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March 04, 2024
January 29, 2024
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Financial Industry Insights from Advisors Asset Management
On March 28, 2022
AAM Viewpoints — Using Fund Outflows to Our Advantage
Outflows and future rate hikes continue to be the driving force of the municipal market. Last Monday, Federal Reserve Chairman, Jerome Powell, expressed his willingness to raise rates by 50 bps (basis points) should the inflation pressure call for it. This prompted more outflows from municipal bond funds. This has many looking for a crystal ball to see what the future may bring. That may come in the form of the new issue market. March has historically been a difficult month for interest rate products and March 2022 was no exception. We have seen the 10-year Treasury go from 1.72 on March 1 to a 2.38 on March 22. Historically, the most difficult period in a hiking cycle has been just before the first hike. After the first hike, we tend to get more stabilization in yields and a flattening of the curve. How are municipalities reacting to this environment? With an expectation of rising rates, you would think that many municipalities would be running to the market to issue debt while rates are still low on a historical basis. However, January saw a 15% decrease in issuance from the previous year and February was down 29% year over year. One of the main factors for this could be that municipalities are flush with cash from both tax revenues and government handouts as a result of the Infrastructure Investment and Jobs Act. 2021 saw more upgrades from the ratings agencies than downgrades, reinforcing the idea of increased credit quality within the municipal space. California alone beat revenue projections by $17.5 billion in the first eight months of their fiscal year. Municipalities simply do not need the money.
The week of March 21 saw municipal issuance tick up to a weekly supply of $7.7 billion. A healthy amount, but still behind 2021 averages. The calendar was headlined by a multi-hundred-million-dollar New York State general obligation bond and a multi-hundred-million-dollar Illinois bond. Because of the size of these deals, they were priced to “clear the market” (a term used to price an issue where supply = demand leaving no leftover balances). This type of pricing can cause a dislocation in pricing as dealers are desperate to “clear the market” with very little institutional support, which in turn creates a great potential opportunity for the retail investor. As larger deals continue to put pressure on the market, it will no doubt affect smaller issues and secondary offerings. In the next few weeks, retail should be able to pick up some nice yield with attractive ratios to Treasuries, while funds are forced to sit on the sidelines. Some analyst expected fund outflows to start to stabilize at the beginning or middle of April. As this happens, and funds jump back into the market, we should expect some pressure on ratio to Treasuries to occur. CRN: 2022-0304-9843 R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.
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