A technical glitch prevented the US Government from sharing key payroll data on time last week. This episode has prompted steps to beef up data release protocols. Overall, we are seeing more and more companies (and governments) continue to step up their protocols as well; data release dates and the smoothness of how those releases go are critical to any organization.
MUNI investors have plenty to choose from regarding new issues and terms. State and local government paper yields are the cheapest since late 2023 for the issuers. When you compare MUNI rates to T bills and add in the volatility, this asset class continues to perform from a safety, low volatility, and liquidity standpoint.
Powell has made it clear that rates will shift in September, and the “time has come” to lower benchmark rates. We have discussed this before at length and should have a clear indication of which way rates will turn over the next 90 days. Longer-dated paper stands to perform well based on overall pricing moving up, as the data as of late has supported this move.
Directors at the FED reserve banks for NY and Chicago voted in July in favor of lowering the discount lending rates based on the records released by the FED on 08/28. This continues to show the signal to reduce rates by many of the FED members. Williams and Goolsbee are prepared to support a cut in September, and as we have discussed, it is a question of how much now not so much if it will happen.
Speaking of cuts, I suspect 25bps are baked into the trade currently for MUNIs. Overall, should we see a 50bps move down, I would think we would see price improvements ~1-2 points in the long end, but will be hard to predict. Overall, pricing will continue to move up; with the speech last week, I think overall, we will see pricing grind higher slowly post rate cut.
As we see rates move, expect mortgage rates to push down over the near term. The hikes we have seen over the past two years have put many out of reach of not only obtaining a mortgage, but those who were on an adjustable mortgage program are suffering. This is yet another issue and data point that the FED is considering.
If the labor market softens more so than previously thought, this should spur faster and steeper cuts by the FED than previously thought. The unemployment rate is expected to peak at 4.40% by the end of this year and stay at that level through 2025. Should the rate move up faster, this will spur thoughts of deeper and longer cuts.
High-yield bondholders of the $287MM American Dream Mega Mall deal in NJ finally received the first interest payment after two years of waiting. These ongoing challenges reinforce the importance of high-grade investments- not just for the reliability of payments but also for liquidity. This is why our firm continues to prioritize high-grade sectors in the market.
The Bottom line:
Chatter about lower rates continues to dominate the news. Rate-talk will continue, and the more it does, additional pricing will be baked into the trade. With yields falling, waiting to enter fixed-income markets could be a mistake.
At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.
David Loesch
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www.drlgroup.net
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Do not buy discount bonds based on the Yield-to-Call (YTC). YTC does not indicate total return; this yield is valid only if the security is called. Bonds may be callable on multiple dates or any date following the first call date, so yield to call is based on the earliest stated call date. Discounted bonds may be subject to capital gains tax. Bonds may be subject to OID (Original Issue Discount). Bonds could also be subject to the DeMinimis Rule; please consult your tax advisor for further clarification. Insured bonds are issued for timely principal and interest payment only, do not cover potential market loss, and are subject to the insurance company’s claims-paying ability. Municipal income may be subject to state, local, and Alternative Minimum Tax (AMT) taxation. Corporate and Municipal securities are subject to gains/losses based on the level of interest rates, market conditions, and credit quality of the issuer. Non-rated (NR), With-Drawn (WR), or below investment grade bonds, lower-rated bonds carry a greater potential risk of default & should be considered by sophisticated investors only.
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