Markets were up big today on news out of China. The day started with Chinese stocks surging on news from the government—Chinese state media told its people that they should load up on stocks. This sent hopes for a recovery soaring around the global and markets rose strongly. Beyond the state’s endorsement, the Chinese economy does seem to be dong well. “In recent weeks the data has looked very positive from China. Its economy is back in motion, and that should lift global equities a bit”, summarized Principal Global Investors chief strategist, Seema Shah.
FINSUM: The state media announcement seems a bit hollow, but since real economic data in China appears to be improving, the overall direction looks positive.
There is alarm growing among muni bond investors as credit quality continues to deteriorate. During COVID there has been a widening gap in pension deficits among municipalities, and investors are keeping a close eye because it is leading to deferred pension payments. This is troubling for a number of reasons. Firstly, it digs municipalities into a bigger hole because they must pay interest on deferred payments; and secondly, it spooks bond markets and makes it harder for them to access liquidity. In other words, deferred pension payments, such as the nearly $1 bn one New Jersey elected to do in May, dig muni issuers into a deeper and deeper hole.
FINSUM: Pension recipients are very likely to be considered senior to bondholders, so this is a very alarming situation for investors.
One of the best ways to watch the damage to the economy is to monitor the performance of consumer debt. Auto loans, student loans and beyond give a clear indicator of the health of American finances. Right now, the data is looking bad, reinforcing why this might be a long and difficult recovery. According to the WSJ, “Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S … The largest increase occurred for student loans, with 79 million accounts in deferment or other relief status, up from 18 million a month earlier. Auto loans in some type of deferment doubled to 7.3 million accounts. Personal loans in deferment doubled to 1.3 million accounts.” The total of deferments is triple the number from the end of April. Lenders, who have generally been accommodative to this point with borrowers, expect delinquency to soar later this year.
FINSUM: You cannot have 50m people—roughly a third of the US workforce—lose their jobs and not have any repercussions. This is the kind of data that makes stock indexes look rather ludicrous right now.
You might not pay much attention to them—most don’t—but closed end muni funds are an excellent deal right now. They are offering high yields relative to other fixed income peers. For example, you can readily get 5% yields on CEF muni funds, equivalent to an 8.45% taxable yield if you are in the top tax bracket. And to be clear, these are not junk muni bonds. The reason yields are so strong is leverage gained from borrowing money at short-term interest rates and buying longer-term bonds. That usually creates a risk that short-term rates could rise, causing losses. However, given the Fed’s position right now, that seems highly unlikely.
FINSUM: This is an ideal time to by CEF muni funds given the low rate risk and solid overall yields. Check out BlackRock’s MFT (5.39% yield), Putnam’s PMM (5.18%), or BNY Mellon’s LEO (5.56%).
Muni bonds are seeing yields way above average right now even as Treasury bonds linger near all-time lows. The reason why is that it is increasingly apparent that there has been a huge erosion in municipal credit quality alongside the lockdown. Costs have surged at the same time as revenues have plummeted, leading to a significantly deteriorated financial picture for municipal issuers. The has been exacerbated by the fact that municipalities have largely been unsupported by the Fed as opposed to corporate issuers. But the sell-off has created opportunity, as even AAA issuers are seeing big discounts and much higher than usual spreads to Treasuries.
FINSUM: This is all about careful credit selection, as there are big opportunities, but there may also be major pitfalls.
The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.
FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.