MUNI Market Insights: Rising Yields, Postponed Deals & Market Shifts

• As we have been discussing, we are now seeing deals get postponed with the spike in yields. This week, a 1.15B high-yield MUNI bond deal was postponed for a Wisconsin issuer, along with others. I suspect you will see more deals get pulled as should yields continue to climb over the next few weeks. This will cut down on the supply, and with High-Grade yields where they are now, I also suspect we are seeing an influx of buyers coming into the market at these levels.
• If you are buying MUNIs issued for riskier projects like Charter Schools and small colleges, which are lower-rated, it is important to know these issues may break a 12-year record for distress as the pandemic aid dries up. So far this year, 46 borrowers have become impaired, meaning they have defaulted on their debt, and reserves to make payments are missing financial metrics required by the bond indenture.
• To continue with the above, Universities in the US are facing higher risk “across the sector” because of moves by the Trump administration, according to Moody’s rating services. Moody’s this past week lowered the education secret to negative from stable, citing a “more difficult environment for colleges and universities.” DRL continues only to trade with larger institutions that are insured. Should you have any questions about your other holdings, please let us know.
• FED Reserve Bank of St Louis President Alberto Muslim said it is not clear if any inflationary impact from tariffs will prove temporary, and he cautioned that secondary effects could prompt officials to hold rates steady. Tariffs are throwing a “wrench” into the FED’s plan, and there seems to be confusion within the markets, again creating higher yields across the curve.
• The US Treasury is planning to lay off a “substantial number” of employees through an effort to reduce the size of the US Government. This will impact job numbers in the following few reports, which, as discussed in past reports, is one of the FED’s preferred measures of inflation.
• As we saw, Powell indicated there is no reason to do anything with the current path of monetary policy. For stocks, that message was a relief; however, over the last couple of days, we have seen that trend reverse. We believe yields will remain elevated for the next few weeks, creating a unique buying opportunity should you be able to tolerate the volatility.
• Looking to April 25B of principal and interest coming due, larger issues are CA, TX, and PA. This will help with any issuance that comes to the market, and we expect investment demand will rise at the end of April and May, with another 22.6B coming due.
• With the increase in yields across the curve yesterday, 03/26, AA-rated paper continues to trade at attractive levels for quality assets. The taxable equivalent yields are >6% for longer-dated paper in the 30% bracket. It is a compelling reason to consider putting money to work here for the longer term.
• We have been reporting on MTA’s for a while; NY Governor Kathy Hocheul, who is in a standoff with President Trump and his administration over congestion pricing, indicated she is encouraged that her “direct pipeline” to the president will keep the system in place. MTA paper has been trading well during these discussions; the US Transportation Secretary Sean Duffy pushed a deadline for NY to turn off the tolls back another month on Thursday last week. Many expect this issue to get resolved, but it is something to watch. If you are buying non-insured MTAs, be aware.

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
605-B Park Grove
Katy, TX 77450
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