By Gayl Mileszko
Market Commentary
Showdown Shutdown
Fiscal Year 2025 funding for the federal government expired just before midnight on September 30 and, at this writing, it is unclear how long our sovereign shutdown will last. We foresee a compromise fairly soon, with one or two short-term spending measures through at least December, but, so far, the Senate has been unable to muster the 60 votes needed to keep appropriations bills moving. Next year, with its mid-term elections, will be even more challenging. Financial markets have faced similarly dramatic government closures 15 times since 1980, with the longest shutdown deadlock in 2018 lasting 34 days. Stock, bond, and commodity traders are so far shrugging off the news. Washington is well aware that if Wall Street does get rattled, if major investors perceive that no real progress is being made, if the standoff is starting to harm the economy, the dollar, Treasury auctions, foreign policy, or life on Main Street, a very loud signal will be sent to Congress and the White House. Far more alarming would be a plot twist involving the debt limit, but this time the contentious issues involve health care spending and tax credits. We do not expect the debt limit battle to surface again until 2027.
Predictions
Prediction market odds (from Kalshi, Predict It, and Polymarket, e.g.) reflect wagers that agencies will remain shuttered for 10 to 25 days. In past years, the majority of shutdowns only lasted five or fewer days, but there were several noteworthy exceptions involving contentious issues such as the border wall, Obamacare, and other budget priorities. Today, at least one major investment bank, JPMorgan, sees a 70% probability that the shutdown will drag on for between 11 and 15 days. But calls like that are sometimes harmful; they can give key players an indication that traders will OK more room for grandstanding instead of pressuring parties to resolve their differences forthwith on pain of crash or fewer campaign contributions.
OMB Directive for an Orderly Shutdown and Threat of RIFs
In the meantime, on Tuesday night, the Office of Management and Budget issued a memo directing that affected agencies execute plans for an orderly shutdown. Altogether, nearly 750 thousand federal workers including approximately 87% of Education Department employees, 76% of Labor Department staff, and 41% on the Health and Human Services Department payroll, have been furloughed. The federal workforce grew 6% over the past four years, but several hundred thousand jobs have since been eliminated as a result of voluntary buyouts, retirements and DOGE cuts. Additional reductions-in-force and other executive actions may follow, all in line with the Administration’s goal of drastically reducing the size of the national government.
Essentiality
Essential employees caught up in the standoff over healthcare spending and tax credits include air traffic controllers and active duty service members. There may well be ramifications such as absenteeism if paychecks are delayed for long. The Federal Reserve, AMTRAK, Fannie Mae and other governmental entities not dependent on federal appropriations remain open. Mail delivery, Social Security payments, veterans medical care and tax processing, and Title I funds for low-income schools and special education are unaffected. Most Medicaid and Medicare services will continue, but telehealth, hospital-at-home, Impact Aid, flood insurance, and other programs are now on hold. Research grants, data collection and analysis – likely including the nonfarm payroll numbers due out October 3 – have been paused for now. The charter school program managed to get out a whopping $500 million in grants last week, but Head Start, school nutrition, and SNAP funding are all threatened if the stalemate drags on. Overseas allies shake their head at the American political process that allows for such shutdowns and debt ceilings; our foes can be counted on to look to take advantage of any vulnerabilities.
Detailed Contingency Plans
Among the federal agencies we most closely follow, contingency plans have all recently been circulated for the Department of Housing and Urban Development, the Department of Education, the Department of Treasury, the Department of Agriculture, and the Department of Health and Human Services. They are all fascinating to read while certainly troubling to view in human terms. We can always count on a discussion about why we have any federal employees deemed non-essential or non-accepted in the first place. But then, unless we face some new national crisis, we always tend to revert to the status quo ante. This time, we are looking at where we are versus pre-COVID staffing. Shutdowns and furloughs are costly and always result in service delays when workers are called back and functions slowly resume. Some investors are hedging their bets, but most are relying on cool heads and common sense to quickly prevail. Otherwise, the most stubborn legislators will hear from irritated voters, pensioners, special interest groups, corporations and major institutional investors whose profits, returns, yields, and access to capital are being adversely impacted by the great divide and their inability to work cooperatively to do their job and keep our government running properly.
September: A Strong Month for Munis
Weak labor data and the latest Fed rate cut has helped bolster tax-exempts last month. September was a great for municipal bonds and October is starting out well so far. September issuance at $44.6 billion was off 10% year-over-year in part due to holidays and the Federal Open Market Committee meeting, but high yield munis tracked in the S&P Municipal Bond High Yield Index saw returns of 3.02%, the highest monthly gain of the year so far. High grade munis were up 2.26%, driven by outperformance in the long maturity bucket from 22 years and out. Year-to-date volume at $433.4 billion was up nearly 12% from last year and on track for another annual record high. Lipper reported that net inflows into municipal bonds funds totaled $3.88 billon, bringing the 9-month net total to $17.6 billion. Although the 2-year muni AAA general obligation MMD benchmark yield closed the quarter at 2.30%, up 10 basis points on the month, the 10-year at 2.91% fell 31 basis points and the 30-year at 4.22% dropped 39 basis points. By contrast, the 2-year Treasury yield at 3.60% fell one basis point, the 10-year at 4.15% dropped 7 basis points and the 30-year at 4.22% lost 19 basis points during the month.
Featured High Yield Muni Sales Last Week
Borrowers enjoyed a nice close to the third quarter. The Iowa Finance Authority issued $21.8 million of non-rated bonds for Stoney Point Meadows of Cedar Rapids, pricing the 2035 at 6% to yield; they also sold $55.5 million of non-rated bonds for Presbyterian Homes Mill Pond in
Ankeny structured with a 40-year maturity priced at 5.875% to yield 5.94%. The North Carolina Medical Care Commission issued $41.7 million on non-rated bonds for Pennybyrn in High Point; the 2055 maturity was priced with a coupon of 5.625% to yield 5.62%. Okaloosa County, Florida came to market with a $72 million non-rated sale for Air Force Enlisted Village in Shalimar that included 2060 term bonds priced at 5.75% to yield 5.77%. The $77.1 million Washington State Housing Finance Commission sale for Josephine Caring Community in Stanwood had 2060 term bonds priced at 6.375% to yield 6.50%. And in the critical access hospital space, the King County Washington Public Hospital District #4 sold $177.8 million of non-rated revenue bonds for Snoqualmie Valley Health with a 2060 maturity priced at 7.00% to yield 6.89%.
Big Muni Finish to 2025
For now, anyway, bond markets are moving on their merry way heading into the holiday season. Muni traders are only minimally affected by a short term federal government shutdown but nevertheless worry about data delays during what is traditionally the highest issuance month of the year. Reinvestment cash at $38.4 billion, including both principal and interest due to holders, has markedly dropped from summer highs, and market volatility that typically sends retail investors into an early fall freeze. But over the past two decades, Municipal Market Advisors reports that munis have produced positive returns in 12 of these years, and we look forward to a strong fourth quarter with an exciting lineup of deals.
HJ Sims in the Market With Two Offerings
This week, HJ Sims is in the market with an $18.4 million BB+ rated financing for the Academies of Math and Science in Metro Phoenix and Tucson, a high performing STEAM-focused charter network with 8,646 enrolled in 10 schools and more than 4,000 students on its wait list. Bonds due in 2060 are structured with a 10-year mandatory put and are being issued through the Arizona Industrial Development Authority to finance the costs of acquiring and improving the Mesa campus and Avondale School. We are also a co-manager on the $89.9 million Clifton Higher Education deal for YES Prep charter schools in Houston, rated Aaa as a result of the Texas PSF school guarantee.
Where do we go from here? Stay in Touch
Futures trading at this writing anticipates two more quarter point Fed Funds rate cuts this year and another two in 2026. The latest monthly Bloomberg survey of economists reflects an average forecast for the 10-year Treasury year end yield at 4.10%, and a 2026 ending yield of 4.01%. Stay in touch with your HJ Sims representative to track the latest developments in Washington, the latest economic data impacting Fed rate decisions, and new trends in the education, senior living and care, rural hospital and student housing sectors. We look forward to working with you to make this final quarter of the year a successful one.