Don’t Cry for Me
Bailing out Argentina has for some in the financial markets become a long term engagement. Many of us recall the so-called Brady Bonds of the 1990’s that were named after the Treasury Secretary at the time. Existing bonds of Argentina were exchanged for Brady bonds that were ultimately backed by collateral of U.S Treasury paper. There have been many disputes about the Brady bonds over the years that tried the patience of investors.
History repeats itself. Here we are once again This time we are providing some forms of liquidity and of swaps to help stave off another bankruptcy event by Argentina. I do appreciate that Bessent Swaps or Bessent Bonds have a nice ring to them. I know we did not select the timing of all this attention. The necessity has to be pressing.
It has me wondering with 5 days to go what we are doing about our own national debt and shutdown of the government. Even a temporary snafu in payment could bring a whole host of difficulties. Yes, there is ongoing authorization to pay but someone has to be present to make the payment.
Reports are that the two sides are not discussing matters of importance to all Americans. It is easy to say that it will come together at the eleventh hour because it has happened so many times before. But, this time feels very different. Democrats do not want to take the risk of negotiating healthcare in December. We will know soon how this will play out. The ten year Treasury has risen only moderately to 4.18% and many other reasons are cited as the cause. The cost of protection for U.S. debt is most likely increasing as we discuss.
If a deal is not reached on keeping the government open, a proposal has emerged to lay off even more non-essential workers. Clearly, there would be a risk for the District and the surrounding area. But there would also be an effect at the national level. We are not certain about how quickly these individuals would find alternate employment. But, generally speaking, a higher paying job is often replaced with a lower paying one.
As for the municipal market, despite the pressures of elevated supply, the market appears to be functioning quite well. Inflows to the funds have remained quite strong for this time of year. Some suggest that part of the influx is due to lower money market rates. Perhaps, there is truth to this claim. But the funds that are on the move are mainly being deployed to the shorter end of the curve.
As we are approaching the mid-year for most states and localities, there are signs that credit is once again becoming somewhat of a focus. There are reports of revenue underperformance in some states. The irony is that retail sales and correspondingly retail sales taxes have stayed as strong as they are. There are some signs that holiday shopping may be more subdued this year. Perhaps, the end of de minimis duties on packages under $800 will have a more pronounced effect than estimated.
It has been reported that Indiana is making some changes to its property tax system that may have an effect on outstanding bonds when it is fully implemented some time in the future around 2027. We would not be surprised to see some legal challenges surface about aspects of the changes. At this point in time, we are in monitoring mode and the market is unlikely to overreact.
The various electoral races around the nation will be entering the full tilt phase in the days ahead. Critical contests are taking place in Virginia and in New Jersey. Virginia has been most affected by the federal downsizing. We will see if this has any bearing on the outcome. In New Jersey there is always dialogue about the too high property taxes. Originally, the income tax when implemented was supposed to take away the pressure on the property taxes. It has not quite worked out that way and there are not many easy ways to provide ready relief.
Here in NYC, the rhetoric will become sharper. Who delivers the best message on public safety and on affordability will have the greatest impact.
We will all be watching intently on what goes on on the Hill over the next few days. I recall in 2011 when the downgrade of the USA was released by S&P, I was on the phone all night until dawn talking to groups in Asia and elsewhere about what it meant and whether other rating agencies would follow. The latter would turn out to take some time.
I look forward to sleeping soundly next week. But, if not, I will be back to discuss more about these weighty matters to us all.
John Hallacy
John Hallacy Consulting LLC
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