Issuance Waiting Game
Now that you have taken some gains in your AI focused equities, there always remains the consideration of where to reinvest the gains. Municipals are always a good option. The challenge is the new issue market is not minting as much supply as it is capable of. Of course, the secondary is always available but there are always those pesty fair pricing considerations.
Municipal volume in May was just over $26 billion for a decline of 28.9% over the same month in the prior year. Only two sectors had increased volume including Education and Electric Power. Education is a perennial winner in the additional supply category.
Taxable municipals were down 82.2% in the month reflecting the inability to bring taxable municipal refunding transactions. The Revenue bond category was down by 24.4% in the period. General Obligation bonds had an even greater downside at 38% less over the prior period.
The volume on a YTD basis is off by 24.4%. NY, FL, & CA issuance was down by 47.6%, 42.7%, and 6.8% for the period. OR, NJ, & IL had increases for the YTD of 43.3%, 33.1% and 18.9% respectively.
Some of the stated declines may be due in part to a hesitation to launch when the debt ceiling consideration has been commanding the main stage. The other challenge has been the appraisal of rate conditions. The momentum in rates has been to the higher side.
The consensus for the next Fed decision on June 14 had been entertaining the possibility of a pause. Given the recent higher inflation readings the outlook has switched back to another modest tightening action. Fed officials in recent speeches have suggested that more must be done to attain what appears to be an out of reach goal of 2% on inflation.
The consumer appears to be quite active still. There is virtually no concern that sales taxes will slow appreciably in the near term. Wage growth has been positive enough to support the uptick in consumer activity. Layoffs have garnered attention in the headlines but have not had a very significant impact to date.
The budget cycle is now at the critical stage with the fiscal year end for most issuers rapidly approaching. Early indications are that fund balances are holding up. Assumptions for next year’s budgets are as challenging as ever. Housing activity has slowed with the lack of inventory. Capital gains are poised to be not as robust as last year. Immigration trends are adding to pressures.
The federal budget restraint that comes with the principal agreements in the debt ceiling lift will probably have some impact since any growth in appropriations will be below inflation. The point has been made that even the growth in defense spending of 3.3% is below the inflation rate.
The rollover in the heavier issuance months of June and July will still need to deal with negative net supply. There is a good chance that market valuations may grow to the rich side holding other factors constant.
Most new issue transactions will continue to be well bid except perhaps for very large transactions. Cash flow borrowing this year should not be very robust except for the regular issuers of the paper. There is some fretting about the quality of the retail bid. Higher rates should address any concerns.
John Hallacy
John Hallacy Consulting LLC
05/31/23
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