Select Market & Credit Impacts
There is much in the market today to generate some optimism on the path for future returns. There are also many risks that are present and could rise to a higher impact threshold. Casting about for small wins is the order of the day.
One good news item is that YTD volume in the municipal market has increased by 25.4% over the prior year to $142.2 billion. Volume in most states increased, however volume was down in a surprisingly large fifteen states in total. Consequently, there may be some supply shortages in select states.
On the rates front, the Fed meets tomorrow and no change is anticipated by the market. Most concur given the staying power of inflation and the relative strength of the economy that only one or two cuts may be possible and there are many who believe there may be none this year. Any tightening talk just does not pass muster currently.
As I sit writing this just down the street from my alma mater, Columbia, I am reminded of just how fragile the balance of the daily struggle can be. The primary purpose of higher education is to challenge a person to commit to making the effort to think and to reason. What I see when I walk by the campus is a lot of anger being vented. I believe in free expression but I also believe that we should not disturb people in their desired activities especially if these endeavors are focused on academics. No one on a college campus should feel threatened in any way for what they believe in or hold true. The disruption has gone on too long. Looking at investment practices for endowments should be revisited frequently. Gaining consensus is not an easy task. Opinions make markets. It is time to breathe deeply and take a step back and consider how to go about all these conflicting priorities and principles in a more rational and deliberative way. Individuals and families have worked tirelessly and have sacrificed to secure a spot in a class that has provided wonderful opportunities to many for life. With some good fortune and fortitude, graduation should take place. I hope the students can think about what another West Sider sang a long time ago: Just Give Peace a Chance.
The closing of some small institutions of higher education is regrettable but appears to be unavoidable. Merger or acquisition opportunities are not always possible. Declining enrollment is hard to combat when resources are scarce. We will keep returning to the topic of affordability and value over the long run. Yields in this sector reflect the greater risk profiles.
The extraordinary redemption provisions for the Build America Bonds (BABs) that came to market in 2009 and 2010 were already bearing scrutiny at point of sale. My original position is that the language used in each of the transactions must be carefully reviewed. Most participants were not anticipating an environment where the tax subsidy on a tax credit bond could be changed by federal sequestration. Also, the definition of extraordinary in an ERP is not well defined. Would sharp changes in rates be in the mix? Asking another bond counsel to review the original document may be productive. Some may wish that all the transactions had been done with make whole provisions. Answers will need to be sought in some constructive way. The ERP was not a provision that was to be invoked at will.
Final changes will be made to the proposed budgets in May and June to be put into place by the July 1 deadline. Some revenue assumptions may be adjusted higher than the original estimate. The higher rate environment should also be included in the forecasting for debt service. Some early indications of direction will be helpful to the reinvestment of July 1 redemptions.
In closing, I wanted to wish my friend and former colleague Harold “Chip” Barnett all the best in his well-deserved retirement from The Bond Buyer. He covered the breadth and depth of the municipal market and he served this market with distinction.
John Hallacy
JH Consulting LLC
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