Market Commentary: Evolving Ecosystems

Through Facebook and Twitter, mountains of data providing insight on human behavior are available to advertisers and social scientists to study and exploit. Via algorithms used in video gaming, datamining is also being applied to the analysis of behavior in nature, where technology now provides oceans of data documenting the social behavior of fish, for example, to help us better understand and model ecosystems. As it turns out, fish form dynamic social networks well outside of schools, taking cues from each other and telegraphing critical information such as where it is safe to go and eat.

These days it is hard for those of us on solid ground to know where it is safe to go out — never mind what is safe for us to invest in. The Federal Reserve, the executive and legislative branches of government at the federal, state and local levels have taken unprecedented actions to both depress and bolster our economy since January. Social media, social distancing, home delivery services, N95 masks, UV-C light, air purifiers, corticosteroids, Vitamin D, convalescent plasma, all appear to be aiding us in battling this pandemic. Common sense, gut instinct, and trusted family, friends, colleagues, and investment advisers are also guiding us as we endeavor to protect our savings and boost our investments in an evolving ecosystem amid an ocean of uncertainty.

We are six months a pandemic that has felled more than 1 million around the world. Our nation has been struck by a recession of historic proportion. But many students are back in the classroom. Consumer confidence just jumped to 101.8 in September, up from 86.3 in August. Daily TSA Airport Passenger screenings have risen from 87,534 on April 14 to 873,038 on September 27. Retail sales have exceeded pre-crisis levels since June. New home sales have risen at the fastest pace since 2006. The Federal Reserve Chair, in testimony before Congress, refers to our economic recovery as “highly uncertain” and points to the need for additional stimulus. But the last jobs report reflected positive momentum. Data on September, the last we will see before November 3, will be reported on Friday. Third quarter GDP will be reported a mere five days before Election Day.

The stock market has had some significant intraday twists and turns in September trading and many strategists expect volatility to increase as we draw close to the presidential election. At this writing with one more day of data to go, equity indices are all down for the month: after swinging by more than 2300 points the Dow is down more than 3%, the S&P 500 has fluctuated by more than 340 points and has fallen over 165 points, and the Nasdaq has lost 6% with intramonth highs and lows varying by as much as 1400 points. On the commodity side, oil prices have fallen nearly 9% to $38.86 and gold prices are down more than 4% to $1,886 an ounce. Bond markets have been remarkably steady. Treasuries have traded in a narrow range all month, strengthening overall. The 2-year yield stands at 0.12%, the 10-year at 0.65% and the 30-year at 1.42%. The 10-year BAA corporate bond yield is flat on the month at 3.01%. Investment grade corporate issuance now exceeds $1.53 trillion in 2020. High yield corporate issuance at $335 billion is already higher than it has been for any full calendar year on record; this month’s volume exceeds $45 billion but the sector is expected to post a loss of 1.30%.

In the municipal bond market, the AAA general obligation bond 2-year benchmark yield has dropped 3 basis points this month to 0.13% while the 10-and 30-year yields have risen by 2 basis points to 0.83% and 1.58%, respectively. Municipal Market Analytics reports that munis have been essentially unchanged for 22 consecutive sessions, beating a 40-year old record. Approximately 40% of primary market sales in September have been federally taxable. Investors took in $25 billion of cash from bond redemptions and maturities; $2.2 billion flowed back into municipal bond mutual funds. Funds have seen 20 straight weeks of net inflows. Year-to-date, the BofAML Municipal Index is up 3.31%; the High Yield Index has returned 0.93% and the Taxable Muni Index 10.86%

September muni volume will likely exceed $50 billion for the second consecutive month. Among the higher yielding transactions last week, Lake County, Florida sold $126 million of non-rated bonds for Lakeside at Waterman Village in a financing that included 2055 term bonds priced at 5.75% to yield 5.58%. The Washington Housing Finance Commission issued $81.3 million of non-rated bonds for Rockwood Retirement Communities structured with 2056 term bonds priced with a coupon of 5.00% to yield 5.25%. The North Carolina Medical Care Commission came to market with a $53 million BBB-minus rated deal for Friends Homes that had 30-year term bonds priced at 4.00% to yield 3.48%. The Public Finance Authority of Wisconsin was in the market with a $22.8 million non-rated financing for Freedom Classical Academy In North Las Vegas structured with 2056 term bonds priced at 5.00% to yield 4.89%. The Colorado Educational and Cultural Facilities Authority sold $18.7 million of non-rated bonds for Liberty Tree Academy that came with 30-year term bonds priced at par to yield 5.75%.

This week, the markets are focused on the first presidential debate, quarter-end portfolio rebalancing, the Friday jobs numbers, prospects for agreement on a pre-election stimulus bill, Treasury loans to U.S. passenger airlines, economic data from China, outflows from high yield corporate bond funds, and a string of Federal Reserve speakers. As we enter the final quarter of the year, we encourage you to contact your HJ Sims advisor to review your positioning and strategy.

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Market Commentary: Twisting Path to Election Day

In the 40 days to Election Day, we follow a path with many twists and turns, certain only to be surprised by what is around the next corner. We have already had quite a journey this year, one that has taken us into a pandemic, a recession, and in directions never before traveled in terms of fiscal and monetary policy, lockdowns, and behavioral change. The appointment of a new Supreme Court Justice may lead us into a right turn, but other developments could have us bear left. The Federal Reserve has used all of its paving powers to try and keep our economy us on a straight and narrow course – one that may extend out to mile markers in 2023.  Financial markets have not always followed it. Stocks have stumbled this past week under a range of pressures. But since Labor Day, the bond markets have been keeping a steady pace. The municipal bond market has seen almost no change in price for three consecutive weeks.  Benchmark yields offer us no clue on future direction, although market history since 2014 tells us that the quarter end tends to take us on a downward slope. At this writing the 2-year Treasury yield and the 2-year AAA municipal general obligation bond yield are at 0.13%, the 10-year Treasury yields 0.66% and the tax-exempt counterpart yields more at 0.84%. The 30-year Treasury yields 1.42% while the 30-year muni is higher at 1.58%.

Last week’s $9 billion municipal calendar met with another warm welcome.  HJ Sims came to market with an $18.1 million BB rated issue for Presbyterian Villages of Michigan and sold the 4.75% Public Finance Authority bonds due in 2053 at a discount to yield 5.00%.  Among other senior living deals, the North Carolina Medical Care Commission had a $96 million BBB+ rated deal for Presbyterian Homes that featured 5.00% bonds due in 2050 at a yield of 3.03%. The Kalamazoo Economic Development Corporation issued $47.8 million of BB rated bonds for Heritage Community’s Revel Creek expansion that had term bonds due in 2055 priced at 5.00% to yield 4.40%. Franklin County, Ohio brought a $27.8 million BBB rated financing for Ohio Living Communities that included 2045 term bonds priced at 4.00% to yield 3.73%.  In the education sector, the St. Paul Housing and Redevelopment Authority issued $26 million of BB+ rated charter school bonds for Hmong College Preparatory Academy that had a maximum yield of 3.55% in 2055, and the California School Finance Authority brought a $10.1 million non-rated deal for Real Journey Academies that had a 39-year maturity priced at 5.00% to yield 3.98%.

At these, or even lower rates prevailing for most issuers, the volume is expected to increase for the next five or six weeks. So much uncertainty surrounds Election Day and outcomes that may not be known for days, weeks or months that borrowers are rushing to bring deals to market as soon as possible.  This week’s muni calendar is expected to exceed $12 billion. Corporate high yield issuance is only $2.5 billion away from a record high for the year and investment grade issuance is expected to total $30 billion. We encourage you to contact your HJ Sims financial professional to discuss whether your portfolio is well positioned for the twists and turns in the months ahead, how you might better prepare, and which opportunities to anticipate.

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Market Commentary: Rock, Paper, Scissors

Hope is what sustained the 102 passengers of the Mayflower who departed from Plymouth, England for the New World four hundred years ago this week. In far more grim circumstances than we face today, on September 16, 1620, there were 41 Protestant Separatists or “Saints” – better known today as the Pilgrims – seeking freedom from the Church of England. A larger group of commoners including servants and children dubbed “Strangers” simply gambled the little they had on a new life in an unknown place in northern Virginia. They were 50 men whose average age was 34, 19 women, 14 teenagers and 19 children. The oldest was 64 and the youngest, Oceanus, was born during the voyage, which was financed by London stockholders. Crammed together with sheep, goats, chickens and dogs on the gun deck only 58 feet long, 24 feet wide and 5.5 feet high, they spent a grueling 66 days at sea during the height of the storm season. They ate old bread and dried fruit and salty fish; with no fresh drinking water, each person was rationed a gallon of beer per day. Nearly five percent of those aboard died en route. Yet, they were filled with gratitude to meet their new world.

The Mayflower passengers arrived in New England on November 11 and a group of 41 managed to draft and sign a 200-word document that came to be known as the Mayflower Compact, the first document to establish the framework for our self-government. It was a simple text, one worth a review in this complicated era where there are too many federal laws in force to count and even more regulations among the 50 subject matter titles in the Federal Register. Signatories agreed to “solemnly and mutually, in the presence of God, and one another; covenant and combine ourselves together into a civil body politic; for our better ordering, and preservation and furtherance of the ends aforesaid; and by virtue hereof to enact, constitute, and frame, such just and equal laws, ordinances, acts, constitutions, and offices, from time to time, as shall be thought most meet and convenient for the general good of the colony; unto which we promise all due submission and obedience.”

Plymouth Rock was said to have “received the footsteps of our fathers on their first arrival” in Plymouth Harbor on December 21, 1620. But, as the Pilgrims and the non-believers slowly built their town, they largely remained aboard the Mayflower in tiny quarters for another four harsh winter months. They endured outbreaks of scurvy, pneumonia and tuberculosis, malnutrition and exposure. Only 52 of the passengers departing from England, including 5 women and half of the 50-man crew, survived that first winter.

There are an estimated 10 million living Americans and 35 million people around the world who are descended from the original passengers on the Mayflower. Several hundred thousand who are not descended from the Aldens, Bradfords or Winslows still risk untold peril every year to come to America by sea, land and air. Latest federal data show that 7.8% of our population self-designates as having English roots, 14.7% German, 12.3% Black or African-American, 10.9% Mexican, 5.5% Italian, 3.3% French, 3% Polish. The U.S. population exceeds 331 million now outnumbered by only China and India. More than 40 million of us were born in another country. 56 million of us are aged 65 or older, but our median age is 38.3 years. Approximately 6.3 million of us work in financial services.

In difficult times, it is important to maintain perspective in order to remain hopeful, much like the Mayflower passengers; we must hold steadfast to the belief that the world will improve. In a time where we are concerned for our loved ones, and in an era where we feel nervous, we must remember that back in the time of the Mayflower, the death rate of the newcomers exceeded 50%. At this writing, the COVID-19 death rate per 100,000 population is 0.06%. However, with tragedy comes a sense of gratitude for what we do have, for what kindness exists in the world. And, we hold hope for a vaccine, we have appreciation for our medical workers who treat those who are need, we gather to help strangers and neighbors, alike. Overall, this is a time to come together—we can experience this as an opportunity to unite.

Perspective helps us process the deaths of more than 196,000 Americans at this writing. With a changing world, twenty-nine million of us are receiving some type of unemployment assistance and many more have had hours or pay cut and income slashed. We have become adaptable as a significant number of children can only go to school online, but some are unsupervised and others have only limited access to the internet and learning. Small businesses are closing by the thousands in cities and small towns—some transitioning to an online model with the evolution of these times. On top of all of this, hurricanes and floods have battered the people of the southeast and megafires have destroyed nearly five million acres in the West. After six-plus months, we see some pockets of recovery but much of the nation is exhausted, numbed, or in a state of shock. The luckier among us gripe about inconveniences: gyms and salons closed, lost vacations, reunions and celebrations postponed. But at night, most of us toss and turn, worry about our college students, our parents in health care facilities, a second wave of illness, our weight, our retirement, the vaccines being rushed to market, how long we can postpone medical tests and procedures, whether our vote will count in November. Life has changed dramatically for many in these past seven months.

The financial markets are always looking to the future and the view from Wall Street is still much rosier than the one from Main Street right now. Investors have come to look to the Federal Reserve as the Rock of Gibraltar, a veritable Pillar of Hercules – a mythical point once marking the limit to the known world, now widely viewed as our barrier to unthinkable loss. So far so good. But the Fed can only loan money. So, state and local governments and markets have also looked to Washington for fiscal relief. Again: so far so good. Maybe too good. Federal spending topped $6 trillion for the first time last month and the federal deficit has topped $3 trillion for the first time; Congressional appropriators are discussing even more fiscal spending but cannot reach agreement. Eventually, they will have to take the scissors to the budget, but for now we are in historic spending mode. The President has taken certain executive actions, and perhaps no more legislative is necessary or possible until after the elections, so it is to the unelected officials of the central bank that we look for any further immediate relief if needed. 

The Fed’s monetary policy committee, the Open Market Committee, met this week for the 8th time this year and provided reassurance that they will be accommodative, hold interest rates at rock-bottom levels through 2023 and basically do whatever else is required for our economy. Economic data show that we have regained at least half of the loss of output so we may see third quarter gross domestic product above 25%. CNN and Moody’s Analytics have teamed up to produce a “Back-to-Normal” Index that actually shows the U.S. at 80% of pre-pandemic levels.

Despite the pandemic-induced recession and pain experienced across virtually every sector, the S&P 500 is up 5.27% this year, the tech-heavy Nasdaq is up nearly 25%. Gold has gained more than 28%.  The 2-year Treasury has strengthened significantly; its yield has dropped lost 143 basis points and currently stands at 0.13%.  The 2-year municipal general obligation bond yield has fallen 91 basis points to 0.13%. The 10-year Treasury at 0.67% is down 124 basis points. The 10-year muni has decreased 60 basis points to 0.84% and the 10-year Baa corporate bond yield at 2.98% is down 72 basis points.  The 30-year Treasury yield has fallen 95 basis points to 1.43% and the comparable muni yield has shed 51 basis points to stand at 1/58%.

Corporate and municipal borrowers continue to vie for space on the calendar of buyers.  So far this year, tax-exempt muni issuance at $337 billion is up 33% year-over-year. Corporate bond issuance as a whole totaled $210 billion in August alone. High yield corporate issuance exceeds $308 billion so far this year, up 74% from 2019.  Mutual fund investors have added a net of $19.2 billion to municipal bond funds, $139.4 billion to investment grade corporate funds and $40.8 billion to high yield corporate funds. With record Treasury issuance this year, outstanding debt at 9/15 totals $26,790,503,839,118.28 and returns are up about 9.31%.

Last week was shortened by the Labor Day holiday but it was by no means a quiet one. HJ Sims underwrote a $107.3 million A-minus rated revenue bond issue for Presbyterian Retirement Communities which we structured with tax-exempt term bonds due in 2055 priced with a coupon of 4.00% to yield 3.10% and taxable bonds due in 2050 priced at 4.00% to yield 4.125%.  Among recent deals on the high yield calendar, there was a $17.1 million BB+ rated California School Finance Authority issue for Classical Academies that had a thirty year term bond priced at 5.00% to yield 3.42%; a $13.3 million Ba1 rated Public Finance Authority financing for KIPP Charlotte that included 35-year term bond priced at 5.00% to yield 4.50%;  and a $10.3 million BB+ rated New Hope Cultural Education Facilities Finance Corporation issue for Southwest Preparatory Academy in San Antonio that came with a 2050 maturity priced at 5.00% to yield 4.00%.

This week, Plymouth, Minnesota has a $41.7 million general obligation bond sale planned. Local Massachusetts news reports that Plymouth Rock, the Landing Place of the Pilgrims, the symbol of our country’s first hardships and struggles, a representation of our freedom and desires for a better life, an international attraction typically drawing a million tourists every year, has unfortunately been vandalized for the second time in one week. Yet, we persevere.

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Market Commentary: Alternatives

There are only 54 days to Election Day (at the time of this writing). We can tell by the attack ads on TV, the robo calls, the mailers, the endorsements, the increasingly slanted campaign coverage from all sides. The fight is often framed in terms of Democrats versus Republicans, conservatives versus. liberals, progressives versus moderates, left versus right, Red versus Blue, incumbents versus challengers, the Coasts versus the Heartland, or Us versus Them. It is said to be the most important election ever, once again. And, as the sportscaster in Rocky IV exclaimed, “It’s a gutter war – no holds barred!”  On the presidential ballot, we do not hear much about the fifteen third party and independent candidates. So, for those taking due diligence seriously, it may seem that considering all the alternatives, the choices are more difficult. But, as the big day draws nearer, our choices dramatically narrow to essentially two as we examine our options from the perspective of our vested interests to either find the candidate who will best represent us or “pick the lesser of the evils” as some believe. As Henry Kissinger once said, “The absence of alternatives clears the mind marvelously.” Speaking of alternatives…

The alternative minimum tax (AMT) and the ordinary income tax are two parallel income tax systems in the U.S. The former was enacted in 1969 by Congress after the public became outraged to learn that a significant number of higher income filers had so many itemized deductions that they paid no income tax. So, to ensure that everyone pays what is viewed as their “fair share,” taxpayers must calculate their taxes under each system and pay whichever is higher. But, since the AMT was not indexed for inflation until 2013, over time more and more retirees and middle class taxpayers became subject to the higher rate. About five million filers were paying the AMT in 2017 when the Tax Cuts and Jobs Act was enacted. The new law applies to tax years 2018 to 2025. It increases the AMT exemption (generally $113,400 for married couples in 2020), indexes it to inflation, and sets the income levels at which the exemptions phase out at much higher levels (generally $1,036,800 for married couples filing jointly in 2020). Many of the tax breaks that triggered the AMT for middle class taxpayers have been changed, so there needs to be quite a few tax preference items to trigger it. These include incentive stock options, a large amount of long-term capital gains, some types of accelerated depreciation, and interest on private activity bonds. Fewer than 200,000 households are now impacted and corporations are no longer exposed to AMT liabilities.

Income from private activity bonds that fund private company projects that benefit the public such as stadiums, airline terminals, and solid waste facilities may be subject to the AMT, meaning that interest income would be taxed at the applicable AMT rate. This could be 26% or 28%. That would be a major hit to muni yields already at or near historic lows. It is easy to tell if a bond is subject to the alternative minimum tax. Since 1986 it has been required that a tax attorney provide an opinion stating whether or not the interest on each muni bond is a tax-preference item subject to the AMT. The opinion is clearly printed on the cover of each official statement. Investors must read any muni bond fund prospectus more carefully. Some funds, including Vanguard’s, may invest as much as 20% of their assets in private activity bonds so a portion of their income distributions may be subject to the AMT.

Investors are advised to speak with their tax advisors before buying bonds, or funds with bonds, that are subject to the AMT.  For those who are not subject and not likely to become subject, we encourage you to contact your HJ Sims advisor.  AMT bonds can offer some incremental yield pickup in the range of 20 basis points in the current market. They also provide access to different sectors of the muni market such as pollution control projects, student loans, single-family housing, and public-private venture expressways.  Among major issuers of both AMT and non-AMT bonds are the Port Authority of New York and New Jersey and the City and County of Denver, Colorado. Last week, The New York Transportation Development Corporation issued $1.51 billion of Baa3 rated special facilities revenue bonds subject to the AMT for the Delta Air Lines Terminal C and D redevelopment project at LaGuardia Airport. The 2045 term bonds priced at 4.375% to yield 4.55%.

HJ Sims was in the market last week with a $134.9 million Palm Beach County Health Facilities Authority bond issue for the Toby and Leon Cooperman Sinai Residences of Boca Raton expansion. We structured the non-rated Series A bonds with a 2055 maturity priced at 5.00% to yield 4.60%. The Series B-1 bonds due in 2027 were priced at 3.00% to yield 3.05%, the Series B-2 bonds due in 2025 were priced at 2.625% to yield 2.75%, and the Series C taxable bonds due in 2024 had a 3.875% coupon priced to yield 4.00%. Among other senior living financings, the Economic Development Corporation of the City of Grand Rapids and the Michigan Strategic Fund brought $47.1 million of BBB-minus rated refundings for United Methodist Retirement Communities and Porter Hills Presbyterian Village with final maturities in 2044 priced at 5.00% to yield 3.88%.

This week’s muni calendar is expected to total $7 billion but the investment grade corporate market may see as much as $50 billion of new issues.. At this writing, the 2-year AAA municipal general obligation bond yield stands at 0.15% versus the 2-year Treasury at 0.14%. The 10-year muni benchmark is at 0.83% while the comparable Treasury yield is 0.68%.  The 30-year tax-exempt yield is 1.57% and the Treasury is lower at 1.43%. The 10-year A rated corporate bond yields 2.22%. Stocks are weaker for the third session, sinking to a four-week low. Oil at $36.87 a barrel has fallen to prices last seen in mid-June. Gold at $1,930 an ounce is 6% off its record August high. This week’s economic calendar includes Job Openings, the Producer and Consumer Price Indices. The Senate returns from recess to vote on an alternative stimulus measure and the nation pauses on Friday, the 19th anniversary of September 11 to honor the memory of those lost and pay tribute to heroes we will never forget.

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Market Commentary: Under Pressure

We live in a world where every inch of our body is subjected to atmospheric pressure of about 14.7 pounds per square inch (psi) at sea level. We don’t do well with abrupt increases, but if the pressure rises gradually, we are able to tolerate a lot more — something even in the range of 400 psi. There are, of course, other pressures placed upon us: pressures to be perfect, to be successful, to fit in, to be fit. From physics, we recall that the only characteristic of pressure is magnitude. From life, we know that magnitude fluctuates and that it often cannot be controlled.

For six months now, governmental policies developed in response to the pandemic have placed unprecedented pressures on individuals, families, groups, businesses, and communities. Some are folding under the pressure, other have exploded, some have adapted, others thrive. Some take medication for relief, others find release in other forms: prayer, kickboxing, community service, grants, loans, forbearance. Many state and local governments and other enterprises working with shaky budgets are unwilling to accept what may be permanent changes in revenues and expenses, and hold their breath for a fifth windfall from Washington. Financial markets, on the other hand, have enjoyed 11 years of monetary policy windfalls in the form of low rates, frequent injections of liquidity, and an ever-expanding balance sheet. So far, none have cracked under the strain of record levels of debt issuance by the U.S. Treasury and American corporations, the worst collapse in GDP in our history, 27 million unemployment claims, hundreds of bankruptcy filings, $26.7 trillion of national debt, a $4 trillion federal budget deficit, $110 billion of state budget shortfalls, and unfunded pension liabilities of $1.62 trillion. Quite to the contrary.

S&P 500 has more than fully recovered from the March coronavirus lockdown shock and is up 8.3% on the year to 3,500 as of August 31. The Nasdaq is up a staggering 31% in 2020 to 11,775. Gold has gained 30% and is now priced at 1,971 an ounce. The 2-year Treasury yield at 0.13% has plummeted 143 basis points. The 10-year is down 121 basis points to 0.70%. The 30-year at 1.47% is 91 basis points lower. The 10-year BAA corporate bond yield has fallen 68 basis point to 3.02%. In the tax-free sector, the 2-year AAA municipal general obligation bond yield has dropped 88 basis points to 0.16%, the 10-year is down 63 basis point to 0.81% and the 30-yield has fallen 53 basis points to 1.56%.

Last week, the Fed indicated that it will continue to monitor the pressure gauge, remaining accommodative regarding rates and tolerating periods of higher inflation in order to focus on keeping unemployment low. The forward-looking stock market, full of optimism for coronavirus treatments and vaccines and pleased with the better than expected economic data, continued to rally. But inflation is not welcome in the lexicon of bondbuyers, so a pressure switch was triggered.. Municipals and Treasuries both weakened; for tax-exempts, it was the third consecutive week of higher yields. Muni investors, flush with cash from more than $47 billion of maturing and called bonds in August added a total of $9.5 billion to mutual funds and ETFs despite increasing credit concerns. On the month, Treasury returns fell 1.20%. The general muni market as measured by the ICE BofAML Municipal Index lost 0.34% while the High Yield Index gained 0.42%. So far this year, Treasuries are up 9.02%, munis are up 3.25%, taxable munis are up 10.45%, and corporate bonds with maturities of 15 year and longer are up 9.05%.

Primary municipal bond volume in August exceeded $40 billion for the third straight month, propelled by $12.6 billion of taxable issuance. In the high yield sector, the Hastings Campus Housing Authority in California sold $406.8 million of non-rated bonds with a final maturity that went all the way out to 2061 priced at 5.00% to yield 4.95%. The Public Finance Authority issued $73.2 million of non-rated bonds for Whitestone Senior Living in Greensboro, North Carolina structured with 2055 term bonds priced at 5.25% to yield 4.56%, and a $20.8 million non-rated transaction for Pine Springs Preparatory Academy in Holly Springs, North Carolina that had 2055 term bonds priced at 6.25% to yield 6.618%. The North Carolina Medical Care Commission came to market with a $47.8 million non-rated deal for Pennybyrn at Maryfield that included a 2050 maturity priced with a 5% coupon to yield 4.09%. The Arizona Industrial Development Authority brought a $28.5 million non-rated financing for Linder Village in Meridian, Idaho with a single maturity in 2031 priced at 5.00% to yield 5.245%.

This week, HJ Sims is in the market with a $135.8 million expansion financing for the Toby & Leon Cooperman Sinai Residences of Boca Raton. The non-rated bonds are being issued by the Palm Beach County Health Facilities Authority and are structured with maturities in 2024, 2025, 2027, and 2055. Among other deals planned for this week is a $1.3 billion Baa3/BB+ New York Transportation Development Corporation issue for Delta Airlines at LaGuardia Airport Terminals C & D, a $274 million Southern Ohio Port Authority financing for PureCycle, a $162 million BBB/BB+ rated Metropolitan Pier and Exposition Authority deal for McCormick Place, a $48.2 million BBB- rated Michigan Strategic Fund/Grand Rapids Economic Development Corporation transaction for Porter Hills Presbyterian Village, and a $16.5 million BB+ rated California School Finance Authority financing for Classical Academies.

Markets will be closed on Monday as America takes the long Labor Day weekend to decompress and celebrate the many contributions made by its workforce of 160 million to the strength and prosperity of our nation. We hold closest in our thoughts the 27+ million who are unemployed and under employed as a result of the pandemic and hope that, with the help of personal and professional networks, that their searches are soon successful and talents again rewarded.

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Market Commentary: Neither Snow Nor Rain Nor Low Yields

The first American post office was located in a bar in Boston, and no one who studies American history would be surprised to learn this. The historic 1639 site has since been replaced many times over and is now home to a 42-floor skyscraper of mixed office and residential use in the downtown area. So, Hinsdale, New Hampshire now holds the record for the country’s oldest continuously operating post office, a clapboard structure on Main Street that still boasts the original brass postal boxes. That location is one of 31,322 currently managed by the United States Postal Service, an independent agency of the Executive Branch, with roots dated back to 1792 when first authorized by the U.S. Constitution. Its 630,000 employees handle 48% of the world’s mail volume, operate one of the largest civilian fleets on the planet with nearly 228,000 vehicles, and place itself at the core of a $1.6 trillion mail industry with more than 7.3 million workers.

There has been a lot of attention focused of late on this agency and its prominent, perhaps integral, role in the coming elections. If many of us decide not to vote in-person at polling sites, as expected, will it be able to process millions of mail-in ballots securely and on time? Under the post 9/11 Mail Cover Program, they already photograph the front and back of every piece of U.S. mail as part of the sorting process, and we currently entrust them to handle 471 million pieces of mail every day, 36 million of our annual address changes, and 80 million of our money orders. Many of our local postal workers are highly trusted as neighbors and friends, better known to us than are any other government representatives, relied upon for critically needed deliveries. In the early days of parcel post, even children were “mailed” back and forth between parents and grandparents on rural routes. But, over the years, the postal mission of serving the public good was in large part intertwined with a business model that has become outdated by technology. It is seen by some as a poster child for mismanagement, a target for privatization, or a black hole unworthy of further taxpayer subsidies.

Ben Franklin was the first U.S. Postmaster General and Louis DeJoy is the 75th to hold that role. DeJoy is the second highest paid government official after the President and, since June, has presided over the nation’s largest retail network — bigger than McDonald’s, Starbucks and Walmart combined – paying $2 billion in salaries and benefits every two weeks, overseeing one of the nation’s oldest law enforcement agencies, straining under losses of $2.2 billion between April and June, $11 billion of debt, and Congressionally imposed limits on rate increases as well as requirements for pre-funding retiree health benefits. DeJoy, a CPA and former logistics executive, was just hauled before several Congressional committees in urgent virtual hearings, peppered with questions on his recent policy changes, and led on record to commit to delivering ballots within one to three days of being mailed. He was unable to cite the cost of mailing a postcard (35 cents) but was thankfully not asked to try and recite the famous words engraved on the front of New York City’s Farley Post Office: “Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds”, written by the ancient Greek historian Herodotus in the 5th century B.C. in reference to messengers in the Persian Empire.

The House of Representatives came back from recess for a rare Saturday session to pass a bill providing $25 billion in emergency funds for the USPS and halt any changes to its operations until after the November election. The funds would be in addition to the $10 billion loan made by the Treasury in July under a provision of the CARES Act. If additional funds are approved by the Senate and White House, they would likely come in the context of a larger stimulus package on which no consensus has been reached since May. Main Street Americans, many struggling with budgets in the hundreds and thousands of dollars find it hard to process discussions involving billions and trillions. And yet these numbers pepper the daily headlines. One trillion is a thousand billion. One billion seconds ago, it was 1988. One trillion seconds ago it was roughly 30,000 B.C. A trillion dollars in $100 bills stacked on top of each other would be 789 miles high. A United Nations policy brief projects that the pandemic will cause $1 trillion in losses to the tourism industry. More than $1.4 trillion if investment grade corporate debt has been issued so far this year. Apple’s market capitalization hit $1 trillion in August of 2018 and it topped $2 trillion last week. The U.S. budget deficit has climbed to a record $2.81 trillion. The total size of the municipal market is $3.9 trillion. The stock market has surged by $13 trillion since its March 23 low; at this writing, the S&P 500 at 3,456 and Nasdaq at 11,589 have risen to record highs. The Chinese economy totals $14 trillion and the U.S. economy totals $21 trillion. Governments and central banks have already committed $20 trillion to pandemic relief efforts The U.S. debt exceeds $26.5 trillion. Assets in U.S. funded and private pension plans exceeded $32 trillion in 2019. The largest banknote on record, 100 Trillion, was issued in Zimbabwe in 2008 at the peak of a hyperinflationary period; it was worth $33 on the black market.

The International Capital Markets Association estimates the size of the global bond market at $128.3 trillion. Bond traders, however, are working with yields that are microscopic. At this writing, the 10-year Treasury yields 0.71%. The comparable sovereign yield in Japan is 0.03%, in the United Kingdom, Spain, and Portugal it is about 0.30%, in Canada it is 0.62%, in France -0.12%, in Germany -0.41%, and in Switzerland -0.47%. The 10-year top-rated tax-exempt municipal general obligation bond yields 0.75%. The U.S. can-maker Ball Corporation recently made history by selling 10-year BB+ rated bonds at 2.875%, the lowest coupon ever in the high yield market for a bond with a tenor of 5 years or longer, according to Bloomberg. There is some nice yield, however, to be found in the U.S. corporate and municipal markets for those able to tolerate some credit and duration risk.

At HJ Sims, neither price trends nor fund flow levels nor light dealer inventories nor lack of primary supply stays our traders from the hunt for and swift execution of purchases and sales for our income-seeking clients. We scour the high yield muni and corporate markets for our clients and offer opportunities to those who contact us with their interests and risk guidelines. Last week, the Tarrant County Cultural Education Facilities Finance Corporation brought a $131.4 million non-rated deal for MRC Stevenson Oaks in Fort Worth that featured 2055 term bonds priced at par to yield 6.875%. The Massachusetts Development Finance Agency had a $56.6 million BB+ rated financing for Milford Regional Medical Center that had a final maturity in 2046 priced with a coupon of 5.00% to yield 3.27%. The Florida Development Finance Corporation issued $14.4 million of non-rated bonds for UCP Charter Schools structured with 2050 term bonds priced at 5.00% to yield 4.70%. The City of Topeka had a $12.4 million non-rated financing for senior service provider Midland Care that included 20-year tax-exempt bonds priced at par to yield 4.00%.

This week, more schools re-open with hybrid learning plans, the world’s foremost economists gather for the first virtual Jackson Hole symposium, and the first virtual Republican National Convention convenes a week after the first virtual Democratic National Convention. U.S. and Chinese trade officials meet, riots continue to upend cities from Portland to Kenosha to New York, and Hurricane Laura threatens our citizens in Texas and Louisiana. There are now more than 179,023 deaths associated with CV-19 in the US. As this summer comes to an end, our thoughts, prayers, and good wishes are with all of the students, families, caretakers, healthcare providers, government officials, party leaders, legislators, thinkers, negotiators, public safety officials, businesses, associations, and market-makers working so hard to help us endure and transcend this pandemic.

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Market Commentary: No Confetti

The first National Convention of the Democratic Party was a three- day affair held in Baltimore in 1832 with delegates attending from every state except Missouri. The incumbent president, Andrew Jackson was nominated for a second term, and former Secretary of State Martin Van Buren of New York defeated John Calhoun to become the vice presidential running mate. The delegates adopted a platform and a number of rules that led to a framework that has since been used by all parties every four years. But over time, delegates could never have contemplated conventions like the ones we are having in 2020 with pre-taped videos, Zoom, empty ballrooms, no hats, no balloons, no streamers, buttons, pennants or cheers, no visible runners or horse-traders. There are 4,750 delegates to the four-day Democratic convention concluding this week. Next week’s virtual Republican convention will include an estimated 2,551 delegates.

For the financial markets, Election Day cannot come soon enough. Traders and investors loathe uncertainty yet, between the pandemic and the polling, the country is enveloped in it right now. Everyone from the top CEOs at investment banks to the young worker just starting to build a retirement account is now speculating on how they will be affected by the November 3 results – if there are results available that night or soon thereafter. If there are widespread ballot integrity issues and we have a repeat of the Bush-Gore contest from 20 years ago with recounts and litigation and unclear outcomes lasting for 34 days or two months, all U.S. markets could slide. It is hard to imagine a contested election lasting beyond Inauguration Day on January 20, 2021, but we have recently seen a lot of developments that were heretofore unimaginable. Two of the more likely possible outcomes would have the greatest impact on stock, corporate, and commodity market volatility for several months, in our view. Under several scenarios, we would also expect some temporary spikes in Treasury prices and yields as the world digests the victories and losses. The steady performer, in our opinion, will likely be municipals. Let us take a minute to explain why.

In a scenario where the incumbent president is re-elected and the House and Senate remain under current control, we anticipate more partisan gridlock blocking further efforts at tax reform. SALT state residents as well as earners in most income brackets will continue to present strong demand for tax-exempt bonds and nontraditional buyers attracted by the yields and credit quality of taxable munis versus corporate credits badly battered by coronavirus will buoy prices. State and local cries for pandemic recovery aid could produce an infrastructure bill with authorization for a national issuer/guarantor or perhaps a subsidized taxable muni product that will prove to be interest to both domestic and foreign buyers. With the Fed remaining in its role as backstop for all markets and protector of liquidity, equities should continue to rally, Treasuries remain in heavy global demand, and municipal yields remain low, bolstered by favorable technical conditions.

Should a new president be elected with control of the House and Senate unchanged, partisan gridlock will thwart attempts at most major policy reversals. Markets would expect a new series of executive orders and actions in the realm of trade, health care and the environment but we can also see the lingering effects of the pandemic likely producing by necessity an agreement on infrastructure as well as state and local aid. This is a neutral to positive environment for municipals but other markets should expect unstable conditions for several months as the details of Democratic priorities and initiatives are rolled out and dissected.

A new president with control of both houses of Congress and a clear mandate would probably lead to action on tax increases, health care reform, tighter environmental regulations, and major stimulus for state and local governments. Nothing happens overnight, but the markets are forward looking and will likely overreact right away. Assuming the absence of another Black Swan, changing fiscal and tax policies are likely to produce prolonged municipal rallies. Demand could be dampened in several states if the state and local tax deduction cap is lifted. But the most volatility would likely be seen in stock, commodity and other markets as new policies take shape and ramifications considered.

Should the incumbent be re-elected and have control of both houses of Congress there might be a clear mandate for further tax reform and the further loosening of regulations, all favorable to equity and commodity markets. Munis could become less attractive. However, there is a wide enough range in philosophies within the Republican party such that consensus on taxes, health care, spending, trade, immigration and other thorny issues may not be so easily reached. In any event, we would expect that pandemic-driven needs for federal assistance will help bolster state and local credits, permit the return of tax-exempt refundings and raise yields enough to offset any loss of interest in tax-exemption as a result of any further tax cuts.

There are 75 days to Election Day. Back in the here and now, investors are focused on the end of summer, very basic back-to-school issues, high-priced assets, and record-setting debt levels and new issuance. Month-to-date investment grade corporate issuance already totals $110.5 billion and high yield corporate issuance so far in August exceeds $47 billion. The U.S. Treasury is on track for a record refunding this month; debt issuance was $2.753 trillion in the second quarter and $947 billion is planned this quarter. The federal government is projected to have a budget deficit of $3.7 trillion during the fiscal year about to end on September 30.

So far this month, equity gains have reversed all the losses suffered since the coronavirus sell-off in March. The Dow is up 5.1% in August, the S&P 500 has just hit an all-time high, and the Nasdaq has gained 4.3%.  Oil prices are up 6.5% to $42.89 a barrel and gold prices have climbed 1.6% to $2,006 an ounce. Treasuries have weakened; the 2-year yield is up 4 basis points to 0.14%, the 10-year has added 14 basis points and stands at 0.66%, and the 30-year at 1.39% is up 20 basis points.  Municipal yields have inched up an average of 2 basis points. At this writing, the 2-year AAA municipal general obligation bond yields 0.14%, the 10-year is at 0.67% and the 30-year is at 1.39%.  Muni investors are adding $32 billion of cash from maturing and called bonds this month and, with a record low amount of dealer supply, have been adding to muni bond fund holdings; funds have taken in new money for 15 consecutive weeks. So far this month, there has been $19.5 billion of new muni issuance, $8.4 billion of which has come as taxable. Last week, the Arizona Industrial Development Authority was in the market with a $250.7 million issue for Legacy Care structured with a 2050 term maturity that priced at 7.75% to yield 7.836%. The National Finance Authority had a $129.4 million B rated resource recovery refunding deal for Covanta due in 2043 that priced at par to yield 3.625%. Florida’s Capital Trust Agency sold $17.6 million of non-rated bonds for Team Success School of Excellence that featured a 35-year maturity priced with a coupon of 5.00% to yield 4.99%. This week’s calendar is expected to add another $12.5 billion to the total, with $4.2 billion of new taxable supply. Among the high yield financings on the slate is a $131.8 million noon-rated deal for MRC Stevenson Oaks senior living community in Fort Worth, a $59.1 million BB+ rated transaction for Milford Regional Medical Center in Massachusetts, and a $14.2 million non-rated issue for UCP Charter Schools in Orlando.

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Market Commentary: Sticker Shock

Municipal bonds advanced in price again last week on the strength of extraordinary cash balances and an absence of sufficient supply. Yields fell to their lowest point in 70 years. Looking for places to reinvest the $22 billion from bond redemptions and maturities on August 1, 2020, investors added another $1.4 billion to tax-exempt mutual bond funds last week and $229 million to muni ETFs. The modest new issue calendar of $8.1 billion was quickly absorbed by buyers who are waiting impatiently in line for more. The State of Hawaii brought a $995 million AA+ rated taxable general obligation deal with a maximum yield of 2.293% in 2040. Phoenix Children’s Hospital had a $245 million A1-rated financing with a final term maturity in 2050 yielding 2.12%. In the secondary market, MMA reported on the sticker shock, citing 5% San Francisco general obligation bonds due in 2025 traded at yields as low as 0.07%. In the high yield sector, the Academy of Advanced Learning charter school on Aurora, Colorado came to market with an $8.5 million BB rated transaction that priced at par to yield 4.375% in 2027. The Bond Buyer Municipal Bond Index (based on 40 long-term bond prices) fell two basis points to 3.52% from the week before. The 20-bond GO Index (20-year general obligation yields) dropped seven basis points to 2.02%. The 11-bond GO Index (higher grade 11-year GOs) declined to 1.55%. The Revenue Bond Index decreased seven basis points to 2.44%.

Munis are not the only products in great demand. Initial public offerings are on track to hit highs not seen since the 2000 tech boom.  Equities, as defined by the Dow Industrial, gained slightly more than a thousand points last week to close at 27,433. Gold prices hit an all-time high last week with spot prices climbing as high as $2,070 an ounce. U.S. corporate high yield bond fund inflows totaled $4.39 billion last week and the primary market saw $21 billion of new high yield bonds issued; the year-to-date volume now totals $260 billion. The average yield on investment grade corporate bonds at 1.82% is at an all-time low. There is also an unquenchable thirst for U.S. Treasuries where new issue supply is much heavier and there is a worldwide hunt for yield as the level of negative yielding debt exceeds $14 trillion. This is indeed fortunate as the Treasury plans to sell a record $112 billion in notes and bonds in this week’s refunding auctions. The three-month Treasury finished last week at a 0.09% yield, the 10-year Treasury at 0.56% and the 30-year Treasury at 1.22%

All of  this remains hard to reconcile in the context of quarterly U.S. earnings reports and economic data which, while above expectations, are nevertheless ghastly; rising coronavirus counts that terrify teachers, troopers and tight ends; the looting and riots damaging so many of America’s great cities; trade combat, more often described as “tensions”, with China; pollsters paid to support divisive narratives; fall election lineups featuring consequential face-offs; and inscrutable political strategies holding up the next national fiscal aid package, just to name a few. This is our status quo through Labor Day — and perhaps until November 3. 

We continue to focus on the positives but look under all the proverbial hoods and kick all the tires in our daily analytic, surveillance, and trading work. We encourage you to contact your HJ Sims advisor to review the credit fundamentals in your portfolio, as well as in new offerings we see every day that may be suited to your risk profile and worthy of your investment.

Market Commentary: Groundhog Day

The 1993 box office hit starring Bill Murray portrayed a TV weatherman from Pittsburgh sent with his producer to cover the annual shadow-no shadow show in Punxsutawney, Pennsylvania which, for 120 years, has produced legendary forecasts of early spring or extended winter. He soon becomes trapped in a time loop nightmare that causes him to relive the events of February 2 with the townies over and over and over again. The movie, which was actually filmed in Woodstock and Cary, Illinois with an unknown woodchuck, became one of the most popular romantic comedies of all time and “groundhog day” became our new term for being stuck in a job or life that is mind-numbingly repetitive and unpleasant.

Groundhog Day is the cycle that many of us find ourselves in for five going on six months now. On the personal front, we smack the same alarm button every morning not knowing if is in fact Wednesday or Sunday, April or August. We are mostly limited to our homes, in mostly small spaces, often with family but sometimes alone, and venture out at our risk with mask and gloves to work, shop, or just get some air. Like the character Phil Connors, some of us try counseling, take side jobs, reach out to help others in need, learn to play the piano, fall in love. Others eat and drink too much, lash out, spend unwisely, take crazy gambles. On the work front, our lives are mostly inextricably linked with the very same spaces, people, events and risks. In many ways, our days are as Yogi Berra once said, “déjà vu all over again”. And try as we might to find humor in our daily routines, exercise, socialize with our family and friends, or make plans for the future, these efforts, once so normal and natural, have become a tiresome chore amid restrictions that were tolerable for 15 or 30 or 60 days but now seem quite permanent. We suddenly long for the good old days, no matter how lousy they may have seemed back a mere six months ago, pre-Covid.

The financial markets have generally loved the Groundhog Day cycle since late March, in the same way they have loved all the vaccines administered by the Federal Reserve for the past 11 years. They have saved us from inflation, depression, and most undesirable losses. While federal and state pandemic control-related policies have devastated small businesses and caused communities to split over what to do about schools, prisons, churches, nursing homes, taxes and the kind of government we want after November 3, as investors we have been reliving a reel of rallies.

Last week, as Fitch Ratings lowered the outlook of the United States of America to “Negative” from “Stable,” the 10-year Treasury yield fell to its lowest level not in decades but in centuries — 234 years to be exact — at 0.52% and the $20 trillion market saw volatility fall to a record low. During July, the benchmark yield dropped 13 basis points, the 2-year sank 4 basis points to 0.10% and the 30-year plunged 22 basis points to 1.19%. At this writing, there is speculation that the entire Treasury yield curve will soon be under 1%.

The Nasdaq, just having hit its 30th record high in 2020, added more than 686 points in July, closing at 10,745. The Dow gained 615 points to finish at 26,428. The S&P 500 ended up 5.5% at 3,271. The Russell 2000 climbed 39 points to 1,480. Reuters recently reported that the average holding period for U.S. shares has dropped to 5.5 months versus 8.5 months in December; this is a new record low, beating the turnover seen during 2008 crisis and reflecting investor fear of missing out juxtaposed against the terror of owning overpriced stocks in illiquid market. Oil prices rose $1 a barrel to $40.27. Gold prices spiked 10.8% to $1,975 an ounce and has since crossed the historic $2,000 mark. Gold is up 35% this year, making it one of the best performing assets so far alongside silver which at $26.80 is up more than 50%.

Despite weakening state and local credit fundamentals resulting from the Covid-depressed economy, the municipal bond market is soaring higher based on technical factors that include light tax-exempt supply, strong demand, buyers significantly outnumbering sellers since march 17, lots of excess cash from summer bond calls, coupons and maturities, light dealer inventories, and a steady stream of inflows for 12 consecutive weeks into muni bond ETFs and mutual funds. In July, $7.5 billion was added to mutual funds and the muni rally continued. July issuance was actually the highest in 34 years at $42.6 billion but 35% of the total came in the form of taxable bonds. Year-to-date issuance of corporate bonds by non-profits is twelve times higher than it was last year. The general market was up 1.3% with strong performances by zero coupon bonds. The high yield sector gained 1.2%, and taxable munis outperformed with returns of 2.3%. During the month, the 2-year tax-exempt AAA municipal general obligation bond yield went from 0.27% to 0.13%, the 10-year from 0.90% to 0.65% and the 30-year from 1.63% to 1.37%. The 10-year muni-Treasury ratio currently stands at 124.8%.

In the muni primary market last week, the Public Finance Authority sold $18.4 million of BB-minus rated charter school revenue bonds for Founders Academy of Las Vegas that came with a 2055 maturity priced at 5.00% to 4.59%. In the high yield corporate market, Seaworld Entertainment had a 5-year non-call deal, upsized from $400 to $500 million, with more than $2 billion of orders that priced at par to yield 9.50%. In the corporate bond sector, investment grade bonds gained 2.9% in July while high yield climbed 3.9% and more than half of high yield borrowers had total returns that higher than that, up to 24.8%. Higher rated issuance slowed to $65 billion and high yield deal volume totaled only $25 billion. This week, investors will see 20% of the companies in the S&P 500 index report quarterly earnings. There are approximately $30 billion of investment grade deals on the calendar and $13 billion of high yield deals have priced already as of Wednesday morning. The muni slate totals approximately $7.3 billion.

U.S. markets are not reflecting the condition of an economy that posted gross domestic product of negative 32.9% in the second quarter and is still struggling with how to track and contain the SARS-CoV-2 virus. But performance must be viewed in a global context where negative yielding debt totals $14.3 trillion and there is a worldwide hunt for any yield. In addition, the Fed is suppressing rates at zero, extending its crisis lending through December, and pledging to do whatever else it takes to overcome a downturn characterized by the Chair as the most severe in our lifetimes. The Fed’s balance sheet has expanded to $7 trillion and may well grow to $11 trillion by year-end. There is no agreement between the House, Senate and White House on the terms of the next stimulus, but this has long been expected to wrap up by Friday when the Senate recess is scheduled to begin. The good news will help to reduce fallout from the weak July jobs numbers also expected on that day and the damage wrought by Hurricane Isaias up and down the East Coast.

Market Commentary: Investment Ballpark

The investment ballpark, much like every stadium across the country, looks different at this point in the season. It has changed as a result of the coronavirus and is still morphing as major players study the whole lineup of social unrest, campaign platforms, and this start-and-stop economic recovery with its unprecedented unemployment, school and business closures, and financial pressures that caused nearly one third of all Americans to miss their housing payments due on July 1. In the same way that Major League Baseball has been struggling with health and safety issues affecting players and fans to determine the future of the game amid alarming increases in cases, conventional financial analysts taking in all these unsettling conditions might deem most investments ill-advised at this time, perhaps none more so than the obligations of state and local government whose revenues have plummeted alongside incomes and sales.

There are some 65,000 individual municipal borrowers with about a million different credits outstanding. Many are general obligations of state and local governments stressed by six months of tax streams that have dried up and a gush of unexpected social spending. Some are backed by specific revenues that have been more impacted than others. Common problems for all are compounded for some by issues stemming from trade wars, court decisions, violent crime, and population moves. Many government and nonprofit borrowers began the year with robust rainy day funds — but plenty of others did not and their best laid plans have been scuttled by Covid-19 related shutdowns. Urgent needs and wish lists have been exchanged with Congress, but the terms of a fifth federal aid package have yet to be determined at this writing. In the meantime, in spite of all the facts and headlines, the 11-week rally continues and municipal bonds are advancing steadily once again. Last week, the 10-year tax-exempt AAA general obligation benchmark yields fell another 4 basis points to 0.71% right alongside U.S. Treasuries, which fell like a sinking fastball from 0.63% to 0.59%. The 30-year muni yield also dropped 4 basis points to 1.43% while the long bond boosted its slugging percentage such that its yield fell a full 10 basis points to 1.23%.

Several factors contribute to the string of rising bond prices. First, the Federal Reserve has not only held rates near zero but also positioned itself as the equivalent of a baseball backstop for both municipal and corporate bonds with liquidity programs that have lulled markets into thinking they are protected from wild pitches. Second, whether or not historic data is relevant to the current times, analysts continue to point to an “error rate” for munis that remains extremely low. Moody’s data from 1970 through 2019 shows that the average five-year annual default rate for its rated municipal bonds was 0.08%. Corporate bonds, which have lower ratings, had a 6.7% default rate over the same period. Third, cash that has been sitting on the sidelines continues to pour into the mutual funds and ETFs from households and institutions; Lipper reported $2.1 billion of municipal inflows and $11 billion of taxable bond fund inflows for the week ended July 22. Fourth, many corporations have paused or cut stock dividends, causing some to exit the equity markets and look to the bond markets for less volatile and more reliable sources of income.

A fifth factor, and one of the most significant, involves the supply/demand imbalance. The low rate environment and need to bolster liquidity to survive a pandemic of uncertain length and effect, has caused a record surge in taxable bond issuance. The U.S. Treasury has borrowed more than $3.4 trillion as of June 30 and plans another $677 billion of debt issuance by the end of the third quarter. Corporation have issued more than $1.2 trillion of investment grade debt and $230 billion of below-investment grade debt so far this year. The year-to-date supply of municipal bonds totals $239 billion, up 25% from last year at this time, despite the pullback in issuance during volatile conditions in March. But an increasing percentage of this debt is coming in the form of taxable issues for hospitals, colleges and large borrowers refinancing debt under the 2018 tax law. So far this year there have been about $69 billion of taxable munis issued; this month, taxable munis are expected to exceed 50% of new issuance according to Municipal Market Advisors. This exacerbates the supply/demand imbalance for tax-exempts which are being sought in great part to offset the loss of state and local tax deduction. The loss was felt by millions again on July 15, the tax filing deadline that was extended due to the coronavirus.

Major bondbuyers — life, property and casualty insurers, pension funds, and foreign institutions have become switch hitters — crossing over into the muni space historically dominated by U.S. households. As sovereign and corporate yields have plummeted under fiscal and monetary policy, and negative yielding debt approaches $15 trillion, tax-exempt and taxable U.S. muni yields are waving buyers in like a third base coach. The 30-year A rated taxable muni yield was 2.94% on Monday, versus 2.76% for the comparable A rated corporate maturity and 1.88% for the comparable A rated tax-exempt.

As we approach August 1, the municipal market is expected to see the largest of the year’s major coupon, call, and principal maturities deliver even more cash to an undersupplied market. Investors will not find as much in the way of pinch runners as they would like. Yields are lower across the board. Dealer inventories are at also at historic lows. Many of the bonds in the few bid-wanted “rosters” in circulation have yields so low that they are in fact negative after accounting for fees and inflation.

The new issue market has been the only game in town for buyers of yield. This week’s calendar will likely come in under $7 billion, so there will not be enough to go around. Last week in the high yield sector, we saw five charter schools. Warren Academy of Michigan came to market with a non-rated $9.6 million limited offering structured with a 30-year maturity that priced at a premium 5.50% to yield 5.45%. Landmark Academy in Michigan sold $13.4 million of BB rated bonds that had a maximum yield of 5.00% in 2045. The College Prep Middle School in Spring Valley, California placed $12 million of non-rated bonds at par to yield 5.00%. MAST Community Charter School in Philadelphia had a $27.7 million financing with BBB-minus rated bonds structured with a 2050 term maturity priced with a 5.00% coupon to yield 3.32%. And Renaissance Charter in Florida borrowed $66.1 million in a non-rated financing that included 30 year bonds priced at 5.00% to yield 4.375%. The Sweet Galilee at the Wigwam assisted living community in Anderson, Indiana brought a $22.4 million non-rated transaction priced at par to yield 5.375% in 2040. The White River Health System in Arkansas had $32.6 million BBB-minus rated bonds issued through the City of Batesville that had a final maturity in 2032 priced with a coupon of 3.25% at a discount to yield 3.35%. McLean Affiliates in Simsbury, Connecticut brought a $64.8 million BB+ rated bond financing due in 2026 and priced at par to yield 2.75%. And Navistar International Corporation had a $225 million B3 rated financing priced at par to yield 4.75% in 20 years.

U.S. Corporations are in the process of reporting second quarter earnings which, while devastating, are in many cases slightly better than feared. Through last Friday, more than a quarter of S&P 500 companies have announced results. Losses larger than those taken at the height of the last recession have not, however, steered investors away from the stock or corporate bond markets. The Dow gave up 202 points last week to close at 26,469. The index is down 7.25% on the year but has crawled back from its March low of 18,591. The S&P 500 lost 9 points but has erased nearly all its early season pandemic loss and is nearly flat in 2020. A handful of all-star technology stocks have caused The Nasdaq to outperform; although the index fell 140 points last week, is up 15.5% this year. Oil held steady at $41.29 but is off 32% since January. Gold has rallied to record highs; last week prices per ounce rose $92 or 5% and are currently 28% or $473 higher than where they started the year.

HJ Sims has been working with a number of nonprofit and for-profit borrowers to help them take advantage of current market conditions and opportunities. Our traders and advisors have been proactive in working with our investing clients on portfolio reviews, swaps and recommendations for strategically putting free cash to work. We are closely following some of the trends in credit impairments and encourage careful and regular professional surveillance of holdings to ensure that current risk limits and future income needs are in line. Those taking summer staycations, those with time to spare when MLB games are postponed, and those doing quarterly or mid-year reviews can benefit from a conversation with their HJ Sims advisors.lk