Momentum Build
The environment for municipals has improved in recent weeks. Supply has been plentiful although that supply is not always in the states where there is specific demand. Flows into the mutual funds have turned positive again. The recent decline in rates has helped to generate some positive returns.
There have been suggestions that issuers are front loading issuance before the elections and that supply will turn down later this year. We believe the uptick in issuance is because critical projects for which there is federal funding available now need to get started.
It has been quite a change from the 4.60% level to the 4.30% level on the ten-year Treasury. Given the slowing of the economy and of hiring, those in the Fed easing camp before year end are heartened by the recent developments in markets. One easing after the election has its appeal.
The municipal market always has its own set of factors to consider while still considering the macro back drop.
The halt in the implementation of congestion pricing by the New York Governor was a bit of a surprise. The MTA can probably carry on for some time without the revenue; however, the time will come when those revenues are required or there will be a crimp in the capital plans and developments. On its face, the main reason is attributed to politics and the political calendar. Another probable cause is the pending lawsuits that have been intended to put a halt to the plan. It would be better to push forward if there is some effort to settle the lawsuits before there is any court action. It is also quite a bit easier to forgo paying back the charge with interest if there were to be an adverse ruling. No matter what the primary motivations are for the halt, we do not expect the action to last long. Replacing the congestion charge with another tax is also not that simple to achieve without a negative reaction from the affected groups or individuals. Ridership is still maintaining a 70% level so the farebox will not be a big contributor.
The refunding of BABs continues to garner interest. I have discussed this before but in my view the documents always rule. Admittedly, the latter can be subject to interpretation at times. The BABs market started with make whole calls and then rapidly switched to the traditional municipal ten-year call. This trend was hard to miss at the time. The extraordinary call has become more of the focus in light of the sequestration. It is never a good move to perturb the Buy-Side especially if the issuer has other taxable debt outstanding or has contemplated issuing taxable debt. But, unless federal policy changes towards municipals, the pressure is not particularly great currently. It was great to expand the buyer base for municipals with the BAB program at the time. That expanded base may not act as favorably if there is another opportunity to increase the supply of taxable municipals.
High yield municipals continue to be a focus as there are new participants in the market and the search for yield has not abated. Much of what has been coming to market continues to be in the not rated category. A widening of spreads may only stoke more interest.
Equity markets and AI in particular command much of the coverage in the media these days. The returns in some of the names have been unprecedented. We must believe that over time some of these gains will be redirected to municipal bond investments. Any turn in the market is not near on the horizon. But the time will come.
John Hallacy
John Hallacy Consulting LLC
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