Reputation Intact
This month has amply demonstrated that September is one of the worst months of the year for markets. Equity markets are well below the highs of the Summer with the Dow Jones Index below 34,000. Rates reached new highs earlier in the week and have remained high despite some moderation now. Rates for municipals do not follow the Treasury market in lock step but municipal rates have also backed up substantially. As of yesterday, the ten-year maturity has increased by 53 basis points for the month to 3.47%. The 30-year maturity attained the level of 4.36% for an increase of 48 basis points.
Is it any surprise that issuers are approaching the new issue market with some skepticism. Outflows have resumed with a $1 billion negative reading for the most recent week. One of the few participants that are thriving in this market are the insurers. Investors also greatly benefit from the higher rates.
On a YTD basis, volume is down 12.9% through the end of September at $274.7 billion. Only nine states have had volume increases of 5% or more including AL, AR, GA, MO, TN, TX, VT, WV, and WY. Texas is the only top issuer in the group.
The Fed continues to dominate the discussion about the prospects for the outlook. After pausing in September, most pundits are now pointing to a 25-basis point tightening in November given the hawkish stance. There is some evidence that the economy is slowing although the JOLTS survey is maintaining relatively high readings of late. Any easing is delayed well into next year.
The other primary concern is just what our elected officials are going to do about passing a federal budget. It certainly looks like even a simple continuing resolution is imperiled from the start of any effort to push for one. Some are advocating for the shutdown. Most citizens lose in this scenario but the decisions are being driven primarily by politics and not economics. It would be good to hear more from the bully pulpit on this topic. Any constructive messages are not being heard. One aspect of this debate rings true. The longer that any shutdown lasts, the more pain that will be inflicted. In the end, back payments would prove to be costly. Any discussion of savings during a shutdown is borderline ridiculous.
Some warning comments have been made by Moody’s on the potential federal shutdown. A shutdown could be a trigger for a rating action of the federal creditworthiness. There is some thought that the move would have been taken already if there was enough consensus on the future path for the nation’s financial profile. A negative action by a third rating agency would be harder to discount if it were to take place.
I attended the MuniTech NYC 2023 conference yesterday. There was a lot of discussion about inducing the municipal market to change from its traditional ways of doing business. The tech crowd that was present made it quite clear that the technological capability exists today to do so despite the niceties of the municipal market in applying updated technological solutions. A strong suggestion was made that there is a lack of willingness on the part of the key participants to update. The burden is on the tech industry to demonstrate how the proposed improvements will lower costs or assist with regulatory compliance or both. Progress in this area takes place in fits and starts. I would say that it takes fewer workers to deliver new municipal supply in an efficient manner to the market than ever before.
One other dimension to the debate on the budget is the consideration of appropriations for easing the migrant crisis and the war in Ukraine. Both considerations could serve to further delay positive budget action. Much needs to be accomplished by way of changing the migrant funding status. It is just challenging to do so when we are just days away from October 1 and we have not been able to bring about constructive change regarding this topic for years.
John Hallacy
John Hallacy Consulting LLC
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