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Munichain Market Perspective #4

By Matthew Gerstenfeld
Market Perspective

New issue activity will remain steady as market participants navigate evolving economic data coupled with rising interest rates. Inflation across the nation continues to climb, outlined by last week’s CPI report which posted +8.3% for the month of April, marking the highest inflation level since the early 1980’s. The pace of inflation continues to hinder national economic recovery after the Fed’s flexible mentality towards monetary policy resulted in a flood of money injection to stimulate growth.

Recent macro market volatility has played a major factor behind volume performance, highlighted by issuer pricing apprehension and corresponding subdued activity across the primary arena. As costs for goods and services surge, state and local governments have been actively modifying budget forecasts in order to account for higher operating expenditures. Financing activities are bound to accelerate as issuers become acclimated to higher rates and seek to issue debt ahead of any further FOMC rate hikes.

US treasuries strengthened over the course of last week, tightening across the curve with the five and ten year tenors falling beneath 3%. Muni benchmarks underperformed the movement in treasuries, bear steepening by 6-10bps with the 30YR ratio hovering 106% to the UST long bond. Fluctuations in ratios have presented opportunity for yield-focused investors seeking to take advantage of higher returns to ladder portfolios and maximize tax-exempt benefits.

Weaker supply has presented challenges for sell side participants seeking to take down inventory for stock with secondary market trading activities fading relative to levels witnessed last year. Mutual funds have also witnessed weakness as accounts adjust to an ascending rate environment while strategically offloading older positions. Looking ahead, participants will remain focused on volume levels and fluctuating credit spreads amidst a challenging market environment.

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