Mixed Prospects
Equities continue to command the bulk of the headlines today. While many investors are assessing their gains in tech and specifically Nvidia (NVDA), there may be precious little time to consider the fixed income space. However, rates have moved up with the 10-year Treasury at 4.25% and this movement upwards has made fixed income more attractive.
Municipals have now experienced some positive inflows for the last couple of weeks. It will be especially interesting to see whether investors liquidate positions to pay taxes come April 15. There must be a large level of capital gains in 2023 that will be factored into the tax bills. Perhaps, a good proportion of those gains have not been realized. California and other issuers are reporting some weakness in personal and corporate tax receipts of late.
Municipal volume has accelerated this year except for the holiday affected weeks. If rates do not rise appreciably in the near term, which is the consensus, we should be experiencing a continuation of steady issuance.
The full Congress is back in session on February 28 that does not allow much time for debate and consensus building before the Continuing Resolutions (CR) term out. There is apprehension building that a government shutdown will be unavoidable this time around. The Border consideration is the greatest flash point. Funding for assistance in the war zones is also a primary consideration. What will spark any compromise is hard to foresee. The Senate and House are relatively far apart on these matters as well as the parties themselves. This is the perfect time for the use of presidential power to bring about a solution.
According to reports from the federal government and from P&C insurers, there were a multiplicity of weather-related events that caused damage in excess of $1 billion per event last year. Many issuers on the public finance side either self-insure or often have policies in place with large deductibles. In some cases, insurance is not available. Addressing the risks also poses financial commitments that are challenging to achieve for a number of reasons. Available federal funding may serve to blunt the financial impacts but it does not often eliminate all of them. There is a considerable focus in the industry on this topic. There are no easily accomplished solutions. The municipal market always stands ready to assist with the funding aspects. Certainly, more creativity and focus needs to be dedicated to this important topic. The irony in all this discussion is that the engineers often have viable solutions at the ready. The financing aspects are more vexing.
SMAs and ETFs are growing appreciably. We do not see any factors on the horizon that will affect the demand in this regard. On the retail side, we continue to focus on whether there is a willingness to go further out on the curve given the Fed’s current stance.
Most pundits and Fed speakers agree that any rate cutting will be later this year. Cuts will come if any in the second half of the year. Although inflation has remained well above the target of 2%, there has not been sufficient backsliding to seriously call for rate hikes.
Moody’s has made a change that will make foreign holdings of municipals whether taxable or tax exempt harder to achieve. Ironically, when Build America Bonds (BABs) were all the rage in 2009 and 2010, foreign buyers made the market. There has been no discussion about reviving the BABs program of late but it had been an extraordinarily successful program at the time. As pressure builds for the federal government to find more revenue to service an ever-growing debt load, perhaps, the BABs idea would resurface at the lower subsidy level. Minor policy changes are more likely than across the board tax increases to address the federal government’s funding needs. This point is especially true in an election year.
John Hallacy
John Hallacy Consulting LLC
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