by Gayl Mileszko

We live in an era when past history is being denounced, flags and monuments buried, and classic old books and movies pulled from the shelves as perceived evidence of systemic racism. One fellow who paid a pretty sum to send his pre-teen daughter to a prominent prep school in New York felt that school leaders were going too far with sudden changes to the school’s curriculum and admissions requirements. He categorized the new policies as mob appeasement and sent a thought-provoking letter expressing his opinion on the woke wars and cancel culture to other parents at the school, entreating them to make their views known to the administration and board. His words soon went viral, stirring emotional responses and revealing how differently we view civic-mindedness.

The Pandemic has certainly magnified some big social, economic and political gulfs in our society that cannot be ignored. But as a republic, as a nation, we will always have certain continental divides. Every generation has stories about the societal changes and challenges we have encountered, fought, adapted to, and overcome. For those of us who grew up in the 1970’s, we had the crises of the Vietnam War, Watergate, double-digit inflation and energy shortages. But this was the decade in which we built the Sears Tower, invented floppy disks, digital wristwatches, portable cassettes, cell phones and voice mail, recorded great music, and passed a gender equality law. We took inspiration from the perfect wins by Mark Spitz, Nadia Comaneci, the Miami Dolphins, Billie Jean King, and Secretariat. We escaped by reading J.R.R. Tolkien fantasies and Agatha Christie mysteries, and by watching movies like the Godfather and Rocky. And we were able to laugh at ourselves and all the stereotypes portrayed in Blazing Saddles, the off-color comedy which has been deemed – at least for now – “culturally, historically, or aesthetically significant” by the Library of Congress and preserved in the National Film Registry.

It will be several decades before historians assess the moment in which we now live and document the social and political highlights and lowlights of this Pandemic era. In retrospect, economic conditions will be the focus for many. Reference will be made to the blazing hot financial markets that categorized the start of the decade, in spite of everything else, stoked by unprecedented central bank interventions and fiscal stimulus. In the depth of a worldwide recession, an endless series of records is being set. Given assurances of more bond-buying and rate controls for the next few years, there may be no stopping the rallies as the recovery takes hold. For new investors unaccustomed to volatility, the day-to-day performance are often jittery with dips and bumps driven by virus case reports, corporate earnings announcements, and weekly government data almost always released with a positive spin. There are also numerous technical factors, policy decisions involving negative interest rates by other central banks, and unexpected events like the situation with Ever Given, that massive container ship that clogged one of the world’s most vital waterways for six days and affected billions of maritime commerce.

Straddles, for those unfamiliar with the official definition, are typically strategies used by traders who anticipate a big move in the price of a stock but want to hedge their bets as to whether it will go up or down. So straddling is a neutral strategy involving the simultaneous buy of a put option and a call option on a stock with the same strike price and expiration date. The straddler profits whenever the stock rises or falls from the strike price by an amount that is more than the cost of the premium. In the current market, we are seeing a different type of straddler – the equity buyer that also likes higher yielding municipal bonds. This is typically a higher income individual residing in a high tax state who likes the dividends and returns of equities but seeks offsetting tax-exempt income and relative safety, mostly from essential public purpose bonds issued with both state and federal tax exemptions paying semi-annual interest and pledging the return of the original principal at maturity. He or she sees the muni market as solid, fairly liquid, and social good-promoting, one that has been rising with — although uncorrelated to — stocks. This investor might straddle other sectors and asset classes as well; CCC-rated corporate bonds, leveraged loans, bitcoin, and even non fungible tokens (NFT), units of data stored on blockchain that commodify and certify digital assets in art, music and sports, for example, as unique.

Municipal bonds have been in particularly great demand, and the clamor for tax-exempt coupons (if not yields) of 5% continues. High-yield municipal bond mutual funds just reported a record $1.28 billion of inflows, breaking a record set in January. In the week ended April 14, muni funds in total took in $2.255 billion. Exchange-traded muni funds reported inflows of $478 million, after having added $350 million in the previous week. Fund assets under management have surpassed $900 billion for the first time and inflows this year have already surpassed the 12-month total for 8 of the last 11 years. In this context, fund portfolio managers, like individual buyers, are understandably having a hard time sourcing product. The supply calendar continues has been light, typically running between $6 billion to $8 billion a week, much lower during holiday-shortened trading sessions. Prices continue to escalate in the primary and secondary markets. The one-year AAA muni yield is at an all-time low of 0.05%.

Some Members of Congress are straddling the fence, but there is non-stop tax talk coming out of Washington. It has many families searching for tax-advantaged investments. The last round of state and local stimulus has bolstered the finances of many frequent borrowers and investors heavy with cash see municipal credit outlooks as improved. Credit spreads continue to compress, so any coupon or call structure that offers additional yield is being bid up. Few muni investors are deterred by the recent gyrations in the Treasury market and auction results. At the close on Tuesday, the 10-year AAA muni general obligation bond yield stood at 0.93% or 60% of the comparable U.S. Treasury yield at 1.56%. The 30-year muni benchmark yield at 1.55% was 69% of the comparable Treasury at 2.25%.

Last week, Florida’s Capital Trust Agency sold $859.6 million of non-rated charter school bonds structured with a 2056 maturity that priced with a coupon of 5.00% to yield 4.00%. The Arizona Industrial Development Agency brought a $33.4 million charter school financing for BB rated Somerset Academy of Las Vegas featuring 2051 term bonds priced at 4.00% to yield 3.22%. The California School Finance Authority had an $11.8 million non-rated charter school social bond issue for iLead Lancaster with a 2061 maturity priced at 5.00% to yield 3.64%. And the Public Finance Authority brought a $9.8 million non-rated transaction for Davidson Charter Academy with a single maturity in 2056 priced with a rare 6.00% coupon and an even rarer discount o yield 6.432%. Among other high yield financings, the Cleveland Cuyahoga County Port Authority came to market with a $250.5 million taxable federal lease revenue bond issue for the Veterans Administration Health Care Center that priced at par to yield 4.425% in 2031. The California Community Housing Agency issued $174.1 million of non-rated essential housing bonds due in 2056 with a 4% coupon yielding 3.05%.

This week, we expect the biggest calendar of the year at $10 billion with a significant percent coming as taxable. So far this year, approximately $41.6 billion of municipal bonds have been issued as taxable or with corporate CUSIPs, up 16% over the amount in 2020. California is issuing general obligation bonds with a 5-month forward delivery date, the largest such forward settlement on record and the latest of $5 billion sold in 2021. The State of Connecticut is also coming with $145 million of special tax obligation transportation infrastructure refunding with a forward settlement in mid-October. Approximately eight financings designated as green, social and sustainable bonds are scheduled for sale. But higher yielding offerings are sparse. Three more charter schools plan sales. At this writing, the Dow is up 2.5% so far in April, the S&P 500 and Nasdaq are up more than 4%. The Russell 2000 has declined by 1.45% while oil is up 5.5%, gold is up 3.8%, and silver is up 6%. Bitcoin is down about 5% but Dogecoin, the meme cryptocurrency created as a joke, is blazing new trails with a market cap of $54 billion, one that exceeds that of Ford Motor and Kraft Heinz.