Municipal Adaptations
The municipal market is no stranger to absorbing and reacting to negative news and other related developments. We have had a sharp change in tone in the market. Flows to the mutual funds have now been negative for several reports. Rates have climbed appreciably. But spreads have not begun the inevitable widening but have instead been tightening. Municipals will always be a safe harbor of sorts but there is a bit of pain involved in securing the safety.
Given my grounding in the classics of Western Civilization at Columbia, the developments in Ukraine immediately hearkened back to my first reading of the Prussian General Carl von Clausewitz’s fine treatise On War. I have made a note that I must read the work again given current events. The premise of the book is that the will of the people must be backing the leader’s initiatives. Many of the lines in the text impart enduring wisdom such as the following:
“The conqueror is always a lover of peace; he would prefer to take over our country unopposed.”
No one knows exactly how the scenario in Ukraine will unfold but markets make up their own minds. The municipal ten year has been stable and simultaneously there are reports that Treasury buying has been brisk. It is difficult taking too extreme a defensive posture in this environment. Short rates have climbed, and the curve is flatter but nominal levels on the short end remain low.
Other mainstream considerations include Fed actions and the waning of Omicron.
The raging debate about what the Fed will do in March is whether there will be a hike if 25 basis points or 50. Even though inflation is on a tear at 7.5% in the most recent reading, I am in the 25-basis points camp. Given all the uncertainties, a more gradual approach makes sense. The danger with a 50-bps move is it may provide too much of a jolt to the system even though a modicum of relief may be provided on the inflation front. Most pundits agree that the economy is doing well. Why risk a sharp deceleration in activity?
Prices at the pump cause one some consternation. If gas reaches $5.00 a gallon in California, there may be unintended consequences.
Supply chain issues continue to be a focus. However, the ports appear to be making progress on the bottlenecks. The chip shortage continues to plague vehicle sales. I have not come across any breakouts of the sales tax in various locales, but the sales tax on vehicles in most states is a major component of the total receipts. Sales tax backed bonds have not reflected this risk so far.
Concerning other transportation, highway and bridge activity is either matching or above pre-pandemic levels. Travel and airline stocks are recovering and the uptick in activity is easy to detect.
Safety in taking mass transit continues to capture the headlines. On recent trips on the MTA system, I have witnessed two police at most stations where I have been. The police presence is elevated in general. Safety supports increasing trips on the system.
Federal funds for various programs are winding down. The federal budget deadline has been extended to March but funding for the range of programs is far from being settled. The tradeoffs among domestic programs and other programs remain significant. When is the last time you heard about Build Back Better? A few individual bills to address domestic spending items may emerge but it is not a foregone conclusion. In the meantime, I expect to be hearing more about the appropriation of funds under the infrastructure act.
John Hallacy
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