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Week of 03/08/2021
“I Expect We Will Be Patient”, Powell…
Muni Bonds Outperform Treasuries, Corporates… COVID-19 Hit Muni Bonds Outperform… Connecticut’s “Debt Diet” Budget Counts on Fed Aid, Reserves… Fall 2021 Likely Recovery For Student Housing… America Rescue Plan Advances…
“I Expect We Will Be Patient”, Powell…“So in terms of the bond market, so you’re right, bond market rates moved up. And as far as that is concerned, a number of factors are factored into it. But from our perspective, we monitor a broad range of financial conditions and we think that we’re a long way from our goals,” Mr. Powell explained, “Today we’re still a long way from our goals of maximum employment and inflation averaging 2% over time.” Transient inflation that comes with the post COVID-19 reopening will by itself not warrant a rate hike, Fed Chair Powell noted, “If we do see as I mentioned, if we do see what we believe is likely a transitory increase in inflation where longer term inflation expectations are broadly stable at levels consistent with our framework and goals, I expect that we will be patient.” Mr. Powell said the recent increase in Treasury yields had caught his attention. “I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals,” Mr. Powell did not signal that the Fed was anywhere close to buying more long term Treasuries each month in an effort to contain yields. The Fed is looking at “a broad range of financial conditions,” rather than a single measure, Fed Chair Powell reiterated that he doesn’t foresee lifting the benchmark fed funds rate from near zero until three conditions have been met: a broad range of statistics indicating that the labor market is at maximum strength, inflation has hit its 2% target and forecasters expect inflation to remain at that level or higher. The central bank will maintain ultra low interest rates until its employment and inflation goals have been met and will continue hefty asset purchases until “substantial further progress” has been made. Mr. Powell noted that the U.S. has about 10 million fewer jobs than before the pandemic and said, “it will take some time to get back to maximum employment.” When asked if the Fed’s goal of maximum employment will be reached this year, Mr. Powell responded, “No, I think that’s highly unlikely. I think we have significant ground to cover”.
Muni Bonds Outperform Treasuries, Corporates…Benchmark municipal bond yields dropped last week, even with Treasury yields rising sharply. Paring back losses, municipal bonds have gained 0.31% this month. Municipal bond index losses 0.66% this year are lower than Treasury bonds’ 3.5% loss and corporate bonds’ 4.4% loss. As Treasury bond market yields ticked higher in the last few weeks, municipal bonds have fared better than Treasuries and corporate bonds.
COVID-19 Hit Muni Bonds Biggest Winners…The riskiest municipal bonds, hit hard by COVID-19, are now making a comeback with outperforming returns. The riskiest municipal bonds backed by lease payments have returned more than 5.4% so far this year and close to 10% from a year ago. The high yield muni bond sector has returned 1.37% this year, in contrast to a 1% loss for “AAA” rated muni index returns. In 2020, ratings downgrades surpassed upgrades amid uncertainty about vaccines. As the pandemic nears an end, investors are betting that improving business conditions will boost economically sensitive project revenues, which bodes well for high yield bonds. Last Spring when COVID-19 took a toll on hotel taxes, airlines, transit revenue and a host of other revenue streams that secure municipal bonds, high yield bond prices fell. Those prices have recovered. For example, a 2050 maturing bond issued by the Metropolitan Pier and Exposition Authority for Chicago’s McCormick Place convention center, the nation’s largest, tumbled to as little as 90.5 cents on the dollar last year. It last traded for about 119 cents. Bonds issued for the American Dream shopping mall in New Jersey, one of the biggest issues of unrated municipal bonds, have jumped to 112 cents from 92 cents in April. Speculative rated muni bonds have been relatively insulated from the rise in Treasury bond yields. Higher yields and coupons of lower rated and unrated bonds make them less sensitive to rising rates.
Connecticut’s “Debt Diet” Budget Counts on Fed Aid, Reserves…Connecticut’s Fiscal 2022 spending plan counts on $775 million of federal aid. If aid does not materialize, the state will tap a $3.5 billion budget reserve to close a projected deficit of less than $1 billion. A $775 million withdrawal from the stabilization, or rainy day fund, would leave Connecticut with about $2.8 billion in reserve, or 13.4% of the general fund budget going into Fiscal 2023. Governor Lamont anticipates depositing excess funds to pensions. Reserves in excess of 15% of general fund budget are contributed to the state’s underfunded pension system per Connecticut law. Connecticut is considering a mileage based fee on tractor trailers, which could raise $90 million annually and could be leverage for $1 billion of infrastructure projects over five years. To match neighboring states, the Governor wants to legalize recreational marijuana and sports betting for incremental revenue. Intent to keep Connecticut on the ‘debt diet’, the Lamont administration has cut debt plans by 15% from five years ago.
Fall 2021 Recovery Likely For Student Housing…Most student housing projects with sound credit quality weathered the COVID-19 related disruption. Strong university support included internal resources for upcoming debt service payments and some tapped bond reserves. Widespread vaccine availability is likely to mitigate health and safety concerns that restricted on-campus housing. By Fall 2021, in person classes and campus activities are likely to resume at most colleges. Student housing occupancy and college ancillary revenues could recover by the year-end. Universities stand to receive additional federal aid to be enacted by the Biden administration.
America Rescue Plan Advances…The Senate voted 50 – 49 to approve to the $1.9 trillion coronavirus relief plan on Saturday, with all Democrats voting in support of the measure and all Republicans opposed. The House is scheduled to vote Tuesday on the Senate version of President Joe Biden’s $1.9 trillion COVID-19 relief bill, a timeline that could see the new federal aid legislation signed into law early this week. That vote is expected to succeed on a party line, as it did in the Senate, with a narrow Democratic majority. House Majority Leader Steny Hoyer said he expects President Biden to be able to sign the legislation, which brings $350 billion federal aid to states and locals, early this week.
Compare 30-Year taxable U.S. Treasury yield 2.30% to 30-year tax-exempt muni bond yield “AAA” 1.85%; “AA” 2.0%; “A” 2.23%; “BBB” 3.03%. For investors in the 35% tax-bracket, a 3% tax-exempt yield is equivalent to a 4.62% taxable yield. Top rated tax-free bonds yield 80% of comparable taxable U.S. Treasuries.
Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.