Sorting it out for Municipals
In these times when the commonly accepted is now being continuously questioned, it behooves us to reflect on what may happen to the municipal market along the way. By now, one would expect that a smooth presidential transition would be underway. This is certainly not the case after this election. This leaves the consideration if whether any constructive policy initiatives will be taken up in the lame duck session.
We have learned from Senator McConnell that he is interested in putting together some kind of a stimulus package and will have direct discussions with Speaker Pelosi on the matter. What is not clear is whether any common ground may be discovered along the way. We have had so many starts on this effort that it is challenging to have any great degree of trust that any plan will be crystalized in the near term. It appears that the two parties are returning to type and are adhering to vastly different levels of support. The Republican ballpark level is around $500 billion, and the Democrats are in the $2+ trillion camp.
Before the election, it appeared that there was some softening towards providing some funds for the State & Local segment despite their general preference for not doing so. There is conviction that long term problems should not be addressed with near term funds from the federal government. One must think that State & Local stimulus remains a long shot at least until after January 20. The calculus may be expected to change after that time and there is likely to be a renewed effort to achieve some results.
In the meantime, municipal rates after a volatile week are settling where they were about one week ago. The ten-year movement is the one to keep an eye on this coming week. A fair amount of supply will be more front loaded. The taxable issuance will take some of the pressure away from long municipals.
Another source of frustration has been the lack of an infrastructure plan. Will still have many that need to return to work. In the construction arena, residential is strong but many major projects that were not underway already before the pandemic have been slow to start. Some federal money would provide an incentive to get started earlier while rates remain favorable. Any infrastructure plan that provides, grants, loans, and tax incentives for the appropriate parties would be very welcome. We had some hope for Opportunity Zones when they were first authorized; however, we just have not seen that many developers who have been willing to take the risk.
In the next months we will start to hear and review reports about how states and localities are performing from the financial perspective at the mid-point in the year. The pandemic curve remains with us and the caseload is on the way back up. We had quite a bit more of economic activity in the last quarter. Retail sales, an important consideration for state and local revenues, had been improving. Since the Wayfair decision, it is a bit less of a consideration about whether these sales are in person or online.
Personal income had been sustained with the funds provided in the Cares Act and the initial round of unemployment benefits. I remain concerned that without more support, individual defaults and bankruptcy levels may be tested.
One bright spot has been the suburban housing market. Properties are changing hands at record levels and in record time. The bottleneck in the suburbs is ironically that there is not enough supply. I remain concerned that entry level and affordable housing is being largely overlooked. Municipal housing programs may only be able to do so much. There is a need for more creative thinking in this regard. I continue to hear how this challenge is most critical in California and other high value states for housing.
As our federal deficit has expanded, we have not encountered any real challenges in placing the paper globally. In much the same fashion, municipals have been able to expand markets by issuing more taxable paper. There is good reason to believe that we still may have a record year in volume despite some tapering off in issuance after the election. Eclipsing the record set in 2010 is attainable.
Next year will prove to be a more challenging budget year for many. The short-term sources of aid and the deficit borrowings should run their course by then. The attitude towards deficit borrowing in this cycle has been relatively benign due to the catalyst, the pandemic. New Jersey has embraced the method while New York and others are remaining reticent about doing so. There still may need to be a program in New York City to get over the hurdle.
The municipal market is functioning quite well day to day despite some swings in volatility. I have not heard many complaints about liquidity. I still expect some more credit stress. Will Illinois need to tap the Municipal Liquidity Facility provided by the Fed before the program ends at the end of the year in the wake of the failure of the progressive income tax at the polls? We will find out in due course.
I am not sure how much year end swapping will go on this year. One would expect quite a bit of taking capital gains on the equity side if there is any hint about taxes and capital gains being raised.
We have all said it before, higher taxes draw investors, especially retail investors, to municipals.
John Hallacy
John Hallacy Consulting LLC
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