Excerpt from The Bond Buyer…

Municipal market contemplates fallout from banking crisis

By Yvette Shields, Christine Albano, Chip Barnett, Caitlin Devitt, Connor Hussey, Jessica Lerner, Thomas Nocera, Gary Siegel, & Keeley Webs

Quoted: John R. Mousseau, CFA & David W. Berson, Ph.D.

The banking sector crisis cast a wide net of influence over the municipal market this week, stirring pricing volatility, upending monetary policy predictions and raising questions among participants over how deep the troubles run and whether the potential contagion will roil economic prospects.

"The failure of Silicon Valley Bank along with Silvergate Bank and the Signature Bank of New York has created what is possibly an inflection point in the bond markets," John Mousseau, president and director of fixed income at Cumberland Advisors, wrote in a commentary Wednesday noting the flight to quality. "The effect on the fixed-income markets has been nothing short of astonishing."

The Federal Reserve has lifted interest rates by 4.5 percentage points over the last year and, ahead of the SVB collapse, analysts believed a strong employment report had upped the odds of a 50-basis point rate hike.

With the failures, the market is now expecting a 25 basis point hike or a pause.

"There is no question that the Fed wants to see the current turmoil in the market calm down before resuming any hiking program. Whether the Fed does raise rates will be data dependent, but all of the above amount to a brew of statistics signaling lower economic activity," Cumberland's Mousseau wrote Wednesday.

"The expected recession is now more likely and will probably occur sooner" perhaps by mid-year and the downturn "may be more severe than previously expected, given the stresses in the banking system," said David Berson, chief U.S. economist at Cumberland.

"Given this outlook, the Fed is likely to tighten only one more time, at the March 21-22 FOMC meeting. It is certainly possible that there will be no tightening at that meeting, but given still rapid inflation and continued economic growth, a 25 basis point move is more likely," Berson wrote Thursday.

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