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Munichain Market Perspective #12

By Matthew Gerstenfeld
Market Perspective

Primary supply is slated to remain modest this week, with the majority of new issue supply flowing from Texas education bonds. Lackluster volume to kick off August highlights a persistent slowdown in state and local government debt issuance following July’s performance which fell significantly below 2021 figures despite summer redemptions.

Greater apprehension on behalf of state and local governments to price new issue deals should come at no surprise given the increased cost of capital and volatility across benchmark levels. In either case, inflation continues to run hot with the most recent CPI of 9.1% peaking to 40 year highs. Although the Fed is actively raising interest rates and strategically implementing quantitative tightening measures to bring down inflation, market conditions have yet to react accordingly.

The risk associated with active central bank policies lies between overextended maneuvers which propel the economy into a recession. Despite the well defined drawbacks of government-led measures to return to pre-pandemic CPI, central bankers appear to discount the potential of a recession and often defer to positive unemployment statistics.

While unemployment figures are generally strong given present economic conditions, such data represents the past and is not indicative of future outcomes. As time elapses, investors are actively monitoring the progression of the Fed’s activities which have yet to be successful in slowing down inflation.

With greater focus on benchmark movements, US treasuries bull steepened over the course of last week’s session with the 5YR tenor tightening by 19 basis points to 2.70% sitting slightly above the 10YR tenor which finished the week at 2.67%.

Muni benchmarks showcased mixed performance relative to treasuries, with the greatest movement noted in the belly of the curve. Muni/UST ratios shifted accordingly with the 10YR and 30YR standing at 83% & 96% respectively.

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