipal scale.
Supply is always a bit lighter in January on into February. We may not know how much of an impact there will be until the inevitable pick up in supply in March.
Most market observers are keeping a keen eye on the anticipated readings now and to follow. However, the real news making will be from the fiscal standpoint with the President-Elect’s near-term agenda. We have heard reports that additional stimulus or relief may be proposed in the multiple trillions range. There is an expectation that aid for states and localities will be among the top priorities.
Assuming additional federal support is forthcoming, states and localities would be able to include reasonable estimates in their budgets before budget adoption time.
The pandemic is still with us and will probably be a factor for most of this calendar year. Vaccination roll outs are now being offered to those of the age of 65+. This is a welcome development. Also, the faster release of existing vaccination supply should also assist in accelerating the recovery.
Traffic at restaurants and travel destinations remains hampered. The latest unemployment data revealed a concentration of job losses in these industries. More of the population obtaining vaccinations and warmer weather will help the outcome to become more positive.
There remains the WFH (Work from Home) phenomenon to continue to grapple with from the business management standpoint. How much office space will be necessary in the future is demanding a great deal of focus from the real estate industry. The commercial mortgage market needs to know how much debt will likely be restructured or underwritten in the future. The Fed wants to know because it is out there buying a lot of MBS bonds. State and local governments need to understand what may be in the pipeline because they need to stay on top of valuations and the taxes those values may reap going forward.
We have many questions in the near term that may receive some answers in the days ahead. However, the implications from these answers may establish new longer-term trends.
Given all the factors, the municipal market tone is maintaining the strength it has found post the trading off last March. That timeframe is now a distant memory. Yet, the municipal market cannot grow much richer in yields than where it is at present. An adjustment to a different environment may prove to be jarring and losses will need to be covered in some fashion. New issue pricing should remain strong and sharp in terms of fine gradations given the credit status of issues under consideration.
John Hallacy
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