Week of 05/17/2021

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Fed Officials Echo Low Interest Rate Approach Amid Temporary Inflation… PREPA Restructuring Gains Traction… Windfall Brings Higher Illinois School Aid… Robust Property Values Boost Govt Finances… New York City Outlook Boosted…“Connecticut’s Comeback” Multiple Rating Upgrades… Airport Bonds’ Winning Streak…

Fed Officials Echo Patient, Low Interest Rate Approach Amid Temporary Inflation…“Now is the time we need to be patient, steely-eye decentral bankers and not be head-faked by temporary data surprises,” Federal Reserve Governor Christopher Waller echoed amid a chorus of Federal Reserve officials who say a pickup in inflation is temporary and warrants central bank policy of low interest rates to continue. Another Federal Reserve Governor Lael Brainard said last week that the central bank should be “patient through the transitory surge.” Fed Chair Powell has made the same argument. “Despite the unexpectedly high CPI inflation report yesterday, the factors putting upward pressure on inflation are temporary and an accommodative monetary policy continues to have an important role to playin supporting the recovery,” Federal Reserve Governor Waller explained six things are contributing to higher inflation readings. Base effects, or the comparison of prices this year to last year’s COVID-19shutdown related depressed readings, higher energy costs, fiscal stimulus, spending of accumulated savings, supply bottlenecks and increased demand for workers, which is driving up wages. After COVID-19 crushed world economies pushing down commodity prices, the cost of an oil barrel fell below zero in U.S. post-COVID-19, a burst of inflation was inevitable upon national opening. Prices of most products haven’t changed that much. CPI gyrations are mostly down to a few items particularly affected by lockdowns and travel restrictions, such as air fares and restaurant prices, as well as commodities. Waller expects inflation to exceed the Fed’s 2% goal in 2021 and 2022 before tapering off. San Francisco Fed President Mary Daly attributed the current supply shortages to a “freedom-induced demand spurt” and argued that the Fed should “ride through the temporary pops in inflation.” The labor market’s recovery would take until late2022 if the recent pace of job creation holds steady, Federal Reserve Vice Chair Richard Clarida added, “Right now that means focusing especially on the labor market.” Vice Chair Clarida said he believes most of the recent acceleration in prices will prove transitory as the economy works through supply and demand mismatches that emerged during the pandemic. “Honestly, we need to recognize that there’s a fair amount of noise right now and it will be prudent and appropriate to gather more evidence,”Mr.Clarida said. Even the usually hawkish Cleveland Fed President Loretta Mester argued in an interview that policy “will need to be very accommodative for some time to support the broadening of the recovery”. She too doesn’t expect higher inflation this year to be sustained. Governor Waller stressed, “We will not overreact to temporary over shoots of inflation. ”With the Federal Reserve intent on achieving its “broad and inclusive ”full employment goal, market economists do not expect the Fed to begin raising rates until late 2023.

PREPA Restructuring Gains Traction… After two years of little advancement, the PREPA bond deal is gaining attention in court. Puerto Rico’s government intends to preserve the debt agreement known as Restructuring Support Agreement (RSA) by evaluating different means of implementation in light of COVID-19 related challenges, as well as changing economic and political landscape, attorneys for the Oversight Board, Island government and PREPA told the court last week. The RSA provides two new classes of securitized bonds to PREPA’s legacy bondholders. The oversight board, Puerto Rico’s administration and the electric utility are “supportive of the terms of the RSA”. Parties to the new central government plan of adjustment have a right to challenge the electric utility’s debt pact. Amid opposition from some Island lawmakers, Luma Energy expects to take over PREPA operations on June 1, the first step in PREPA’s privatization.

Windfall Brings Higher Illinois School Aid… A change in heart comes upon a windfall of better than expected state revenue and looming $8.1 billion direct federal aid. Governor Pritzker is ready to fund a scheduled $350 million increase in school aid, after skipping hikes in state funding to schools last year upon COVID-19 related uncertainty. Illinois schools have received $569 million from the CARES Act (March 2020), $2.25 billion from federal COVID-19 supplemental relief signed by President Trump (December 2020) and will receive $5.05 billion from the America Rescue Plan (March 2021). Illinois’s state tax collections continued to outperform; April general fund revenue soared 46% from a year ago. “Our state revenues are outpacing the estimates and the expectations that experts gave us earlier this year,” Governor Pritzker noted. Illinois has raised its general funds revenue forecasts for fiscal years 2021 and 2022, although much of the Fiscal 2021 outperformance could be due to one time factors that will not repeat. Mindful of the eventual unwinding of various stimulus programs post-COVID-19, Governor Pritzker noted “We need to act responsibly with these dollars. I believe this is an important step toward putting our state’s fiscal house in order.” Higher state funding is credit positive for Chicago Public Schools and Illinois school districts.

Robust Property Values Boost Govt Finances… Solid gains in home prices have driven local government revenue growth to record highs. Population growth led the South and West to witness the highest growth in property values. Among the nation’s largest cities, property values grew 8.8% in New York City and 5.6% in Chicago. Tax base appreciation has boosted the financial picture of cities and counties. Local government reserves continue to grow. Sizeable reserves, amounting to over 35% of city and county revenue, provide financial flexibility in times of downturns. Government capital assets continue to depreciate at an increasing pace, signaling need for greater investment. As a percent of property value, city and county debt levels have declined since real estate has appreciated in recent years.

New York City Outlook Boosted… New York City’s accelerating reopening led Moody’s to become the first rating agency to lift its credit outlook to stable from negative. Subway ridership has recovered to the highest levels since COVID-19 and New Yorkers’ vaccination rates surpass national average. Major employers, restaurants, museums expect on-site activity to resume this summer. Federal aid, $15 billion, amounts to about 24% of Fiscal 2022 city revenue, future budgets are expected to be manageable and state aid is likely to flow without any cuts. Mayor Bill de Blasio stated, “There are so many pieces that go into the recovery we are building every single day in this city.”

“Connecticut’s Comeback” Multiple Rating Upgrades… Improved ratings are another sign of “Connecticut’s Comeback”. “These upgrades by S&P Global, Kroll, Fitch and Moody’s are independent, third-party validations that our administration is putting Connecticut on the right track,” Governor Lamont said. For the first time in two decades, Connecticut bonds have received credit upgrades. Every rating agency has upgraded Connecticut’s credit rating within the last six weeks. The latest upgrades of Connecticut’s credit rating come from Fitch, which upgraded Connecticut’s credit rating to “AA-” from “A+”, along with S&P’s upgrade to “A+” from “A” on the heels of Moody’s March upgrade to “Aa3” from “A1”. Governor Lamont added, “For years, we’ve seen negative headlines about our finances and the state’s fiscal position, but this is even more proof that we are seeing sustained progress by addressing the sins of the past and investing in the future of this great state. We have made tremendous strides in just a few short years and the credit rating agencies are now taking notice.”

Airport Bonds’ Winning Streak… COVID-19 hit transportation bonds may continue to outperform after delivering some of the highest year to date returns to tax-free investors. A positive outlook on the U.S. airport sector from Moody’s comes as CDC relaxed its mask guidelines and removed prior quarantine/testing restrictions on travelers. Citing pent-up demand fueling strong domestic travel, Moody’s stated, “We expect the recovery to reach another peak as the summer season starts.”

Compare 30-Year taxable U.S. Treasury yield 2.34% to 30-Year tax-exempt muni bond yield “AAA” 1.65%; “AA”1.76%; “A” 1.96%; “BBB” 2.97%. For investors in the 35% tax-bracket, a 3% tax-exempt yield is equivalent to a 4.6% taxable yield. Top rated tax-free bonds yield 71% of comparable taxable U.S. Treasuries

Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.