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Federal Reserve Chairman Ben Bernanke spoke, markets listened, and little changed.  The week ended August 26, 2011 saw light municipal bond trading activity at the peak of the summer doldrums, with some market participants hanging on Bernanke’s every word, while others may have been more concerned with getting their children back to school, or getting in some much needed vacation time.  Bernanke’s speech in Jackson Hole may not have had the substance to shock markets, however it did provide direction on how the government should act moving forward, from an economic perspective.

 Bernanke took a rather centrist route in his speech, acknowledging certain economic themes among both democrats and republicans.  In regards to spending, “U.S. fiscal policy must be placed on a sustainable path,” however, we cannot, “disregard the fragility of the current economic recovery.”  The U.S. is in an environment where spending has increased over the last decade, particularly in healthcare and defense, while being funded with tax cuts.  That does not work.  For the long term health of the economy, we need to decide whether or not tax-payers want to fund all of the essential services that the government provides. 

 If the U.S. decided to balance the budget today, approximately 9% of GDP would be wiped out, which has the risk of shocking markets.  A rebound among the housing market and the middle class job market could go a substantial way towards more stable long-term economic growth.  Some feel the biggest takeaway from Bernanke’s speech was the affirmation that the federal funds rate could remain in the 0 – 25 basis point range for another two years to help stimulate economic growth. 

 The municipal bond market is gearing up for a plethora of new issues.  The State of California is coming back to the new issue market in the following weeks with revenue anticipation notes expected around September 15th, general obligation bonds expected around September 16th, and public works bonds expected in mid October.  While this year’s California budget debacle has been creatively solved, again, looming future shortfalls are likely to persist, and could require significant, painful structural changes to be sustainable for the long term.

 Gauging the local markets, many municipalities are making the tough decisions to pair back expenses in response to declining revenues over the last few years.  As new tax receipts come in, some are greater than expected, but others are continuing to struggle.  The City of Hercules recently received a letter for the State of California’s Controller, John Chiang, ordering an investigation into some inconsistencies in their financial reports.  This, on top of past reports of fraud, abuse, and misuse of funds make the City worth keeping an eye on.  Alamo Capital specializes in the California municipal bond market, and has strong resources to understand the financial stability of local municipalities.  If there is a municipal credit in your portfolio that you would like to have a better grasp on, reach out to your Alamo Capital representative today. 

 10-year municipal bond yield curve comparison

 
  AAA AA A BAA
8/26/2011 2.26% 2.51% 3.23% 4.25%
7/26/2011 2.68% 2.91% 3.61% 4.61%
5/26/2011 2.65% 2.89% 3.77% 4.66%
2/25/2011 2.99% 3.22% 4.05% 5.05%
8/26/2010 2.17% 2.33% 2.92% 3.96%

Source: www.TM3.com (8/29/11)

Billy Schmohl
Investment Information Coordinator

 

This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.

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