Market Commentary: Fifty Fifty

By Gayl Mileszko

Fifty Fifty

LA Dodger superstar Shohei “Shotime” Ohtani recently became the first player in baseball history to hit 50 home runs and steal 50 bases within the same season. The 30-year-old set this record in the 7th inning on a 1-2 count at the Miami Marlins’ LoanDepot Park with a 391-foot hit off a knuckle-curve that landed in the Recess Sports Lounge just beyond the left-centerfield fence. The nine-inning game on September 19 ended with a 20-4 score and will perhaps go down in history as the single greatest day in the history of pro baseball. The crowd in Miami recognized this. They made the “Sho-stopper” come out of the dugout to take a bow, and gave him a long-standing ovation. One Miami fan walked away with the record-setting ball but the 6-foot four inch, 210-pound Dodger has since gone on to hit three more homers and steal 5 more bases. His team has clinched a playoff berth and Ohtani, the newly married native of Oshu, Japan with a $700 million, 10-year free agent contract, is on track to become the first full-time designated hitter to win an MVP award.

Divisions and Splits

In Japan, Ohtani was known as a “yakyū shōnen” —a kid who lives, eats and breathes baseball. Here in the U.S., we have hundreds of grown-ups living, eating and breathing politics right now. The U.S. has basically been a 50-50 country since 2000. Many polls show the presidential candidates as neck-and-neck with only six weeks to go to Election Day. The House and Senate are each split almost exactly along party lines today and control of the next session’s chambers appears likely to switch. On Wall Street, the financial markets have been living, eating and breathing rate cuts for the past year; on the eve of the Federal Open Market Committee decision last Wednesday, forecasters were just about evenly split on the size (25%? 50%) of the cut in the fed funds rate. All but one of the voters went with a 50 basis point cut while trying to assure the world that inflation is coming down, the labor market is at solid levels, and the unusual cut was not being made due to a substantial weakening of the U.S. economy. A significant number of investors believe that the Fed has been swinging and missing for far too long, but the cut announcement made a big hit in the markets. Just about everything rallied in response – except Treasuries, mortgaged-backed bonds, taxable munis, and iron ore.

HJ Sims in the Market as Fed Cuts 50 Basis Points

Just hours before the Fed rate decision, HJ Sims came to market with a $25.4 million financing through the Arlington Higher Education Finance Corporation for Leadership Prep School, a K-12 public charter school with 1,400 students in Frisco, Texas. The revenue bonds were guaranteed by the Texas Permanent School Fund and bore a triple-A rating from Moody’s. We structured the bonds with eight years of serial bonds and five term bonds; the final maturity in 2059 priced with a coupon of 4.25% to yield 4.50%. Amid other deals on the $9.1 billion slate, the Lee County Industrial Development Authority brought a $98.6 million BBB+ rated financing for Shell Point Obligated Group in Fort Myers, featuring 2054 term bonds priced at 5.00% to yield 4.38%. The North Carolina Medical Care Commission had a $25.3 million BBB-minus rated transaction for EveryAge in Newton, including a final maturity in 2054 priced at 5.00% to yield 4.70%. New York’s Broome County Local Development Corporation sold $16.3 million of non-rated student housing improvement and refunding bonds for SUNY Broome Community College in Binghamton, which priced at par to yield 7.125% in 2054.

Odds of A Recession Fall Below 50% For Most Forecasters

Going into 2024, a majority of business economists surveyed by Bloomberg saw the odds of a recession running as high as 50%. The odds have since fallen with JP Morgan last assigning it a 35% chance, and Goldman Sachs pegging it in the range of 25%. In response to the Fed’s announced recalibration of policy and the release of a “dot plot” reflecting a forecasted series of additional cuts, equity markets continue to see a soft landing for the economy. The Dow has set a new record of 42,000, and the S&P 500 has climbed above 5,700 for the first time. Equity ETF’s took in a whopping $41.1 billion last week. However, many others see softness in labor market trends. There are troubling signs in the latest report from global bellwether Fedex, which missed quarterly estimates and lowered its annual guidance. The price of gold, a haven in times of economic uncertainty, continues to reach new highs, currently at $2,655 an ounce. The net percentage of small businesses showing quarter-to-quarter growth has fallen below zero for 26 straight months. Manufacturing data is still coming in weaker than expected. Nervous investors, both retail and institutional, still have more than $6.3 TRILLION dollars sitting in money market funds, earning as much as 5.12% according to Crane data. The New York Fed’s latest 12-month probability of recession, as predicted by the Treasury spread, stands at 61.789%.

Market Movers This Week

This week will require traders to focus carefully. There are 18 Federal officials on the speaking circuit and 8 Treasury auctions. Key economic data for release includes PCE, consumer confidence and sentiment, new and pending home sales, GDP, and durable goods. The New York Fed hosts its annual Treasury Market Conference. A strike by 85,000 dockworkers is threatened while Boeing’s 30,000 machinists are in their second week on the picket line. The United Nations meets in New York. China has announced a huge new stimulus drive. Our Congress is working to finalize a short-term funding measure for the government to avoid a shutdown ahead of the elections only six weeks away. The fundraising squeeze is on, campaign ads fill the airwaves, and bold new policies and promises are floated in desperate efforts to attract votes. A hurricane threatens the Gulf Coast. Rockets and warplanes fill the skies over Israel and Lebanon. Worldwide, the picture is dark, but the union of our 50 states – in spite of our divisions – remains the global bright spot.

Yields Fall in September

With the exception of the 7-day SIFMA high grade tax-exempt market index, tax-exempt AAA general obligation bond benchmark yields have all fallen in September. As of the close on Friday, the 2-year at 2.30% is down 15 basis points. The 10-year at 2.63% and the 30-year at 3.52% were each lower by 8 basis points. However, these top-rated munis have underperformed taxable counterparts. The 2-year Treasury yield at 3.59% is down 32 basis points. The 10-year at 3.74% has fallen 16 basis points. And the 30-year at 4.08% is 11 basis points lower. As of the close on Friday, the ICE BofAML Treasury bond index has notched a 1.50% return in September and the taxable municipal bond index is up 1.82%, beating the S&P 500 at +1.05% the Dow at 1.31%, and the Nasdaq at 1.39%. Non-rated munis are up 0.98% in September, and 6.74% year-to-date. Investment grade munis are 0.86% higher in September and +2.46% so far this year.

Technical Support for Muni Market Through Year-End

Municipal bondbuyers are seeing historically high levels of issuance. Volume is already close to exceeding the entire year totals in 2022 and 2023. Consumer confidence indicators may be at 3-year lows, but there is plenty of support for tax-exempts. Several deals coming to market have been up-sized. Many offerings meeting with exceptional demand are being repriced. We will likely see another $40 billion of volume by the time September comes to a close next Monday. This week alone will likely see as much as $17 billion. There have been 12 straight weeks of inflows into municipal funds and only 8 weeks of net outflows in 2024. So far this year, long-term funds have taken in a net of $14.9 billion, and high yield muni funds have added a net of $9.5 billion of assets. Tax-exempt money market fund assets stand at $128.5 billion, up 12% from $114.5 billion one year ago. The fundamentals and outlook for the muni market through the end of the year are all very good.

HJ Sims Private School Offering

HJ Sims is back in the market this week with a $34.7 million non-rated construction financing for La Scuola International School in San Francisco. This is a PreK-8 private, independent school serving 436 students and offering an Italian immersion program. Bonds are being offered in $250,000 denominations to qualified institutional buyers and accredited investors. We invite you to contact your HJ Sims representative to learn more about this offering, our forward calendar, and all of our secondary fixed income market activity. The third quarter of the year comes to a close on Monday, and we look forward to working with you to meet your year-end goals and prepare for 2025. Count on us to give our 100%.