Risk On Continues

Risk On Continues

The first half for municipals was quite impressive. Volume surged by 30% and is on a pace to have elevated issuance for most of the remainder of the year. The wild card is certainly how disruptive to the pace the election will turn out to be. Even though supply increased during the first half there are still some states where participants could use more supply. Some states keep a tight rein on supply. The key for the market has been that the increased supply has been easily absorbed without many adjustments in yields. Even the billion plus transactions have cleared the market with ease.

The election has gone into a less predictable phase. Policies between the two parties remain quite a contrast. If the Republican ticket prevails, we are likely to see tax cuts proposed and tariff increases. On the Democratic side, there continues to be the push to raise personal taxes for those with incomes above $400,000. Clearly, the outcome is also dependent on the composition of Congress and the likelihood of approval for the respective packages.

Tax cuts are often not beneficial to municipals even though they may serve to stoke the economy in the short run. After tax returns would be subject to some reevaluation. Higher yields may not be enough to tease out higher demand. It is much less likely that crossover buyers would come to the rescue when returns are so much greater elsewhere. The crossover buyers do not assign a value to the tax exemption.

Another factor that is ever present is the size of the federal deficit and how to address the burgeoning national debt. Discussing plans to address these factors has not been conducive to winning elections in the past.

Nevertheless, the Treasury must place ever increasing amounts of debt at the auctions going forward. At least to date, there has been a ready market in placing the paper at reasonable interest rates. The question is whether the superior reception for the paper will continue ad infinitum.

Comparing municipal yields with Treasury yields has always been fraught with complexities. It is about to get even harder. Fortunately, there are several municipal scales around now that tend to compare with each other in a relatively narrow band. There is some expectation that better data driven scales will continue to emerge. But the traditional go to scales will always be in play.

On the budget front given we are starting the new fiscal year for most today; we heard a bit of grousing about insufficient funding for various cherished programs but the budgets were still approved. This pattern is the normal course for budgeting. One of the more optimistic notes for this year’s round was that in many cases revenue estimates have been revised upward. Employment has been strong, unemployment is low, the stock market is strong (although breadth may be wanting) and tax coffers have been hitting targets or beyond. California has the largest budget gap to contend with this cycle. Cuts and drawing down reserves have been the answer.

The MTA is always on the hunt for new revenue sources. We thought it had been found in congestion pricing. There are not too many alternative revenue sources around that can produce $1 billion a year of revenue without outcries from affected interest groups. No one has suggested the fare box or curtailing service at this point. The municipal market was looking forward to bringing to the market a new name with a new revenue source. Unfortunately, the wait for the new credit is indeterminate.

Enjoy the 4th. Perhaps, France will keep it together enough to host a great Olympics.

John Hallacy

John Hallacy Consulting LLC

07/01/24