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Market News & Commentary – 10-17-2024

October 17, 2024

We try to keep politics out of these newsletters; however, this topic should be covered with the US elections less than three weeks away. We have been discussing supply for quite some time and how the 30-day supply of MUNIs rose to about $22.9B as of Wednesday this week, the highest since October 2020. We have discussed why municipalities want to push paper out to the street before we see a change (either way, we will see a change in this election) in the White House and perhaps Congress. Overall, I expect the supply to decrease over the next 2 weeks, and I think yields will remain elevated until after a decision is made on the election.

We have been discussing Chicago BOE and have been buyers of this credit for years. BOE (Board of Education) has been an issue for Chicago for years and one of Chicago’s original problems, which started its decline. There has been an “abrupt” changeover in leadership at the BOE, which has caught Moody’s attention. The mayor appointed a new slate of board members earlier this month after all seven members resigned. This will most likely not result in a material shift in credit quality; however, it is something to pay attention to, as millions of bonds are callable now. 

Florida credit continues to show a positive trend, with the state’s financial health improving and cash reserves growing. On 10/15, FL announced a tender to buy back their debt for around 500MM. This is the first-ever tender by the state; FL indicated on the tender that they would like to reduce their debt. If you hold FL paper (State of FL), you will see tenders coming your way.

“Sticky inflation” will become a keyword over the next few weeks. The CPI numbers we saw last week were a bit higher than expected, which is driving yields to the highest levels since July. To put things into perspective, the bills have also risen to the highest yields since January this year. Overall, this makes it hard for buyers to decide to deploy cash into the FI markets.

Kashkari indicated that “further modest reductions” in the central bank benchmark rate will be appropriate in the coming quarters. Ultimately, the path ahead for policy will be driven by the actual economic data—this is in line with what many believe: two more cuts. With Retail Sales coming out today, 10/17, at .40% compared to an estimate of .30%, we are seeing yields spike on the T bills. MUNIs will always lag. However, I suspect October to be a poor month for the Fixed Income markets for various reasons.
To add to the above, FED Reserve Bank of Dallas President Lorie Logan stuck by her view that rates should move slowly to a more normal level. She described the economy as solid and stable, pointing to meaningful rates ahead. With all this talk, we are seeing FED members suggest we will have additional cuts. Again, one will see. We will need to get through the elections first.
Stan Druckenmiller (Billionaire investor) indicated yesterday the markets are pricing in a Trump victory. During the past 12 days, the markets seemed very convinced Trump will win; just look at the banking stocks and crypto. I suspect Trump will be good for MUNIs not from a “tax POV” but from an overall fueling the economy POV. As the economy picks up steam and rates fall, these two attributes will positively impact our markets.
Fitch issued a gloomy report on the financial outlook for US colleges and universities, with smaller private schools being hit the hardest. DRL has been discussing this for quite some time, slowing revenue growth and steeper costs from inflation are squeezing school budgets across the country. However, institutions that are particularly vulnerable are those less selective and dependent on student fees. The bottom line here is we suggest avoiding these types of schools if you are a buyer; it is simply not worth it if you are trying to build a solid portfolio.
We have been discussing visible supply over the past few weeks; today, it starts the week at 20.4B, well above the average of 11.7 B. This has been a “thorn in the side of investors” for the past several weeks, and I don’t think it will slow down for the month of October. The issuance coming from the municipalities seems to be at a record pace, and one would think “why” we are seeing so much come to market. I suspect it is due to the lack of issuance for the first half of the year as many municipalities were “advised” by their FA’s to hold off on issuing debt as rates will move down.

The Bottom Line:

Yields are up based on supply and eco numbers. Elections are not helping either. Overall, yields should trend lower after elections (not right after). If you are in this market for the long haul, we stick with our call on buying on the dip.

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
[email protected]
www.drlgroup.net
605-B Park Grove
Katy, TX 77450
866.664.4040 (toll-free)
281.398.8600 (direct)

Securities are offered through New Edge Securities, Inc., a registered Broker-Dealer, FINRA and SIPC member. The DRL Group is not a subsidiary or control affiliate of New Edge Securities, Inc.New Edge Securities, Inc. has no affiliation with Bond Desk Trading LLC, Bond Trader Pro, Tradeweb Direct, Bondpoint, TMC, or any other ECN.

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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By: David Loesch

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