CREDIT AND MARKET STRATEGY
MUNICIPAL MARKET WEEKLY
December 10, 2018
Risk-off sentiment pervaded markets amidst geopolitical and domestic economic uncertainty, compounded by aggressive Treasury curve flattening and front-end inversions. The equity market convulsed, with losses ranging from 4.5%-5% for major US equity indices, while most US fixed income sectors posted their strongest weekly gains of the year. Treasuries averaged returns of +98 bps (-30 bps YTD), Munis returned +60 bps (+81 bps YTD), and IG Corp returned +77 bps (-318 bps YTD). Tax-exempts underperformed 5yrs and out (1.2 ratios avg) as heavy supply, slightly rich valuations, and fund outflows weighed on the market. The primary market had new issue of $9.7 bil., or...
The week began with a positive tone following the Trump-Xi meeting at the G-20 summit, where a 90-day truce in the US-China trade war was announced, but quickly turned sour on Tuesday after Trump proclaimed himself “Tariff Man” and news broke that the CFO of Huawei, China’s largest telecom company, was arrested in Canada (at the behest of the US) for violating Iran sanctions. Markets also became fraught with uncertainty on the real potential for a “no deal” Brexit, chaos at OPEC, and aggressive Treasury curve flattening and front-end inversions (2s5s and 3s5s), a potentially ominous sign of...
Treasury and Muni curve flattening was truly staggering for the week. Treasury 2s5s flattened by -5 bps to -2 bps (inverted), 2s10s flattened -6 bps to +14 bps, and 2s30s was -7 bps flatter to +42 bps following yield declines of -18 bps in 5yrs (2.69%) and 10yrs (2.85%) and -19 bps in 30yrs (3.14%). For the reasons cited above, Munis in 5yrs to 30yrs underperformed...
Munis look somewhat less attractive following last week’s strong rally, but should maintain a firm tone through year-end due to favorable market technical factors, including higher absolute yields (+20% YTD), strong Dec. and Jan. coupon reinvestment, slowing global growth, and slightly negative net supply. The macro risks to our view include fair-to-rich Muni credit spreads and ratios, still bloated dealer balance sheets, ongoing market volatility, Fed balance sheet taper, inflation, and higher Treasury supply to fund the Federal deficit. Provided interest rates remain somewhat range-bound, the MMD curve’s steepness through...
This week continues last week’s theme of solid gross supply with $9.3 bil. on tap. The negotiated market is led by $1.64 bil. NY Dorm PITs, $535 Northern CA Energy, $430 mil. IL Tollway, and $400 mil. LA DWP. Competitively, the largest deal is $390 mil. Washington Suburban San. This week’s new issue should do well given a variety of different names coming to market. Gross supply YTD is $306.4 bil, or -18% YoY and 30-day gross supply is +$9.8 bil., which in Dec (ex-2017) historically represents...
This week’s major data release is on Wed when the BLS releases CPI for Nov as the market is expecting headline CPI to be +2.2% YoY (vs Oct’s +2.5%). There are no Fed speakers scheduled ahead of next week’s Fed meeting, although there will be plenty of other catalysts, including the...
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SAMUEL A. RAMIREZ & COMPANY, INC.
QUARTERLY MACROECONOMIC OUTLOOK
FINANCIAL STRATEGIES GROUP – 2nd QUARTER 2018
Please find attached Ramirez & Co.’s Quarterly Macroeconomic Outlook. In our report, we continue to monitor the US economy, global events and the Fed’s outlook on the economy and rates:
- Almost a decade after the onset of the Great Contraction of 2007 – 2009, the Fed deserves an “honorable mention” for achieving its dual mandate of full employment and price stability – the cries of naysayers notwithstanding.
- And now, the Fed is on to its next phase of gradually raising the federal funds rate to around 3% and passively contracting its balance sheet.
- Market participants who are bullish on the economy think that 10Y Treasuries will move up to a fair-value yield of 4% as the term premium rises, while forecasters who are bearish on the economy think that the 10Y yield will move around an anchor of 3%, possibly because of still expanding foreign Central Bank balance sheets and strong global demand for safe assets.
- Risks on the horizon entail rising US debt-to-GDP levels, financial market distress due to “trade wars” or “overpriced assets,” pressures on the short end of the yield curve primarily due to increased US Treasury funding needs and worries about a flat or an inverting yield curve signaling an impending recession.
- The question remains whether the Fed will be able to smoothly navigate around the risks mentioned above. Consensus is emerging that the Fed’s balance sheet will not contract as sharply as initially expected.
Members of our Financial Strategies Group, Niso Abuaf, Konstantin Semyonov and Duncan Sinclair, would be happy to discuss further any of the material with you.
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