Finding Positives in a Down Market
Before we head out to the fireworks, I always find it helpful to take the step back and to reassess. No one is debating that it has been an incredibly challenging year for municipals. The outflows from the mutual funds have resumed and the negative performance has been over 9% on a year-to-date basis.
Volumes in the primary market have moderated and most analysts on the street have lowered their volume estimates for the year. We know that the Fed in the near term is on a continuous path of rate hikes. The war in Ukraine continues to rage with no conclusion of any kind in site.
Supply chains are still experiencing difficulties even though there has been some improvement. Demand is still relatively strong although some have pointed to a modest easing of late. Yes, it is true that inflation will be hard to beat in this go around.
I cannot find blame or fault in trying to find positives to point to in this market. In a way, I admire the energy being channeled into this enterprise. It also reminds me that the small wins are just as important as the large ones. Credit is not helping much in this endeavor because it remains a neutral at this point. We expect that this will change in the next couple of years, and it may happen all at once when the federal pandemic support has run its course.
The focus for the market has become an intense focus on the inefficiencies and in the areas that may have been overlooked. The hunt is on for value. There may be bad coupons for the times or there may be a particularly low supply in select states.
Long maturities remain the sandbox for the institutional crowd. Many have continued to point to the value in the intermediate range and remind us that there will not be as much of a negative jolt as rates ascend.
Another more troubling development has been the politicization of the market. I believe that Issuers are well served when they have the most accounts bidding for their bonds. Any parameters imposed on the process are bound to have a cost.
ESG is here to stay. Perhaps, some Issuers do not care for the designation getting blended into the rating process. I think rather than have rigid ESG scoring of some kind, there should be some consideration as a factor in the evaluation. If the municipality is in a hurricane prone area or some other area of natural hazard vulnerability it is reasonable to ask questions about the preparedness of the entity in question to cope with such an event. Liquidity and market access concerns crest after an event. And we know from experience that FEMA will not close all the necessary funding gaps.
Voters need to decide the course on gun, energy, abortion, and other critical issues at the state level. We have always had the patchwork quilt of policies across the nation while being able to one nation. The glue that binds us together appears to be subject to some degradation in efficacy.
Let us remember that we are all part of this great experiment called democracy as we anticipate what will be served from the grill.
John Hallacy
John Hallacy Consulting LLC
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