Final Lap
At this time of the year the soothsayers turn out their estimates for next year. Last year, I called for $375 billion plus or minus $25 billion in either direction. I am covered here. We are at $346 billion through November with light issuance expected except for a handful of megadeals anticipated in the remaining days of the year.
Sixteen states have had increases in issuance volume. Texas has led the league with an uptick of approximately $10 billion in issuance. California has been runner up.
I believe that presidential election years are not the best for issuance. The histrionics that are likely to go on next year should serve to be an inhibitor to issuance. However, rates play a much greater part in what is likely to happen. The recent moderation in rates and the rally in values assuming the trend will continue will serve to boost issuance next year. Most pundits anticipate rate cuts by the Fed by mid next year. Few are calling for any recession.
Given these factors, I would expect a marginal increase in volume resulting in a baseline assumption of $380 billion. I reserve the right to say the number may be plus or minus the baseline assumption by $10 billion. Rate moderation should contribute to a modest uptick in refunding activity.
Returning to current activity through November, YTD volume is down by 6.6%. On the other hand, 4th Quarter issuance is up 21.9% so far. The year is ending on a stronger note after a less than enthusiastic earlier part of the year.
Congress has been busy with the Santos expulsion and other matters that are of lesser importance to the budget process. Now there is a focus on what to fund for improvements at the border along with aid for the war zones. How this equation is solved is not possible to predict at this point. The implication for the budget deliberations is that there will continue to be a turbulent period ahead. We only have days away until the first deadline in January after the break for the holidays. Most polls indicate that the citizenry would like to see cooperation in Congress to get the important matters resolved.
The recent negative outlook for China assigned by Moody’s also has a focus on debt levels. In this case, the pressure is emanating from local issuance that may have implications for the sovereign. In the USA, municipal debt outstanding has been around the $4 trillion level for some time. There is not likely to be much growth in the aggregate debt outstanding in the near term. Although there is some off-balance sheet state and local debt in the USA, debt outstanding is very transparent and there is no “shadow” debt of any real consequence.
Our federal government has a preponderance of debt and there is debt at the federal level with implied guarantees of one kind or another. This debt topic will likely receive much more airtime in the political realm in upcoming days. At federal budget time the topic will become especially important.
There has been some slowing of the economy with the JOLTS number coming down. Some companies have pared back positions to maintain profitability. We will probably see some more trimming in the days ahead.
Equity markets continue to hold up relatively well. The interest in fixed income continues to be a key consideration for investors. The 60/40 portfolio has performed reasonably well in this environment.
The run up in the price of gold may be a harbinger of what is to come. But it is always good to remember that gold does not pay any interest the way that a quality municipal bond does and the municipal interest is tax free.
John Hallacy
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