Zeitgeist Check
When one steps back and contemplates the health of the financial markets, we are truly in an extraordinary generational period. Equity markets attain new highs on almost a daily basis. Employment remains relatively strong and unemployment is low. There is some concern about the Labor Force Participation rate, but we know that some have voluntarily left the labor force altogether. There are many differing reasons for this status. Of course, Boomer retirements continue apace. Hiring has slowed to a degree. Most pundits have opined it is too early for AI to have contributed much to increased productivity.
The Fed and investors continue to be laser focused on inflation. Statements have been made that there remains real conviction to meet the 2% target. But all participants are openly speculating about what that will mean in coming days. It is easy to assume that there will be no rate hikes until after the midterm elections. But we know that the data rules and if action is required rate hikes may become necessary to slow inflation. One of the wild cards is just where and how new imposed tariffs will direct price increases. It would be most helpful to have a few more clues about future direction from the Fed. Such a reveal is not expected in the near term.
The bulk of the financial activity has clearly been on the equity side. Some of the large corporate bond transactions for the hyperscalers have garnered the necessary attention. But the latest sale of 30-year Treasury bonds had a bit tepid response. Municipal bonds are very idiosyncratic and specific in attracting the necessary demand. The municipal part of portfolios is sought after for the lower risk features of the segment. Municipal returns even if appropriately grossed up for the effect of the tax exemption, cannot compete with returns in a growth fund or even a value fund. But that is the point. Relative safety has a price. But the benefits are many fold.
Municipal Matters
There are quite a few topics of interest that are affecting the broader municipal market besides monetary policy. The Continuing Resolution has taken the focus off the fiscal policy status for the moment until the debates are taken up again after the congressional break.
The treatment of addressing the implications from natural hazards especially of late, fires, has weighed on credit. It used to be that FEMA aid would be requested in the aftermath of major events, and some assistance would be forthcoming in a reasonable period. Now there is not much direction regarding how and whether FEMA reimbursements will be granted. It is disheartening to contemplate that politics will dictate how this process will proceed. We await some further guidance. But if states and localities will need to shoulder more of the burden, budgets will need to accommodate the expenses with some degree of difficulty.
We read with interest about the renegotiation of the sharing rights to Colorado River water. The history is that the first agreement was hard won after many debates. So much has changed in the region, especially since there has been significant population growth of the cities. The first agreement leaned more in the direction of protecting agricultural interests. This time the focus will be altered to a degree. If one or more states believe they will not be receiving their “fair share”, there will be more appeals. The relative growth of the states will be affected going forward.
Pricing and placing municipal paper continue to exhibit strength in the face of competitive factors. Next week the NYC TFA comes to market as a test of very strong credit. Only a significant slowdown in employment or a recession would affect the overwhelming coverage of the PIT pledge. Neither of these conditions is on the horizon.
I attended the Municipal Bond Club’s networking event last evening. It was great to see so many engaged individuals with a high degree of optimism about the market enjoying a night out. It remains a market that is dependent on relationships even though tech does an increasing amount of the interface and the work. The Club continues its education mission for all participants. I commend them.
John Hallacy
John Hallacy Consulting LLC
08/13/26
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