Extended Deadlines
Will the real deadlines please come forward? The December 3 deadline has come and gone, and we now have an extension until February 18 on the budget. Getting past calendar year end is probably a clever idea but what happens come February? The nation is already bracing for the mid-term elections and the matter should be resolved quickly or political footballs will be tossed around in Superbowl style.
And there is the matter of the debt-ceiling to continue to focus on in the near term. Secretary Yellen has highlighted December 15 as a critical time for cash flow. Some payments that are more internal may be delayed or deferred. But payments that are intended for unrelated parties to the government will be much harder to interrupt. Senator McConnell tells us that we will not lapse into default but are we to trust this affirmation?
Now we are hearing about Christmas time as being the practical deadline for legislative action. Hopefully, adults will do what they are empowered to do by the voters. They must keep the ship of state afloat.
One sidebar issue that is important to the municipal market is the SALT limit. The House has proposed raising the limit to $80,000 from $10,000 for a limited period. I have not heard much commentary out of the Senate on this point. In the meantime, the legal community has developed work arounds for the well to do. This kind of relief is not available for the average wage worker. One must contemplate the intricacies of the impact on state and local taxes. But we must assume that the outcome is not positive from a revenue standpoint.
One of the unexpected developments of late is the trend on interest rates. The 30-year Treasury is hovering about where we earlier thought the 10-year would be by year end. Even the slight back up to 1.43% on the ten-year Treasury may be viewed as beneficial to Issuers and will induce more to come to market before year end.
The first two weeks or so of December are often a time of heavier issuance in the municipal market. This year is shaping up to be no different. Issuance this week is hitting a near term high mark at approximately $15 billion. What is interesting is that the lower rates have brought some more of the higher yielding paper to market including tobacco bonds.
The flattening of the yield curve is also noteworthy. There appears to be much more risk at the front end. Municipals may not behave in lock step due to the supply and demand characteristics in the near term. Any time we have a surfeit of supply, rates in the municipal market tend to cheapen.
A widespread breakout of the omicron virus is feared a bit less as witnessed by the rally in the equity market over the last day. We still have the Fed to be focused on in the near term with the meeting on the 14th to the 15th. The unveiling of a faster timeframe for the taper has already been absorbed by the market. The consideration is whether we will have more of an update on the timetable for raising rates. There would be a much greater market reaction if there are any changes in this regard.
Predictions for municipal volume for next year have come cascading forth. It is no surprise that the estimates are trending higher. The average is reported around the $470 billion mark. I am no longer beholden to producing an exact estimated number. It just seems to me that a year with $40 billion or so per month would be a noticeably big year. I appreciate that the high estimate is over $500ga billion.
One could make an argument against such lofty numbers, but this coming year will be different primarily due to the infrastructure bill. Even if the $100+ billion of infrastructure spending is delayed by the bureaucracy, this spending will have a significant impact even before considering the leverage factor. As I have stated before, the federal spending will induce more spending on the municipal side that will require higher levels of bonding. My confidence on this point is bolstered by having reviewed many municipal plans of finance over the years.
John Hallacy
John Hallacy Consulting LLC
12/07/21
Recent Comments