Some of the federal level drama was recently reduced by the stroke of a pen. However, some subplots continue to play out including the $2000 addendum and the filling of recent vacancies in various posts. Of course, there is every reason to believe that we will have even more drama to contemplate with the elections in Georgia and the transition of power on January 20. There may still be some unanticipated developments that have the potential to introduce a measure of volatility. If the result is, we do not have a divided Congress after the election, that development would be certain to cause some ripples in the market.
A good colleague in municipals recently asked me what I thought the key dates would be that would affect the market in 2021. Typically, the question is what themes would be important. Scanning year ahead prognostications, most of the emphasis has stressed relief aid, taxable municipals, climate change and cybersecurity. These are all fine areas to focus on with some having more of an immediate impact than others.
Returning to the topic of dates, the first one that comes to mind in the Fed calendar. Every meeting is important even though some meetings may be relatively uneventful. We have put a certain amount of faith in the commitment to hold the line on rates until 2023. We appreciate that the Fed can always change its mind.
Although Fed actions underpin all fixed income markets, the municipal market has not tracked Treasury levels as closely in this to be concluded year. Ratios have become relatively rich in municipals once again. As I have so often heard, ratios matter.
Two factors for the strong ratios include the continuation of relatively strong flows to the mutual funds and strong demand given a very manageable municipal calendar. At this point, the calendar is not expected to pick up until mid-January. The January effect should be reasonably strong this year.
Budget introductions especially for states are always important. Most of the activity in this regard takes place in the January to early March timeframe. Preparing revenue forecasts that will hit the mark will be even more challenging this coming year. Tell me the date when 80% of Americans will be vaccinated and I would be able to tell you with greater accuracy how refined the estimates will be.
Focusing on the Fall, the audits for Fiscal Year 2021 will start to be released. The audits should provide the most accurate picture of just how much the pandemic has wrought from the fiscal standpoint. Credit downgrades tend to occur at the two major times of budget introduction and at audit release time holding other factors constant. It is fair to contemplate that more downgrades will happen at these times. Rating adjustments or watch listings have been assigned to some notable credits but there have not been widespread actions taken. I fully appreciate that criteria are designed to avoid such circumstances. But not many analysts or anyone else for that matter were factoring in the effects of a pandemic.
More key dates would include proceedings in the case of Puerto Rico. The market and bondholders remain focused on preserving value. It is also not clear if there will be any developments on the statehood front.
The legislative calendars in each of the states always has significant matters pending. Bond elections are ongoing at various times of the year. The legislative calendar and any ballot initiatives would be more expected at the mid-terms in 2022.
There will be a focus on tax policy when the new administration starts to consider budget proposals for the ensuing year. Adjustments in the top bracket and in the corporate tax rate would be expected to be debated in earnest somewhere in the August timeframe. As we have witnessed in the past, any actions to raise taxes will put more of a focus on municipals.
We always must be vigilant about what may be proposed that will possibly affect the municipal market. Given the potential for an infrastructure bill under a Biden administration, there is a real possibility that private activity bonds or PABs may be expanded. Expanding the small issuer exemption may also hold some promise for the bank qualified market.
Taxable refunding activity will continue if rates and the yield curve continue to cooperate. Some believe there are better prospects ahead for reinstating advanced refunding in the tax-exempt mode. My only hesitation is that there will be a demand for an offset in the federal budget equal to the price tag.
There will be many priorities that will demand funding in 2021. The prospect for additional stimulus or relief aid will have the priority from an economic and equity standpoint.
State and Local relief was not included in the $900 billion that was just enacted. Spending the balance that remains from the CARES Act is helpful. Indications are that the absence of new funding for this purpose will be taken up in the new Congress.
I remain hopeful that there will be some capacity remaining to give municipals an expanded role.
I know most of us are happy to move beyond 2020 except for those who have benefitted measurably from the strength in equities. Some of those gains may find their way to municipals.
I wish you a happy, healthy, and productive new year.
John Hallacy
John Hallacy Consulting LLC
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