Areas of Focus for Direction

Areas of Focus for Direction

We are all intently searching for direction in fixed income markets and in the municipal market in particular. Many have noted the extreme stability in the municipal sector due to the continuing strong demand for the paper. The positive flows to the mutual funds continue to amaze given all of the activity and prospects for returns available in other markets.

The Fed will always be a primary focus. We know from last week’s Jackson Hole virtual conference that any change in the approach to rates continues to be somewhat further in the future. Many are questioning the timing of such a potential change. What did become much more clear is that the tapering may even start this year as was voiced by Chair Powell.  Even when participants are fully primed for such a move there is still bound to be some reaction. The key is not to have an outsized reaction and a companion sell off. We will see if this time will be any different. The first formal signal is expected to emerge from the September Fed meeting.

Until some kind of decision is made on September 22 about the taper there are many other events and factors to consider.

We are still awaiting the final outcome for the infrastructure bill. It would appear at this point that we will know what Congress will do at about the same time as the outcome of the Fed meeting. I continue to think that some optimism is in order. We should also be closer to a final federal budget that is due by October 1 but we know there is always the possibility of a continuation budget until there is enough agreement to have a final budget.

The evacuation in Afghanistan is certainly an ongoing cause for concern. The last day of withdrawal is upon us tomorrow. We do not know what additional violence and fall out there may be. The tragic loss of life will be with us forever. What is ponderable is that Treasury rates have not responded much at all. There are many technical reasons for why the Treasury rates continue to exhibit strength at this stressful time.

Hurricane Ida which has now been downgraded to a tropical storm is certainly conjuring up memories of what transpired and what the aftermath was for Hurricane Katrina sixteen years ago. We do not have damage estimates at this point given the lack of power in New Orleans and environs in part due to the power outages. Full restoration of power is likely to last a week or more. I especially want to learn whether all of the improvements that were made after Katrina were effective or not. The massive pumps that were installed among other improvements have been counted on to make a difference in the recovery time.

I came to appreciate what the Army Corps of Engineers meant by the bathtub effect they highlighted after Katrina. I was standing in the 9th Ward on a heavily damaged block where only one house was still standing about two weeks after the event. I looked up and saw that the peak on the roof of the house was below the lip of the levee. I now possessed a profound understanding of what the Army Corps comment meant.

Municipal analysts will need to assess the damage especially to local governments. At times such as this it is quite difficult to get local officials on the phone. Within a reasonable timeframe, the secondary market disclosures will need to be posted and participants will need to judge just how serious and lasting the impacts will be in general and in regards to specific credits. Perhaps, spreads for bonds in the affected areas will widen, but, then again, this market continues to defy logic, experience, and expectations when it comes to the spread consideration.

We also have the 09/11 anniversary on the horizon. Remembrance and reassessment of events that day wrought is important to continue to evaluate. I will not indulge in my own personal recollections but I have many that have brought sorrow over the years. What have we learned? I hope and trust that the day will be peaceful given the many dedicated people who are working to keep all of us safe.

My final thoughts are about the expiration of unemployment benefits and the end of the moratorium on evictions. Unemployment has certainly improved overall. But there were many forced retirements and involuntary separations from the workforce. Some have given up the search. The evictions would likely serve to have individuals seeking out other channels of support. Without federal assistance, states and localities will need to search deep for what they may be able to do on their own. The safety net spending may just shift in this case. This process may pressure state and local finances to an extent. At this point, I do not expect  rating changes on the way.

John Hallacy

John Hallacy Consulting LLC

08/30/21