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September 17, 2018

Municipals followed Treasuries lower on the week and posted mixed performance as optimism on US economic growth buoyed equities (led by tech and energy) in favor of bonds. The S&P 500 equity index gained 116 bps (+865 bps YTD) as the 10yr Treasury yield rose 7 bps to 3.01% on Friday, sending the Treasury index down -25 bps (-146 bps YTD). The Main Muni index ended down -18 bps and erased positive gains on the year (-4 bps YTD). The primary Muni calendar last week ticked up...

Markets last week focused on decade-high wage gains of 2.9% YoY as reported in the prior week’s Aug jobs report as investors mostly shrugged off the week’s negative headlines, including escalating US-China trade tensions, a lower-than-expected Aug Core CPI reading of 2.2% YoY, soft Aug retail sales (0.1% MoM), lower EU growth forecasts (ECB left rates unchanged), and Hurricane Florence hitting the Carolinas. Wage gains are viewed by investors as the...

Muni’s mixed performance on the week largely maintained valuations at rich-to-fair levels vs Treasuries, with only the 30yr ratio ending slightly cheaper vs the prior week at 100.5%. Munis inside 10yrs continue to benefit from very strong retail demand due to flatness of the MMD curve while intermediate and long-dated maturities (~15yrs+) have weaker sponsorship due to the absence of significant bank and insurance company participation following tax reform. Ratios need to get cheaper by least another 2-3 points in the 15yrs to 30yr part of the curve to materially entice investors to support longer duration given the still very flat MMD 2s30s at only...

We particularly like selling Muni High Yield into current market strength to capture gains at this time as we think bonds in this sector are vastly overbought at a spread of...

Muni gross supply this week is higher than average again at $7.3 bil., led again by a mosaic of different names in both the competitive and negotiated markets. The negotiated space is led by $1.63 bil. TX Water Dev, $500 mil. State of CO, $325 mil. Long Beach, CA, $253 mil. Fairview Health (MN), and $252 mil. Great Lakes Sewer. The competitive space is led by $675 mil. MD DOT. Total gross supply YTD is $227.6 bil., or  -12% YoY, which is surprising to the upside due to 8% YoY increase in new money issuance. For now, we are maintaining our full-year 2018 supply projection at...
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Quarterly Review


Dear Clients,

Please find attached Ramirez & Co.’s Quarterly Macroeconomic Outlook. In our report, we continue to monitor the US economy, global events and the Fed’s outlook on the economy and rates:

  • Almost a decade after the onset of the Great Contraction of 2007 – 2009, the Fed deserves an “honorable mention” for achieving its dual mandate of full employment and price stability – the cries of naysayers notwithstanding.
  • And now, the Fed is on to its next phase of gradually raising the federal funds rate to around 3% and passively contracting its balance sheet.
  • Market participants who are bullish on the economy think that 10Y Treasuries will move up to a fair-value yield of 4% as the term premium rises, while forecasters who are bearish on the economy think that the 10Y yield will move around an anchor of 3%, possibly because of still expanding foreign Central Bank balance sheets and strong global demand for safe assets.
  • Risks on the horizon entail rising US debt-to-GDP levels, financial market distress due to “trade wars” or “overpriced assets,” pressures on the short end of the yield curve primarily due to increased US Treasury funding needs and worries about a flat or an inverting yield curve signaling an impending recession.
  • The question remains whether the Fed will be able to smoothly navigate around the risks mentioned above. Consensus is emerging that the Fed’s balance sheet will not contract as sharply as initially expected.

    Members of our Financial Strategies Group, Niso Abuaf, Konstantin Semyonov and Duncan Sinclair, would be happy to discuss further any of the material with you.

    Full Quarterly Report