Just when we were feeling a bit better about the prospects for the future, we were hit by the inflation reading above expectations. The release has solidified the consensus that the Fed is not done and that we will have at least another 75 basis points tightening. Why this is such a shock to the system is somewhat surprising given that the Fed has been on message about the upward trajectory of rates for some time now. It is a bit early to suggest that the Fed will change direction quickly if the economy softens appreciably. Most of the economic releases of late are indicating that the economy is remaining relatively strong. Even the increased appetite for leisure travel is lifting the prospects for the airlines and is improving cashflow at airport operations.
But the losses in all markets are ongoing. All investors have been affected except for the most astute. Losses in the municipal market are now calculated at over 9% on a year-to-date basis. Some of the best advise I have heard from the talking heads of late is to buy the 2-year Treasury at approximately 3.8% and rest easy at night.
We should be receiving some information of revenue performance for the first quarter of this fiscal year relatively soon. We will hear about revenue performance for the first half of this fiscal year for New York State in October. These results may affect elections at the margin but there are so many other topics of note in the ether that the view of the revenue performance may not make that much of a difference. The late cycle upgrade of New Jersey is well deserved given the positive steps that have been taken regarding pension funding and reducing debt. One wonders what happens when we hit a recession in six months and all ratings on states will need to be reviewed given the fresh readings on the economy if the trends turn negative. RTO should be a positive for the economy.
Flows out of the municipal mutual funds are ongoing unabated. It is hard to know exactly where the proceeds from the sales are being redeployed but it does not appear to be going to equities. My guess is that a fair amount of the total is just going to cash.
Many commentators in our market have correctly pointed to how costly it becomes to stay in cash. If held to maturity especially if the security is relatively short, the return on a taxable equivalent basis of tax-exempt paper in the 3.5% to 4% range is most appealing. Credit could upset such a return but there is no cause for concern now despite some sector specific concerns that could increase with a slowing economy.
There are indications that the bankers are working diligently to find ways to take advantage of the tax credits provided in the Inflation Reduction Act. This work could lead to some more structured financing and may help the volume numbers if not in the near term, then in the long term.
Given the volatility in the markets, pension fund returns, and pension funding status will be back in the forefront. The reporting of said results will await actuarial reports that lag by a considerable time factor. Preliminary results will need to be gleaned from disclosures in current official statements if such information is offered.
We are headed into the Fall as Summer wraps up and are wondering if another variant of Covid-19 will be arriving soon. Fortunately, new boosters will be widely available in the near term. Most of the restrictions have been relaxed. Riding the subway without masks is a real visible change. Unlike what is happening in China, we will be very reluctant to go back into lockdown once again. But the reality is that cases are still out there.
The good news is that the new issue market is still operating efficiently. The rise in secondary market trading is a precursor of how year end swapping activity may be poised for an uptick of activity this year. In the meantime, the pursuit of pockets of yield in select sectors continues to intensify. This exercise may be assisted by the rising yield environment. Selling to make quarterly tax payments should not be as pronounced as in earlier periods.
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