Course Correction

Course Correction

We have been anticipating a turn in the market for some time. While you are out in the boat coming about, the course correction for the market has arrived. The ten-year Treasury bond attained the level of 4.30% yesterday while settling down today to 4.23% as of this writing. ?These rates have not been this high since 2007 and we know how difficult a year that was.

As expected, rates for municipal transactions are also being forced higher. It will be interesting to see whether any of the large deals scheduled for next week will be resized or whether couponing will be reconsidered to a degree. With higher yields, we would expect there to be some stiff competition for some of the maturities due to demand for yields at these new levels.

Issuers will be asking for updates on the new range of yields from their financial advisors. Some issuers may contemplate a sale or the timing of a sale a bit longer than before this turn in the market.

I have been receiving some calls about the recent event in Maui. I am heartbroken by the loss of life and of property. The estimated range for the property damage has been pegged at $5.5 billion to $7 billion on a preliminary basis. These estimates will be refined over time. I have not come across any estimates of how much private insurance will cover at this point.

In turn, we look to how much FEMA will cover and whether any funding will be forthcoming from the state. A recent article pointed out that FEMA is running down its cash position due to the proliferation of natural hazard events. Whether there will be a need to wait for funding from the regular federal budget process or a supplemental appropriation of some kind will need to be determined. The President is scheduled to make a visit to Maui and that visit should make a difference in providing forthcoming funds.

The rating agencies are not quick to downgrade in these circumstances. Much work must be done to assess the damage numbers and FEMA funding and any private insurance. Self-insurance programs may also be a factor for some of the governments.

Lahaina was one key area that was most affected by the fire. The consideration is how much the economic activity in Lahaina has accounted for in the total picture for Maui and for the state traditionally. To what extent the tax receipts will be negatively affected also requires careful consideration. None of the participants want to make rash decisions. However, watch listings and downgrades are possible. We have seen this careful approach in the aftermath of the wildfires in California.

When congress reconvenes after the summer recess, the federal budget will be front and center once again. There are not many days in September when congress will be in session. The presumption is the budget will need to go the route of a continuing resolution.

More importantly, the two parties remain relatively far apart on priorities. Consensus building will be hard won. The debt ceiling consideration has been moved beyond the election but there will still be much carping about debt levels. There may be an upward level on how much debt we may issue eventually, but the anticipated elevated level of paper is not being resisted so far. Higher rates assist in clearing the paper.

There is a long record of providing funding for natural disasters on a bipartisan basis. This time should be no different from the practice in the past.

Given the pace of economic activity and inflation that has not been susceptible to declining sharply, we would expect the Fed to hold firm on rates for the remainder of this year. At best, perhaps we have an additional pause. The Jackson Hole meeting should be informative on these points.

John Hallacy

John Hallacy Consulting LLC

08/18/23