By Gayl Mileszko
Double-A Ball
In the big leagues, coaches say Rule Number One is “Never Be Number Two”. But here we sit, the United States of America, right alongside Austria, Finland, Hong Kong, New Zealand and Taiwan smack in the middle of the second tier of creditworthy nations. For reasons unclear to us, we were suddenly relegated to the minor leagues by Moody’s Investors Service last Friday after the market close. America was downgraded from Aaa to Aa1. If the Moody’s analysts were intending to influence the weekend negotiations over the massive House reconciliation bill, the effort failed. If they wanted to capture headlines, they only got about four hours’ worth after the market opening in New York on Monday.
Leads and Lags
Aside from its outsized hat tip to the Federal Reserve and odd reminders of our long-standing system of checks and balances and respect for the rule of law, there was nothing new in the Moody’s report. It recited all that Main Street and Wall Street already knows about our entitlements, deficit, debt, rising interest costs, and the inability of our elected officials to reverse trends for more than two decades. Treasury Secretary Bessent dismissed the Moody’s action as a lagging indicator, something akin to the unemployment or inflation rates: a measure of what has happened rather than a prediction of future outcomes. Over the weekend, he linked our current fiscal woes to the previous Administration’s profligate spending. On Monday, after a few hours of volatility in the global financial markets, investors settled down and came to side with White House Economic Council Director Kevin Hassert who insisted that “the U.S. debt is the safest bet on Earth,” adding that “There’s no country that I’d rather have than the United States — and so Moody’s can do what it wants to.” He pointed to the spending cuts, waste elimination, de-regulation and supply side growth underway.
Fiscal Bullpen Out of Order
Presidents, legislators, and every citizen paying even a tiny amount of attention have long known that our fiscal house is not in order. The last time we had a balanced budget was in 2001. Our national debt crossed $1 trillion for the first time in 1981 and it surged after the 2008 financial crisis and during the COVID-19 pandemic to the point where it now stands at $36.8 trillion. The central bank held interest rates near zero for so long, we no longer have a sense of what is normal. We have been on a mad borrowing and spending spree. This Administration is focused on upping the economic slugging percentage. But, aside from the Department of Government Efficiency (DOGE), there are very few warm up pitches for major league cuts in mandatory and discretionary spending.
We are Not Yet at the Tipping Point
The big wake-up call, a shock to the global markets, came in 2011, when S&P was the first to dare to take us down a notch, below Germany, Switzerland, and even Lichtenstein, a nation of 40,000 with no debt. But it took another 12 years for Fitch to make its move. They made a cut that shifted the average of the three ratings downward, causing some funds and indices to either change guidelines or revise allocations. But nothing major has truly shaken the markets or demand for U.S. Treasuries. The U.S. is not likely to be upgraded anytime soon since we have not reached that unpredictable tipping point on debt sustainability. Placed in context, global confidence in our ability and willingness to service debt remains high. Washington’s motivation for making massive spending cuts, taxes, sales and benefit changes remains low. What comes next?
U.S. House is in the Batter’s Box
At this writing, the House Rules Committee is focused on the details of amendments that Members seek to offer to the 1,100-page reconciliation measure reported out of the Budget Committee on Monday. No new, dramatic cuts are anticipated. Depending on whose scoring is agreed upon, the debt appears likely to increase. The proposed debt limit will likely be raised by about $4 trillion, the 2017 tax cuts will likely be extended, spending for the military and immigration enforcement will be boosted, and certain Medicaid and energy tax credit cuts will be made. The House Speaker is exerting pressure on his party’s conference to get the bill to the floor, pass it, and send it to the Senate before they recess for Memorial Day. If that happens, the pitching rotation changes, moving the ball to the upper chamber where it takes on a new spin. Lobbyists of every stripe in the stands are following every move. We continue to monitor action being taken in Senate Finance with respect to private activity bonds and the municipal bond tax-exemption. We are all too aware that, between now and the printing of the House-Senate conference committee report, anything can happen during the 9th, 10th or 11th inning.
Different DC Pitching Style
While the Congress does its work, markets are glued to the White House and all the major daily news of executive actions to ink new and more favorable tariff agreements, bring new investment commitments from abroad on shore, clean up waste and fraud in federal programs, and formulate proposals for several key peace agreements. Pitches and news, balls and strikes, walks and hits, come fast and furious. The Moody’s report of May 16 noted mildly that recent months have been characterized by a degree of policy uncertainty. But the U.S- based agency assumes that our institutions and governance will not materially weaken “even if they are tested at times.” We understand that there will be many tests up through the mid-year elections in 2026 and again in the runup to 2028. But for right now, consumer sentiment has plunged to a low not seen since the peak of pandemic trauma in June of 2022, as workers fear job losses and higher inflation. We remain bullish on our bond market and look for media reporting with a “Sell America” narrative to end soon, creating the type of waves we often see in stadiums from cheering fans for their winning team.
In the Global League
In the global league of sovereign yields, the world’s benchmark – the U.S. 10-year Treasury yield — stands at 4.59%. It is the what the world and almost every other interest rate and asset class view as the risk-free rate. Yet, even though our dollar is the most commonly used currency in international transactions and our rates remain the reference point for all other sovereign bonds, our 10-year only trades on par with that of New Zealand. At this writing, our yields are currently 426 basis points HIGHER than those of Switzerland, 196 basis points HIGHER than those of Germany, and 129 basis points HIGHER than those of France.
Municipal Bond Yield Standings
At this writing the 30-year Treasury yield stands at 5.09% for the first time since October of 2023 and, before that, July of 2007. The 2-year AAA general obligation municipal bond yield stands at 2.86%, 6 basis points below the start of the month but 4 basis points higher than where it started the year. The 10-year at 3.34% is flat on the month, but 28 basis points higher year-to-date. The 30-year tax-exempt yield at 4.50% is 12 basis points higher in May, 60 basis points higher so far in 2025, and only 59 basis points apart from the comparable Treasury yield.
Municipal Bond Ratings Higher than US Treasuries
The average rating on the $4 trillion of municipal bonds currently outstanding is the AA range, with an estimated 55% of credits falling into this category. Although some bonds may be downgraded in the wake of the latest action on sovereign debt, 14 states, 22 cities and several institutions including Harvard, Yale, Stanford, and the J. Paul Getty Trust, still boast of Triple-A ratings. Some of these bonds may offer a once-in-a-lifetime opportunity to grab rates higher than those of the U.S government. Some have traded better than Treasuries over the years but there is much focus on relative value right now as the reconciliation bill moves through the process and talk of the approaching debt limit, increasing debt service costs, and spiraling entitlement expenses heats up. The State of Maryland held the triple-A crown, touting the highest ratings from all three agencies, until last Wednesday when Moody’s cut the state a notch to Aa1. So now it is North Carolina general obligation bonds that are viewed by many as the benchmark for all Triple-As. Last week, the City of Albuquerque brought a $65 million AAA rated general obligation bond financing to market and sold its 2040 term bonds with a coupon of 5.00% to yield 4.03%. The Northside Independent School District in Texas brought a $200 million PSF-guaranteed triple-A deal to market structured with a 2050 maturity that priced at par to yield 3.55%. In the non-rated sector, the City of Brainerd, Minnesota issued $44 million transaction for Pinecrest of Country Manor that included 2060 term bonds priced at 6.00% to yield 6.125%.
HJ Sims Market Recap
HJ Sims came to market last week with a $26.2 million non-rated issue for Hozho Academy, a preK-11 charter school in Gallup, New Mexico, affiliated with Hillsdale College’s Barney Charter School Initiative, working to expand to include the 12th grade this Fall. Bonds were issued through the Wisconsin Public Finance Authority and featured a 2055 maturity priced with a coupon of 7.125% to yield 7.20%. We have several more charter school and senior living financings in the pipeline, so check with your HJ Sims coverage for details. Elsewhere in this week’s update, you can read about our involvement in university retirement communities as well as the capabilities of our Sims Mortgage Funding team. We invite you to contact us for more information on all that our experts are able to offer in these areas, as well as for all that our bankers, traders, and sales executives present in the primary and secondary markets.
Pause to Honor the Fallen
Along with the rest of the nation, the HJ Sims family of companies will pause on Monday to honor all the fallen soldiers, airmen, sailors, and marines who made the ultimate sacrifice in service to our country. In the interim, we wish all readers safe travels and a happy start to summer, with all its graduation celebrations and reunions, barbecues, picnics, parades, and ballgames.