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Munichain Market Perspective #5

By Matthew Gerstenfeld
Market Perspective

New issue activity will remain quiet over the Holiday-shortened week as participants battle large fluctuations in yields coupled with lackluster supply levels relative to years prior. As investors navigate a complex landscape, economic stability and growth remains a focal point among public and private sector participants seeking to address financing needs.

Government-led initiatives to foster a stronger economy have resulted in greater volatility throughout macro markets, as investors adjust holdings accordingly to factor risk tolerance and yield appetite. Following the most recent rate hike, FOMC officials reaffirmed an aggressive stance towards restoring price stability, with two additional 50 basis point rate increases forecasted in the coming months.

Costs for basic goods and services have skyrocketed in recent months, with the price of fuel hitting all-time highs of $7+ in California, placing tremendous strain on American families. Food prices have also surged with levels approaching +11%, marking a challenging atmosphere for the average worker who faced a ~2.5% pay cut as a result of inflation within the past year. As concerns mount over the state of the economy, the impending risk of a recession presents a major obstacle in order to return to pre-pandemic economic levels.

US treasuries bull steepened over the course of last week’s session, with the 5YR tenor tightening 17 basis points to 2.71% coupled with the 10YR & 30YR tenor hovering at 2.74% and 2.97% respectively. Muni benchmarks significantly outperformed treasuries with a bump of 42 basis points noted across the curve, presenting opportunity for retail and institutional investors seeking to put cash to work across various credits.

Muni/UST ratios reacted to last week’s hefty pull back in benchmarks, with the 10YR and 30YR ratios standing at 91% and 96% respectively, falling below the 100% level witnessed in the weeks prior. Despite the wide shift in ratios, mutual funds continue to witness persistent outflows as select accounts stick to the sidelines in order to evaluate opportunities within the primary landscape.

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