Double Dip or Soft Landing

Posted on Centerlines Blog on Oct. 16 by Liying Gu
During today’s Finance Committee meeting, Ira Smelkinson of Morgan Stanley and Jason Simmons of Piper Jaffray provided an overview of the financial, municipal bond and airport bond markets.

According to Smelkinson, equity market continues to exhibit high volatility and U.S. Treasury continues to be safe heaven not withstanding ratings downgrade of U.S. credit rating. Opinions differ as to whether the U.S. economy is heading for “double dip” or “soft landing.” Since 2008, corporate, household and bank balance sheets have grown stronger.

The municipal bond market sees reduction in new issue money by 34 percent to date this year. New money issuance represents 50 percent as opposed to last year’s 64 percent. Interest rate remains low at last year’s comparable level. Tax-exempt bond markets have been extremely volatile. Cheapness of municipal bond has led some issuers to use taxable rather than tax-exempt bonds as lower cost alternatives. Outflows from municipal bond funds have moderated and funds across all segments see inflow. Tax-exempt credit spreads have remained constant over the last year. Tax-exempt yield curve has flattened in the long-end of the curve. Medium term funds are now the focus and see significant inflow as investors look for higher yields.

Jason Simmons updated the audience on the airport bond market. Issuance spiked in 2010 driven by low interest rates and the AMT holiday and 2011 has seen issuance fall to the lowest level in several years. 2010 issuance was spread among the three most common rating categories, i.e. Aa3, A1, and A2, while issuance in 2011 was primarily in A1 category. 2010 issuance was primarily new money as many airports issued debt to take advantage of the low interest rate environment and the AMT holiday. 2011 issuance has been dominated by refunding activity with new money issuance comprised primarily of $1 billion for Chicago O’Hare. 2010 issuance was primarily not subject to AMT due to the AMT holiday whereas 2011 issuance has mostly been AMT, with the majority of the Non-AMT issued by Chicago O’Hare.