By John Kirby, Investment Officer
After the January Georgia Senate runoff elections and the presidential inauguration, the Democrats officially have control of the Presidency, the House and the Senate (by the narrowest margin possible). What does that mean for credit union investors?
For the most part, conditions are likely to remain much the same. The Federal Open Market Committee (FOMC} expects to remain actively involved in the markets, and there is zero indication they will raise rates anytime soon or adjust their asset purchase program. You can still largely expect low short-term rates, limited short-term supply and continued spread compression in amortizing securities.
However, a few things may look different as 2021 continues:
More deposits
The original stimulus deposits from this spring’s massive Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, ended up being stickier than most financial institutions expected. Over the subsequent seven months and right up until the last week of 2020, Congress failed to pass additional legislation – mostly a resistance to additional spending – even as millions were out of work. Then came the $600 checks that flooded your balance sheets at the beginning of 2021.
The second week of January, then President-elect Biden announced his new stimulus plan to the tune of $1,400 per income-qualified American, plus billions more for businesses, vaccine distribution, etc. Without treading too far into the political ether, most would probably agree that Democrats are less averse to spending than their GOP counterparts, so with Biden now in office, we may see more financial stimulus, provided the initial measure passes both chambers of Congress.
Beyond the $600 payments and the potential $1,400 payouts, there may be more individual assistance as the year goes on, especially if vaccine distribution fails to slow the spread of the virus and the pandemic continues.
Safer municipal bond purchases?
For some brokers, but not all, municipal bonds have been a point of contention for the better part of 2020 into 2021. The reason is the expected revenue shortfalls from a reduction in local sales tax income related to COVID-19 business closures and shutdowns.
Until Biden’s stimulus announcement, it was unknown whether local municipalities would receive additional federal aid to supplement those revenue shocks, as additional funds for state and local governments were not included in the year-end stimulus deal. Now that Biden has announced $350 billion in additional aid for those entities, it remains less of a question mark, but risks remain.
It’s not that anyone is expecting a slew of defaults, but in the context of your individual investment policies, a credit downgrade could cause more headache than it’s worth if you end up having to sell a municipal bond to stay in compliance with your policy.
The horizon looks safer for municipal markets, but we’re still a long way from the finish line, so it remains a “caveat emptor” market for investors.
Higher interest rates
Higher rates are not anticipated on the short end, as the FOMC is committed to keeping short-term rates anchored near zero. The good news is that the yield curve has steepened quite a bit since the Georgia races were decided the first week of January, creating some strong yield opportunities on the intermediate-to-long part of the curve. The 10-year Treasury yield has jumped as much as 25 basis points since January 5, as traders priced in additional stimulus spending on behalf of the Democrat-controlled government.
Traders are betting the additional money they expect Democrats to spend – funded by Treasury bonds, of course – will be inflationary, leading to an eventual market-driven increase in rates as the Treasury increases coupons to sustain demand. I find that claim somewhat dubious, considering the already immense levels of outstanding U.S. debt accrued in recent years have yet to budge inflation anywhere near the FOMC’s sustained two percent target.
However, in her Senate confirmation hearings as Treasury Secretary nominee, former FOMC Chair Janet Yellen opined that now is a good time to issue additional long-term Treasuries due to low interest rates. So, additional stimulus seems likely at some point this year. Whether it’s inflationary remains to be seen.
As always, Catalyst Corporate’s team of seasoned brokers is positioned to help credit union investors weather the storm. If you’re interested in setting up a plan to address potential new market conditions, contact us today.
All securities are offered through CU Investment Solutions, LLC. The home office is located at 8500 W 110th St, Suite 650, Overland Park, KS 66210. CU Investment Solutions, LLC registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934. CU Investment Solutions, LLC is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.