Almost Anarchy
The recent events in our nation’s capital must be raising many questions around the world. The primary question must be is the USA able to be governed effectively and is the form of government in the USA essentially broken. In addition to the overarching question, there is the matter of the federal budget and the timeliness of action. Progress on the budget is not possible until a new Speaker of the House is seated.
Chances are the selection process for a new Speaker will account for quite a few days remaining until the Continuing Resolution expires in mid-November. There is also the consideration of just who takes the slot will have considerable influence over the process. The new occupant may just want to proceed to a full shutdown.
The sideshow of who has what physical office is a bit sophomoric and reminds me of musical chairs or High School Musical.
What happens with the federal budget has many implications for states and localities. If cuts are going to be made, there is every likelihood that those cuts will fall on domestic spending versus other categories. We know that Medicare and Social Security are less likely to be called upon. Cuts in defense spending are also much less likely to be affected by the paring back. Some well-established domestic spending programs will not be affected but some of the forthcoming appropriations may be slowed.
I believe the bond market has taken all these questions to heart. Even though there has been some moderation in rates today, the basic levels have backed up considerably. The ten-year now stands at 4.725% or just under its 52-week high. Mortgage rates are now reaching heights we have not witnessed since the financial crisis in 2007. These levels are just not fodder for consideration by the academics. Citizens are dealing with all the various financial implications. Invariably, the economy will slow due to the higher rates. This factor will become even more important to the Fed’s deliberations for the future path for rates even though the trend has been to move higher to slow inflation.
Consideration and evaluation of current rates is also a very important element for when an issuer decides to come to market. Yes, it is true that the project funding consideration is the primary factor but every basis point counts. Just ask the issuer’s financial advisor about this factor. There have been some reports by Bloomberg and others that transactions have not just been postponed but have been cancelled outright. However, other issuers are being motivated to get to market before rates trend even higher.
The upward trend in rates has also induced portfolio managers and others to conduct more secondary trades. The MSRB recently reported that activity reached new daily highs. Much of this activity was probably caused by losses incurred due to the higher rates.
Despite all the pressures, volume appears to be climbing in the near term. Milder temperatures can help with construction cycles but climate change is working against the extended seasonal activity.
Where it is permissible to build and how that structure will be insured once completed will need to be even more critical to future development. I have not come across what the Army Corps of Engineers is up to in this regard. But I must believe that we will see some more restrictions in the future especially regarding riparian rights.
Please, indulge me on one historic recollection of mine. I met Senator Feinstein when she just had become Mayor of San Francisco during that tragic and chaotic time. I was just a young analyst at a rating agency working on the city’s rating at the time. I recall when I asked questions that she always had a very deep understanding of the facts and was quick with a response. She rarely had to ask her team at the meeting to clarify any of the points. She served her city, state, and nation with dedication.
John Hallacy
John Hallacy Consulting LLC
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