Worries Amid Low Rates
We have learned over the years in the municipal market that low rates may be quite beneficial. There was a time when low rates would produce a surfeit of advance refunding activity. It is painful to recall the halcyon days when refunding activity would be as much as 50% of primary market new issuance. Some members in Congress and the BDA among other industry groups are doing their best to bring back this important capability. Despite having some hope about a positive outcome, the probability does not appear to be remarkably high currently.
Issuers appreciate low rates greatly. Investors yearn for higher rates. Levels keep grinding tighter. The most incredible aspect of this market is that the flows to the mutual funds remain positive. One would think the opposite would prevail. Some have proffered that demand from aging Baby Boomers is providing a level of support for the market. Demographics are certainly a powerful factor. The prospects for tax changes may be an even more significant force. It is hard to know with precision which drivers are the most influential. All we know is that the strong demand is keeping the market tone solid.
Climate change issues are certainly coming to the fore in several ways. The rash of wildfires in the West amidst high temperatures is making its mark. Concerns over water sufficiency have forced some usage restrictions. The West could be facing rationing once again if the conditions require. Now we are forced to think about all the potential bond issues out there for water storage and retention. Will voters be more likely to approve projects in the future before the memories fade?
The low water levels are also causing implications for hydropower in the Northwest. As was the case in the winter storms in Texas, I am forced to think of reliability of the power supply once again. The array of power supply sources in the baseload requirement needs to keep this factor in mind. Peaking units are expensive to run and often pollute more but they remain necessary. Nuclear power might be more acceptable if we ever solve the waste repository issue. I have a hard time believing that the matter has been pending since I started in the business.
The New York Times had an excellent article over the weekend about rising water levels encroaching on the city of Chicago. This is not an easy issue to address. Seminal engineering work will need to be done. Physical improvements will need to be made. We know that it takes a crisis before the funding is forthcoming. All over the nation it would be optimal to act now when rates are low.
We will be hearing from the Fed Chair once again this week in the testimony before Congress. We will be on high alert for any nuances or indications that there may be more consideration for a change of course. We may be able to gauge how important the Delta variant may be to future actions among many other factors including inflation. The market has not been hypersensitive of late, but we shall see.
In the meantime, municipal volume has increased appreciably, and the market appears to be poised to absorb the issuance in the efficient manner it has exhibited of late. Perhaps, we will have even more Space bonds before long.
John Hallacy
John Hallacy Consulting LLC
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