By Gayl Mileszko
Abracadabra
Way back in the second century, malaria ravaged the Roman Empire. Thousands afflicted with the deadly strain known as Plasmodium falciparum presented with fever, suffered, and perished. There were herbs and charms potions and prayers but nothing even remotely resembling antibiotics to treat them. A learned tutor to the emperor’s two sons, Quintus Serenus Sammonicus, boldly proclaimed a cure in his Book of Medicine, Liber Medicinalis. Hang an amulet around the neck of the sick one, he wrote. Place parchment inscribed with one word inside, one word written eleven times in a series of lines forming an inverted triangle with one less letter on each line until no characters were left. As the letters disappeared, so too would the fever, he assured readers. What was the magical word said to cure all? Abracadabra.
The Inauguruption
Today when we hear the word, we conjure up the image of a magician, it is a man with a wand on a stage performing seemingly impossible tasks to the oohs and ahhs of his audience. Captivating the broadest audience from a global stage in the weeks following what a JP Morgan strategist dubbed his “inauguruption”, the new American president has been wielding a pen like a wand, trying to saw federal agencies in half or make them vanish altogether, suspend foreign aid, levitate artificial intelligence and crypto ventures, transform a mountain and waterway, float tariff threats. Will he next pull the proverbial rabbit out of a hat and end the war in Ukraine, remake Gaza into the “Riviera of the Middle East”, stop the flow of fentanyl, reverse the trade deficit, and balance the budget? If only that 11-letter word could truly work its magic this year, throughout the tenure of #47, and in every future administration …
Promises Made, Promises Kept
Wall Street is trying to follow all the wand work, the rapid-fire announcements coming out of the White House, policies reversing everything that had been the status quo, harsh medicine being prescribed for our underperforming economy and ailing society. It is hard to keep up. But most of the programs and plans were laid out during the campaign. We can’t say we didn’t know what he had up his sleeve and behind his ear. In fact, there are few real surprises other than the pace of all the rollouts, and a few early failures. But markets have been volatile, particularly over tariff announcements, as traders try to separate genuine substance and real-world possibilities from fairy dust. The Administration celebrates a series of “promises made, promises kept” while some investors long for the old days when all we had to worry about was if the next economic data releases pointed to or away from a recession, and what the Federal Reserve would do next to support the stock market.
Goldilocks Numbers
The Federal Open Market Committee kept the fed funds rate unchanged in the range of 4.25% to 4.50% last week, as expected. This was their first pause after a series of three cuts that began last September. Futures trading currently reflects the expectation that nothing will change when they next meet on March 19 and May 7. Quarter point cuts are, however, being forecasted for the June 18 and December 10 meetings. The Fed Chair continues to point to the bank’s data dependency and the financial markets keep rooting for “Goldilocks” numbers – not too bad, not too good – as was the case with inflation-adjusted gross domestic product with a 2.3% annual growth. This week, the key numbers are job openings, nonfarm payrolls, consumer sentiment and major corporate earnings. In addition, investors will be watching the outcome of six Treasury auctions and announcements from the new Treasury Secretary on our debt management strategy and borrowing plans for the next six months.
YoYo Market Moves since Election Day
As usual, most of the attention is focused on the stock market, where we have seen a 5% rise since Election Day, and increasingly on the cryptocurrency markets, where Bitcoin prices have skyrocketed 41%. But there have been a lot of ups and downs in these past three months and this can be seen in the 116% swings in the VIX or “fear index”. Gold prices have climbed by $102 an ounce as investors look to havens from the volatility. Bonds, also long a destination for investors seeking safety, have driven some of the movements in stocks; traders fear the stinging impact of higher inflation that could result from various tax changes and new tariffs on our most frequent trading partners. But some proposals may not come to pass, and others may produce something far from current expectations. In January, Treasury index yields closed up 0.55%, high yield corporate bonds up 1.38%.
Munis Sometimes Chart a Solo Path
Over the past three months, municipal bonds have followed somewhat in the path of U.S. Treasuries but have been much less impacted by the gyrations in prices of other securities. Indeed, while the 10-year Treasury yield has risen 24 basis points since Election Day, the 10-year muni AAA general obligation benchmark actually fell by 2 basis points. Nevertheless, January saw double the amount of volatility than we have seen in the last 15 years. Several factors are in play right now. Investors are lured to the tax-exempt market by attractive yields. $45-plus billion of principal and interest payments are hitting investor accounts this month. They have $134 billion invested in tax-exempt money market funds and, in the reach for both income and appreciation, they now have more than $808 billion in mutual funds and $141 billion in muni exchange traded funds. The high new issue volume so far this year has been well received. And high yield munis have been the darlings of the sector for going on three years now with no end in sights. Year-to-date, non-rated muni indices are up 0.91% after finishing last year at +6.07%.
Threats to Tax-Exemption
As has happened over decades, during all the major tax reform bill drafting sessions, the possible elimination of tax-exempt financing options for state and local governments and many nonprofits is back on the table. That means a broad array of normally quiet advocates for essential public purpose financings out of state houses, legislatures, county and local offices, senior living communities, charter schools, critical access hospitals, and many others have sprung up to raise voices that are being backed by thousands of member votes. The goal is to make our elected officials spellbound with example after example of critical, tangible, visible, long-lived projects over the years only made possible through tax-exempt financing. Municipal bond borrowers and investors have much to tell their elected officials, as do so many advisors, analysts and others, many of whom are armed with great thousands of stories, trades and have lived through major threats before, saw double the volatility.
How to Help Quash the Threats
At this writing, there have been no tax or budget bills yet introduced in Congress with specific language making tax-exemption disappear for some or all munis, either old or new. Such a thing would truly shock the borrowing and investing communities across all municipal sectors. The very prospect has spurred some with expansion, refinancing, repair, or repositioning plans to move up market entry into the first half of the year, presumably before talk gets serious and the market gets overwhelmed. Investors reading the tea leaves are working to increase their holdings in the event that outstanding municipal bonds would be grandfathered in, no matter what happens to new issues in 2026. One of our industry’s most prominent analytic firms, Municipal Market Analytics, has just upped the odds on the probability of removing tax exemption altogether — as well as for private activity bonds — to 50% this week. They urge investors to assume that the exemption is in real jeopardy right now. We encourage you to reach out to your HJ Sims banking representative for more information on how and when to schedule your financings and refinancings. For our investing clients, we advise that you reach out to your HJ Sims adviser to discuss how to best position yourself, your family and business during this unusual window of opportunity. We invite all colleagues to raise awareness with your elected officials and become actively involved in organizations that are banding together to support all the “Built by Bonds” campaigns.
A Good But Slow Start to 2025 for Munis
Municipal bond issuance in the senior living and charter school sectors has been off to a slow start in 2025. HJ Sims has so far led the senior living sector with our $135 million 35-year Kahala Nui Hawaii financing. We have also seen a $7.5 million non-rated Connecticut revenue anticipation note deal for Odd Fellows Home/Fairview, which came with a final maturity in 2030 priced at par to yield 12%. And Luthercare came to market with a $29.7 million BBB+ deal through Pennsylvania’s Lancaster Municipal Authority that was structured with a 2055 final maturity priced with a coupon of 5.00% to yield 4.79%. In the charter school sector, the Illinois Finance Authority brough a $28.7 million BBB rated deal for the Noble Network which featured 2039 term bonds priced at 5.00% to yield 4.32%. The City of Eagan, Minnesota had a $16.9 million on-rated limited offering for Great Oaks Academy that came with a 40-year final maturity priced at par to yield 6.50%. And Hapeville Charter School in Georgia brought a $7.1 million non-rated deal through Wisconsin’s Public Finance Authority with a 2054 term bond proceeds priced at par to yield 6.875%.
No Illusions or Tricks, Just Sound Guidance
We are proud of all our HJ Sims team members, some of whom have 20 to 50 or more years of experience to lend to you via our underwriting, trading, analysis, sales, banking operations and compliance teams. When you speak to us, you have the benefit of expertise dating back to 1935, spanning diverse presidential administrations, congresses, courts, economic and financial crises and booms. We have pretty much seen it all in the way of deal structures, marketing techniques, coupons, yields, call features, purposes, and covenants. It is hard to surprise us, but we delight in all new opportunities such as the ones available right now. We are always proud to share our experiences with you, and will do so soon at our 22nd Late Winter Conference, less than 3 weeks from now. Join us if you can for some spectacular insights, rare networking, news you can use, and speakers that will inspire your work throughout the coming year. We are hosting this gathering in Fort Worth, Texas, where we are hosting several special events alongside an agenda that should be of interest to all senior living, charter school, and private school operators. There is indeed magic in our gathering, the things we learn and share, and we look forward to seeing you at the Worthington Renaissance from February 25 to 27!