While The Year of the Rat was doomed from the start according to some Eastern astrologers, we all root for a reversal in the second half of 2020 as we mourn the more than 545,000 lives lost to Covid-19 worldwide, including 131,500 in the U.S., at this writing. Needless to say, we are also still counting the toll taken on many of our neighborhood businesses: barber shops, restaurants, dry cleaners, and hotels. Many national names that became local favorites as well have filed for bankruptcy: Hertz, Gold’s Gym, GNC, Neiman Marcus, Brooks Brothers. One hometown, Fairfield, Alabama itself filed for Chapter 9 in May; its financial troubles date back to the closures of a U.S. Steel mill and Walmart Supercenter five years ago but this pandemic proved to be the last straw.

The first two quarters of the year are in the rearview mirror now. Many unknowns lie ahead: the availability of a vaccine, where we are in the lifecycle of SARS-CoV-2, election outcomes less than four months away. We cling to assurances from our central bank that rates will remain at near zero, likely through 2022, and that the Fed together with the U.S. Treasury stand ready to quickly iron out the major wrinkles and puckers that afflict the fabric of our economy. The cost is enormous and will be born by this and future generations. Our national debt exceeds $26.4 trillion. The Fed balance sheet has expanded to $7 trillion; more than $2 trillion of Treasuries and mortgage-backed securities have been purchased with no limit on future buys, and no less than 11 emergency facilities have been rolled out to prop up wobbling markets, including municipal and corporate bonds. The scope and scale of these programs, we are assured, will be magically increased as necessary.

The new decade started out on such a good roll. There had been predictions of an imminent recession for several years, but the U.S. economy was firing on all cylinders and nearly every financial market sector was rallying in an expansion that would last an astonishing 128 months. Six months ago, no one would have believed that the entire world could be simultaneously toppled. We could not imagine that our tightly packed subways and buses in New York City would be virtually empty for months with ridership now down 53% at this writing. It was impossible to think that our children would all be home-schooled, that chemotherapy treatments would be canceled, that almost every Mom and Pop shop on Main Street would close, that our skyscrapers and trading floors would be vacated. Whole new words, phrases, and behaviors have entered our vocabulary: zoonosis, aerosolized droplets, N-95 mask, co-morbidity, face shields, nitrile gloves, superspreaders, viral shedding, social distancing, contact tracing, liquidity facility, yield curve control.

Debates will rage for years over the approaches taken by local, state and federal officials during this pandemic. The permanent damage from the disease as well as some governmental policies cannot be assessed yet. We are still trying to collect data we never knew we needed. But green shoots as well as superstars have emerged. New entrepreneurs have sprouted, new business models crafted. Population shifts are underway. We are finding our way out and up.

On Saturday, we celebrated the 244th anniversary of American independence while recognizing just how dependent we are – on information technology, on our hospitals and doctors, researchers, public safety officials, life care providers, pharmacists, manufacturers, truckers, and grocery stockers, to name a few. But we Americans prove time and time again how resilient we are. Nonfarm payroll data is coming in well above expectations. Pending home sales were up a record 44% in May. Consumer confidence saw its biggest jump since late 2011. U.S. manufacturing just hit a 14-month high.

Summer is now upon us. We are weary of our lockdowns, worried about the new strain of H1N1 swine flu virus appearing in China or another black swan event, and anxious for a break, a pause, some respite, a vacation. There is pressure on Congress to act on another stimulus before they take their next recess. There is little agreement among economists on the shape and timing of this recovery and what measures are still needed. A number of proposals are circulating: infrastructure, direct aid, business liability limits, the restoration of advance refundings, and Build America Bonds. But as we head deeply into campaign season, most everything has become politicized and issues long bubbling below the surface have boiled over. The threat of a second Covid phase this fall or winter also looms large; a number of states are already seeing new outbreaks among younger populations. Some re-openings are being pushed back or reversed. State and local leaders are struggling with issues attendant to re-opening schools, protecting frail elders; hospitals are seeing new cases, and some patients are reluctant to resume the elective surgeries that generate the revenue that keeps health care systems running.

In the municipal market, muni bond funds have seen inflows for eight straight weeks after experiencing after experiencing record-setting outflows this past Spring. Muni mutual fund assets stand at $771.4 billion down from $814.1 billion at the start of the year. Muni ETF assets total $54.1 billion, up from $49.1 billion in January. The primary calendar is almost back to normal although taxable issuance, including munis issued with corporate CUSIPs, have taken over 25% of the calendar. The slate is dominated by colleges, hospitals, and state general obligation bonds. Note issuance is up 28% over last year and total issuance is at $193.6 billion is 15% higher than last year at this time. We are in the midst of peak redemption season so redemptions, maturing and called bonds will bring in $17 billion more in cash than available supply. The same is true for August, so that bodes well for prices and the reception for new issues through Labor Day.

Some investors have ventured far out on the risk scale, believing that there is an implicit backstop from Washington for just about everything. Others see markets behaving in a manner entirely inconsistent with the economy and sit idle while admitting to a fear of missing out. Money market funds received more than $1.2 trillion of new money between March and May, as investors liquidated some holdings and parked cash from dividend, coupon, maturing and called bonds.

Among the best performers at halftime, gold is up 17% year-to-date, convertible bonds are up 13.13% , the Nasdaq has gained 12.74%, AAA-rated corporate bonds are up 9.42%, U.S. Treasuries 9.02%, and taxable munis 8.13%. In the corporate high yield sector, food and retail is up 5%.

At the close on June 30, the 2-year AAA municipal general obligation bond yield stood at 0.27% versus the comparable U.S. Treasury at 0.14%. The 10-year muni yield was 0.90% while the 10-year Treasury yielded 0.65%. The 30-year tax-exempt benchmark yield was 1.63% versus the long Treasury bond at 1.41%. During the first half of the year, tax-exempt yields declined an average of 59 basis points across the curve. Treasury yields have dropped an average of 122 basis points. Ten-year BAA corporate bond yields have fallen by 31 basis points. The Dow Industrials fell 9.55% during the first half of the year to close at 25,812. The S&P 500 finished at 3,100, down 4% from January. The Nasdaq topped 10,000 for the first time ever. The Russell 2000 fell nearly 14% to 1,441. Oil prices have climbed back after a dramatic fall into negative territory, but were still down 36% on the year at June 30 to $39.27. Gold prices climbed by $261 an ounce to $1,783.

Some industry professionals encourage investors to place cash in ETFs until there is more clarity on the path of the pandemic, the impact that it had on second quarter performance, and prospects for the second half of this unforgettable year. For those investors with low rate fatigue who are focused on generating income but wary of the risk in equities and certain credits, we encourage you to contact your HJ Sims advisor to review your portfolio and make recommendations on some of the many individual bonds that we underwrite or trade, analyze and surveil, that could be better suited to your investment needs and risk tolerance. For those looking to enter the market to take advantage of this low rate environment and wide range of financing and refinancing options, we invite you to contact our investment banking team.

Everything comes to pass and nothing comes to stay. This is the message, usually comforting and reassuring, delivered in sermons, therapy sessions, or along with a bear hug from grandma. Covid-19 has already been an abhorrent presence for too long, and it cannot pass quickly enough for any of us, especially for its principal victims: those with serious underlying medical conditions and those over 65. Medicare is the federal health insurance program for those of us in this age group or with certain disabilities. More than 62 million Americans, nearly 19% of our population, now fall into one of these categories. In data released on Monday, the Centers for Medicare and Medicaid Services reported that, between January 1 and May 16, there were 326,674 Medicare recipients diagnosed with Covid-19, with peak counts coming between mid-April and early May. The percentage of men and women affected was nearly equal, as was the percentage of the aged and disabled, but the agency found disproportionately higher counts in those over 85 as well as in Black enrollees, those in lower income brackets, and those from urban areas. Of all diagnosed, 109,607 or 33% required hospitalization at an average cost of $23,100 per patient. Twenty-seven percent of those admitted were successfully treated and went home, 23% were discharged to a skilled nursing or assisted living facility, 5% went to hospice care, and 28% died in the hospital.

There are 6,146 hospitals here in the United States and, at last count by the American Hospital Association (“AHA”), they have an average occupancy of 60%. Altogether they have 924,107 staffed beds or 2.8 beds available for every 1,000 people. And, every second of every hour of every day, at least one patient is being checked in. Hospital staff began preparing for chaos early this year, they opened satellites in gyms and convention centers, rationed masks and ventilators, and saw pandemic-related spikes in admissions mid-Spring. Many now face new surges and wonder, what comes next? The paradox is that hospitals are the only place where the word “positive” is a bad thing.

On an annual basis, for one reason or another, 34.2 million of us will be admitted to what is known as a community hospital. The AHA defines such facilities as non-federal hospitals serving the general public with average lengths of stay under 30 days; others define them as hospitals with fewer than 550 beds and minimal teaching programs, typically located in a smaller town and locally governed. Fifty-eight percent of us live less than five miles away from a community hospital but–even if the closest one is 25 or more miles away–we can all immediately call to mind the one nearest us where our babies were born, the place we rushed to at 3 am when an alarming symptom appeared, where we celebrated a miracle cure or lost someone we love, where we can count on facts and empathy from doctors and nurses because they are also neighbors and friends. These hospitals are among our largest local employers and serve as a central resource not only for acute care but also for counseling, housing, shelter, job training, and long-term care placement. Some are actually designated as “safety nets” when in fact they all are. In every sense, our community hospitals are not only essential service providers but the true lifelines of our communities.

At HJ Sims, we remain big believers in not-for-profit community hospitals and are investors in the bonds that they issue. Our traders and analysts take a close look at individual credits which vary widely by location, size, level of care, specialization, ownership, management quality and function. We like many critical access hospitals–those with 25 or fewer inpatient beds located more than 35 miles from another hospital. We consider inpatient and outpatient revenue, operational challenges such as nursing shortages, operational efficiencies such as sponsored or acquired health plans, competitors with major market share, government payor mixes, area demographics, charity care, and the emergence of nontraditional disruptors like Amazon. Since the pandemic hit, we have been monitoring the amount of federal assistance received, the increased use of telemedicine, the resumption of elective surgeries, the levels of hazard pay wage increases, and the likelihood of consolidations, particularly for rural hospitals under the most financial stress.

On April 10, the U.S. Department of Health and Human Services began distributing the first of $175 billion of relief funds to hospitals and health care providers. Although federal aid has offset some of the increased expenses and revenue losses attributed to the pandemic, many hospitals have nevertheless had to delay capital projects, furlough staff, and make pay cuts. Some entered the crisis with strong cash positions and are in locations that have been less severely impacted. Others have been slammed and, lacking further aid, may soon breach their bond covenants. Although it is unlikely that debt service payments will be missed, each situation varies depending on the depth and extent of the pandemic, its spread in the community, and the timing of successful treatments and vaccines. Financial challenges posed by dwindling patient volumes, increased competition, rising costs, and reduced reimbursements have already led to the closure or bankruptcy of at least 42 hospitals so far this year.

Our day to day inventory of hospital bonds varies but we have access to a wide array in different rating, geographic and functional categories. At this writing, we own and offer, for example, New Jersey bonds issued for AA- rated RWJ Barnabas Health, the largest academic healthcare system in the state by virtue of its affiliation with Rutgers University and one of the state’s largest private employers with 11 acute care hospitals, 4 children’s hospitals, and the state’s largest behavioral health network. At the time of its last financial report on March 31, the system had 274 days cash on hand and covered its debt service by 3.9 times. These bonds will likely be sold by the time of this publication, but we welcome inquiries for this or similar credits. The primary calendar has recently been heavy with health care deals as institutions look to refinance or bolster liquidity. In the market last week for example, Spartanburg Regional Medical Center in South Carolina, a tertiary care hospital with the first regional heart center and in-patient hospice unit in the two Carolinas, sold $125 million of insured A3/A rated revenue bonds that included a 20 year tax-exempt term maturity priced at 3.00% to yield 3.02% and taxable muni bonds due in 2050 at par to yield 3.553%. The Seattle Cancer Care Alliance, the top cancer treatment and research center in Washington state, issued $232.9 million of A2 rated revenue bonds; the maximum yield bonds in 2055 came with a coupon of 5.00% to yield 2.66%.

This week’s calendar includes tax-exempt and taxable bond issues totaling $350 million for Aa1 rated Intermountain Healthcare, a system of 24 hospitals based in Salt Lake City. On the forward calendar is a $32.1 million deal for BBB- rated White River Medical Center and Stone County Medical Center which together serve 10 counties in North Central Arkansas. The California Health Facilities Financing Authority also plans to bring a $145 million issue for AA rated Stanford Health Care in Palo Alto, the principal teaching affiliate of Stanford University School of Medicine.

The AAA general obligation bond benchmark yields are significantly below where they began the year and where they stood one year ago. The 2-year at 0.27% is 77 basis points below the yield on January 2, the 10-year at 0.88% is 56 basis points lower, and the 30-year at 1.66% has dropped by 43 basis points. One year ago, these benchmark yields were at 1.27%, 1.63% and 2.32%, respectively. So far this year, hospital bonds as measured by the ICE Bank of America Merrill Lynch Hospital Index, have returned 1.42%. The ICE BoAML main gauge of municipal bond performance is up 1.78% and its taxable municipal bond index is up 7.31%.

The Beverly Hills Hotel, subject of the 1977 Eagles classic rock and roll platinum album, is among the California hotels where you are welcome to check in anytime you like. The 108 year-old Pink Palace with its five-star luxury suites and bungalows, long associated with honeymoons and Hollywood, are open although spa services have not resumed yet. Denver’s Brown Palace, which just re-opened after a 64-night shutdown, the first in its 128-year history, is back to offering manicures and massages as well as its iconic afternoon tea. Nationwide, hotel occupancy rates have been slowly rising since April, when they reached a low of 21%. There have been one or two point gains almost weekly in May and June, so reservations have crept up to 36.4% in the most recent week tracked by data firm STR.

All classes of lodging are reporting rates over 20 percent now with the economy bracket showing the best improvement. Many hotels were deemed essential businesses at the state and local level, and have remained open to house medical workers and non-critical patients. But as stay-at-home orders ease, Americans are arranging for some getaways. Among the hotel markets with the fastest improving figures are Virginia Beach, Phoenix, and Philadelphia. In central business districts such as the one in Chicago, however, occupancy is still stuck in the 16% range and it may take two or more years before corporate travel returns to pre-pandemic levels. New York’s hotel industry has perhaps been hardest hit; as many as 25,000 rooms or 20 percent of the city’s total, may never reopen in their current form or under current ownership.

Since March, when travel came to a virtual standstill, an estimated 83% of hotel debt borrowers have asked their lenders for forbearance or payment deferral on loans according to the American Hotel and Lodging Association. The Bureau of Labor Statistics reports unemployment in the leisure and hospitality industry at 35.9% in May; the number of workers has fallen from 16.8 million in February to 9.8 million. Hyatt just announced that it is cutting 22% of its global workforce and extending pay cuts, reduced hours and furloughs for another three months.

So, what is the future of our hotels, valets, concierges, chefs, and housekeepers in the post CV-19 world? When will we leave the palaces we call home and again feel comfortable staying at, eating in, and enjoying the facilities, features and attractions they offer in major cities, quaint towns, and bucket-list destinations such as the palaces of Versailles and Buckingham?

The answers seem to hinge on more widespread antibody testing as well as our acceptance of data, social distancing regimens, vaccines and treatments. The future of this industry is also closely tied to the airlines, how safe we perceive planes to be, how businesses view the necessity and liability of travel. Some analysts expect that drive-to and limited service hotels will come back first and indeed leisure travelers are starting to take short road trips. But various state restrictions with respect to quarantining and rentals still apply and the Centers for Disease Control and Prevention still post alarming warnings of the associated risks of getting and spreading Covid-19. In the meantime, hotels are struggling to address key concerns via contact-free check-ins and rigorous cleaning and safety protocols. Marriott has overhauled its housekeeping practices, Hilton has partnered with Lysol, and Westin is introducing UV light-zapping robots.

The overall growth in the economy is generally expected to lead to a rebound in the hotel industry when we take to the roadways and skies again. The IMF estimates the global economy will expand by 5.8%, and the U.S. economy by 4.7%, in 2021. The Federal Reserve estimates that our economy will shrink by 6.5% this year, then grow by 5% in 2021. In testimony before Congress this week, Fed Chair Powell described three phases related to the pandemic and our recovery. The initial phase of course was the shutdown. Now he believes we are entering the second stage, a bounce-back, evidenced by the drop in the unemployment rate and record 117.7% spike in May retail sales. While continuing to pledge the use of all available tools to help bring about robust growth, he noted that there is still great uncertainty due to rising case counts, consumer fears, and the substantial damage done to many industries. A full recovery is unlikely, he noted, until the public is confident that the disease is contained.

Fallout from the coronavirus has left no sector of our economy untouched, but it is hard to tell by looking at the stock market. Since the end of February, the Dow has gained 3.5%, the S&P 500 5.8% and the Nasdaq 16%. Equity investors are casting many virus-related worries aside, feeling confident in government and central bank stimulus and better than expected economic numbers. Since the pandemic was declared on March 11, Hilton Hotels (NYSE: HLT) stock prices are up 40 percent from their low on April 3, Marriott (Nasdaq: MAR) is up 59 percent from its low on the same date, and Hyatt (NYSE: H) has gained 55% from where it sank on March 18. The prices of 30-year BB rated Hilton corporate bonds have increased by 35% from their pandemic lows in March to $104.329 at this writing. At $98.345, Baa3 rated Marriott Corporation bonds with a similar maturity are also up 35%, and Baa3 rated Hyatt bonds at $103.50 have gained 30%.

Despite the massive increase in U.S. Treasury bond issuance to finance the stimulus, demand has remained steady for the world’s haven asset and yields low. The 2-year Treasury yield has fallen 34 basis points to 0.19% since the pandemic was declared. At this writing, the 10-year yield at 0.75% is down 5 basis points, and the 30-year yield at 1.54% is only 27 basis points off its low. Similarly, municipal bonds have demonstrated remarkable resilience. Two-year tax-exempt AAA rated general obligation bond yields at 0.25% are 30 basis points below where they stood in mid-March. The 10-year benchmark at 0.87% is 4 basis points lower while the 30-year yield at 1.64% s only 9 basis points higher. The municipal new issue calendar has been very well received, municipal bond mutual fund flows have been net positive for six consecutive weeks, and daily customer “buy” trades have exceeded “sell” volume since March 17. Last week we saw a Ba2 rated Texas charter school with a 30-year maturity price with a coupon of 5.00% to yield 4.80% and two non-rated limited offerings: a Florida charter school financing due in 2055 priced at par to yield 6.00%, and a California charter school deal priced at par to yield 6.25%.

At HJ Sims, we believe in the outcome of income. Our bankers, traders and advisors are hard at work every day delivering revenue-maximizing and income-generating ideas for our clients. We have a nice pipeline of senior living financings to benefit non-profit and for-profit partners who have been waiting for conditions like these. We read that assets in money market funds have ballooned to $4.6 trillion, the highest level on record, up $1 trillion so far this year, and reach out to our clients all day long with specific proposals for putting their cash to work in smart ways that are in line with their respective risk tolerances.

With many public companies eliminating dividends to protect liquidity, we find that the steady interest, monthly or semi-annual, produced by higher yielding corporate and municipal bonds to be the right solution for many investors. Whether on Elm Street or Rodeo Drive, as you prepare to celebrate the official start to Summer, pay tribute to the fantastic fathers in your life, and mark the midway point in the year, we invite you to make an appointment with your HJ Sims advisor to discuss your income needs, your views on the economic recovery, and your interest in the opportunities being identified by our traders in sectors including hotels, airlines, schools, and senior living.

In twenty U.S. states there is a town or city called Paradise. In Michigan, there are two. At one point there were 36 different communities with that name. In Indiana, it was believed to be the ideal location for mining; in Montana, fishing. In California, it was the perfect spot for filming scenes from Gone With the Wind. The one in Nevada was created in 1950 so that its five casinos could avoid paying taxes to the city of Las Vegas. Because gambling produced so much revenue, mob-run businesses once paid for all the services they needed out of pocket, using their own private security instead of relying on local or county law enforcement. Paradise, Nevada is still an unincorporated section of Clark County, home to most of the Las Vegas Strip although The Pair-O-Dice is no longer open; its citizens are now served by the Las Vegas Metropolitan Police Department.

There is some talk of late that having a police-free society would be paradise, or at least an improvement over some of conditions that exist in several parts of the country. Since 1751, when the first city police services began in Philadelphia and the first police department was created in New York in 1854, we have come to expect nearly the impossible of our men and women in blue. We cannot overlook evidence of brutality, nor can we discount the sacrifices or forget that more than 22,217 law enforcement officers have been killed in the line of duty. Right now, we have 17,985 police agencies based as far north as Point Barrow, Alaska and as far south as Ka Lae, Hawaii with more than 1.1 million full-time employees. In the wake of dozens of senseless deaths roiling American cities these past two weeks, we welcome civil debate over how some of the $100 billion of our tax dollars spent every year on crime prevention and protection of the citizenry should be redirected or supplemented with training programs, employment screening, and broader initiatives tackling poverty, homelessness, mental health, drug addiction and troubled youth.

With the exception of the 8 minutes and 46 seconds of silence on the floor of the New York Stock Exchange on Tuesday, the financial markets have not paused for a second in recent weeks over headline news of protests, riots, looting, COVID-19 case counts, corporate bankruptcies, widespread continuing unemployment, coming elections, or anything else going on here or abroad. There is simply very little if any correlation between our actual economy and the performance of Dow, the S&P 500 and Nasdaq. To Main Street, where going out for a mere cheeseburger seems like paradise, the endless rally is surreal. We know that Wall Street tends to discount background noise and look for blue skies. We also know that the indices reflecting gains are driven by a shrinking number of firms, heavily weighted by a technology sector that in many ways has benefited from lockdowns and efforts to organize. Most of all, we cannot ignore the Federal Reserve’s massive presence and the market’s near total reliance on its perpetual interventions. The $3 trillion of liquidity support happens to be right in line with the gain in the S&P market capitalization dollar for dollar: from $21.42 trillion in March to $25.24 trillion at the end of May.

The securities industry employs approximately 442,400 and has certainly featured its share of textbook bad actors and felons over the years. Working conditions could not have been more favorable in recent years. Perhaps with the assurance of Fed injections at the first sign of any sniffle, and Congress poised to deliver additional stimulus, the capital markets perceive open-ended tickets to paradise. Conditions for borrowers certainly remain heavenly. But we are now formally in recession after 128 straight months of expansion. On Monday, the National Bureau of Economic Research declared that the record-long recovery from the Great Recession ended in February. In the past, the declaration has required consecutive quarters of negative growth. This time, since our economic collapse was rapid, with an unprecedented decline in employment and production driven by pandemic containment policies. The good news is that economists predict that GDP will turn sharply positive in the third quarter as businesses continue to reopen and Americans get back to work. On Wednesday, we will get more color from the Federal Open Market Committee, which meets for the first time since April 29.

During the first trading week of June, the Dow gained nearly 7%, the S&P 500 was up 5%, the Nasdaq rose by 3.5% and the Russell 2000 increased by more than 8%. Oil prices climbed 11% to $39.55 while gold fell by $45 an ounce to $1,685. The rally in corporate bonds continued as well. The yield on 10-year Baa rated corporate securities fell 12 basis points to 3.75%. U.S. Treasury yields rose over the course of a week capped by the unexpected jump in payrolls and drop in unemployment. The 2-year increased by 4 basis points to 0.20% while the 10-year gained 24 basis points to 0.89% and the 30-year added 26 basis points to 1.66%. Municipal bond yields rose as well after seven days of no change, but to a lesser degree than governments. Flows into municipal bond mutual funds totaled $1.2 billion, marking a third consecutive week of net investment, and reception for new issues was solid. The Fed expanded the eligibility for its liquidity fund to smaller municipalities after the State of Illinois became the first to take advantage of the program with a $1.2 billion, one year loan. The 2-year AAA general obligation benchmark finished the week at 0.19%, up three basis points in yield. The 10-year and 30-year yields rose 5 basis points to close at 0.89% and 1.70%, respectively. This week, we encourage you to contact your HJ Sims advisor for opportunities. The muni calendar is expected to exceed $7 billion with a wide range of tax-exempt, taxable and corporate issues.

Doug Hurley, 53, of League City, Texas, was a Marine Corps fighter pilot before becoming an astronaut twenty years ago. A graduate of Tulane, known for his call sign “Chunks,” he is married to a fellow astronaut. In July of 2011, his last mission was aboard Atlantis on the final flight of NASA’s space shuttle program. Bob Behnken, 49, a native of St. Ann, Missouri with a doctorate in mechanical engineering from the California Institute of Technology, also joined the NASA astronaut corps in 2000 and married an astronaut from his class. Dubbed “Dr. Bob,” he previously served as a test pilot and flight test engineer in the U.S. Air Force, and is the former Chief of the Astronaut Office. The two retired colonels with numerous distinguished service medals have been close friends for two decades. Today both are aboard the international space station, orbiting 220 miles above Earth after having piloted SpaceX’s Crew Dragon spaceship in a spectacular Falcon 9 rocket launch from Cape Canaveral on Saturday, May 30th. They had worked for years to perfect the brand new “bird,” a brainchild of Elon Musk funded with $3.14 billion of federal tax dollars, becoming not only the first two humans on a commercial spaceflight, but providing a moment of much-needed human triumph for a world marred by pandemic and social unrest.

While much less stunning on the global scale, U.S. financial markets have celebrated some milestones. In May, municipal bonds posted their strongest May price performance in history with the ICE BoAML Index returns up 3.25%, reversing two months of losses and bringing year-to-date returns into positive territory at 0.98%. A total of $3.3 billion poured into municipal bond funds and $1.52 billion into municipal bond ETFs in a reversal of the panicked selling a mere two months ago. The coming June, July and coupons, calls and maturities will produce $20 billion of new cash looking for reinvestment opportunities. With few exceptions, the yields on the coupons cannot be replaced. Short investment grade bonds, when factored for inflation and transaction costs, are in fact negative. The 2-year AAA general obligation bond benchmark yield closed on May 29 at 0.16%, right on top of the U.S. Treasury yield and a full 75 basis points below where it began the month. The 10-year muni at 0.84% fell 62 basis points during the month. State and local issuers are now able to access the markets at rates so low that loans are effectively free, which explains why the June calendar could exceed $40 billion. In May, muni issuance totaled $27.9 billion, of which 42% was taxable, including $5.7 billion through the corporate bond market, and nearly all with investment grade ratings or bond insurance.

The last trading week of May closed with both the Treasury and municipal bond markets relatively range-bound with little change in yields or prices. High yield corporates strengthened by 10 basis points on the long end. The Treasury 5-year auction, one of the latest in a long string, was considered weak while the 7-year auction was described in the trade press as uninspired. This capped a month of larger than expected 10- and 30-year auctions as well as the first 20-year auction since 1986. The Beige Book, a report of the Federal Reserve Bank of St. Louis published eight times per year, reiterated the havoc being wreaked on the economy by the pandemic, lending no new insight or direction to markets clutching for reasons to continue their rallies. However, it started to lay the groundwork for the use of a policy tool with a new name, yield curve control, at a time when so much more than yields appear to be beyond control.

Stocks have cast aside concerns over ugly economic data, Hong Kong, China, and the protests, and riots that has escalated in more than 100 U.S. cities in the aftermath of the killing of George Floyd, a 46 year-old truck driver and furloughed security guard. The 220 miles around Minneapolis includes 193 counties in seven states but looting and violence quickly spread far beyond that radius. As if in a parallel galaxy, equities, as defined by the Dow, Nasdaq and S&P 500, all gained more than 4% in May on optimism for progress with treatments and vaccines as well as state and local business re-openings and signs of other major economy recoveries. The Dow finished up 1,037 points, the S&P 500 was 131 points higher, and the Nasdaq gained 6.75% or 600 points. High yield corporate bonds and preferreds have returned more than 9 percent during April and May combined. Oil prices surged $16.65 a barrel or 88% to $35.49 last month, and gold prices increased by 2.5% to $1,730 an ounce.

At this writing, more than 17,000 National Guard troops have been deployed to 23 states to support law enforcement. This is on top of the 45,000 already dedicated to pandemic-related duties in all 50 states. The Federal Reserve, the white knight on which Main Street and Wall Street have relied for solutions to many urgent problems for years, is powerless to quell the social turmoil. Officials are instead entering their traditional blackout period ahead of the June 10 meeting. The damage and destruction to municipal operations and private businesses may not have lasting economic impacts, but the conflicts have further inflamed political divisions likely to persist long after the November elections.

An ambitious young Canadian immigrated to the United States at the age of 29 and began a business in Chicago by selling cheese from the back of a wagon. Six years later, James L. Kraft was joined by three brothers and they soon moved their headquarters to New York. By 1915 they had patented a processed cheese product that did not require refrigeration and sold six million pounds of it to the U.S. Army for military rations. They rebranded as Kraft Cheese Company and captured 40% of the U.S. cheese market before they sold themselves to National Dairy in 1930. Four decades later, the Kraft name was resurrected and the firm began a long series of dizzying mergers and sales until it was acquired by Philip Morris then spun off again. In 2008, Kraft replaced AIG in the Dow Jones Industrial Average and pursued ventures with Group Danone and Cadbury. In 2012, Kraft divided its business into two companies, one focused on grocery product sales in North America, the other on snack product sales worldwide.

Henry J. Heinz, the driven young son of German immigrants was 25 years old when he formed a horseradish packaging company in Sharpsburg, Pennsylvania. In 1876 he started another firm with his cousin and brother. Within 20 years he bought them both out and expanded his business line from tomato ketchup and sweet pickles to include more than the “57 Varieties” in his catchy slogan. By 1908, the Pittsburgh-based firm had become the world’s largest tomato manufacturer and, over time, developed marketing innovations ranging from octagon shaped glass bottles to single-container pouches of mustard and relish to commercials set to the hit song “Anticipation.” The company was managed by members of the Heinz family until 1969. Henry was the great-grandfather of U.S. Senator H. John Heinz III and a second cousin twice removed of President Donald J. Trump.

In 2015, Kraft’s parent company merged with H.J. Heinz Holding Corporation in a $23 billion transaction arranged by Berkshire Hathaway and 3G Capital, two firms that hold a 47% ownership stake. Kraft Foods in Northfield, Illinois became a division and brand within Kraft Heinz Company (NASDAQ: KHC), now the fifth largest food company in the world with 80 factories and $24 billion of annual revenue. The Heinz brand and division in Pittsburgh includes many of the world’s most popular condiment including relish, sauces, gravy, vinegar and baked beans. Kraft’s most popular products include Philadelphia Cream Cheese, Planters Nuts, Jell-O Desserts, Kool Aid, Maxwell House, Oscar Meyer, Nabisco cookies, Cadbury and Toblerone chocolates and, of course, Kraft Macaroni and Cheese which sells one million boxes a day.

The debt-financed merger of the two American success stories has made it rather tough going for shareholders. Market share, revenue and net income have declined along with consumer preferences for fewer packaged foods and the company is reliant on Wal-Mart Stores for more than 20% of its sales. Kraft Heinz has slashed expenses, cut dividends, sold assets, and taken writedowns in an effort to remain competitive. The brand names nevertheless retain huge popularity: during the pandemic lockdowns, pantries around the world have been stocked with Kraft and Heinz staples that are trusted and viewed by consumers as having value. The company is in a defensive sector, one that is likely to remain strong under stay-at-home, eat-at-home scenarios throughout the recession. It has scale and a solid supply chain. In addition, as of March 31, the company had $5.4 billion of cash and a $300 million credit facility still untapped.

Kraft Heinz came to the high yield corporate bond market earlier this month with a $1.5 billion deal funding a tender offer but found enough investor demand to upsize the bond issue to $3.5 billion. This was its first debt raise in the high yield market as the company was downgraded to BB+ by S&P and Fitch who cited a two-year decline in profits, high dividend payouts, and failure to bring its $32 billion debt level down after splurging on acquisitions. Among its outstanding debt, the 4.375% bonds due 6/1/2046 are priced at $92.97 to yield 4.854% at this writing. We compare the yield to that offered by 20-year Treasuries at 1.19%, 30-year Treasuries at 1.43%, 30-year Fannie Maes at 1.55%, and 30-year Baa rated taxable municipal bonds at 3.95%. On the tax-exempt side, Baa3 rated State of Illinois general obligation bonds due in 2045 currently yield 5.17%. For current offerings from our municipal and corporate bond trading desks, please contact your HJ Sims Advisor.

We divert from our usual weekly commentary focused on municipal bonds this week to pay tribute to one of our longtime corporate bond traders, Peter Polakoff, who passed away this week. Peter was a senior vice president in our Boca Raton office for 19 years until he retired after 45-year career in corporate and municipal bond trading. He relished the stories behind each bond and could always find hidden gems among the varieties in our $8 trillion corporate debt market. We at HJ Sims extend our sympathies to his family.

There is at least one place on Earth untouched by the scourge of the pandemic: it is our driest, windiest, and southernmost point, a place that never had an indigenous population, one so cold that if you throw boiling water into the air it will instantly vaporize. With fewer than 5,000 scientists or tourists in peak season, all clumped into one of 70 camps scattered across a desert tundra the size of the United States and Mexico combined, 98% of which is ice, it is the least densely populated of our seven continents, entirely surrounded by water. Antarctica is a scientific preserve governed jointly by 54 countries under a treaty banning military, mining, and nuclear activities. As far as we know, there is no mad rush to seek refuge from pandemic fatigue, Zoom burnout, and anti-lockdown protests there on the Frozen Continent. Most of us have been camping in our homes for two months, creating “quaran-teams”, social bubbles, and virtual cocoons. The cable news, radio, print and social media that so polarized us at the start of the year has largely united us in our need for real-time information, assurance of progress, distraction, and consolation. Some of our thinking, however, is still frozen in time.

Let us take a look at how we view stocks and bonds for a moment. At the start of the new decade, it looked like we were continuing the record-setting 128 month-long economic expansion with rallies ahead in virtually all markets for as far as the eye could see. Unemployment was at 50-year lows. Borrowing rates were at record lows. Inflation was under control. Not everything was rainbows and unicorns for all Americans by any measure. Plus we knew asset prices were inflated. The cycle had to end at some point. But before we heard of SARS-CoV-2, the Fed was our backstop and traders were able to discount nearly all talk of recession, impeachment, war with Iran, or breakdowns in relations with China. Then came the twin traumata of destabilized oil markets and the Wuhan virus cluster that was declared a global pandemic on March 11. Like volcanic eruptions on Antarctica, they changed the landscape. For almost three weeks, the uncertainty was like lava flow and caused markets to move in ways not seen before. Federal, state and local officials then intervened with restrictive policies that had no precedent. Central bankers followed by Congress, moved at the polar opposite of glacial speeds with mountains of money that came out of air as thin as it is on the highest continent in the world.

Citizens complied. Schools quickly learned how to hold online classes. Businesses put up signs: “Sorry Temporarily Closed,” “Take-Out Only,” “Stay Safe, See You Soon.” Markets without trading floors, operating from remote workstations with residential Wi-Fi, took comfort in daily Task Force briefings, reports on the yeomen’s efforts underway to develop tests, treatments and a vaccine, manufacturers nimbly switching from car parts to ventilators, naval hospital ships redeployed, convention centers reconfigured as triage centers. The anguish of separation and loss, particularly among families of those in nursing homes, was in some small part allayed by hopeful signs of slowdowns and recoveries in countries overseas that were earlier afflicted, and reports from hospitals that were not as overwhelmed as feared.

But the lockdowns were extended. Now, barely one third of Americans say they are working and 30% have withdrawn more than $6700 on average from their retirement savings, mainly to buy groceries. More than 4 million Americans are skipping their mortgage payments. Cars are still lining up for hours at food banks. It has become painfully clear how many millions of Americans live paycheck to paycheck, and how many work in jobs not eligible for unemployment. How small businesses are so closely reliant upon daily community patronage that, according to one Washington Post report, more than 100,000 have permanently closed since March. Nevertheless, financial markets turned around. As Fed and federal aid began to flow, the Dow, the Nasdaq, the S&P, the Russell 2000, U.S. Treasuries, municipal bonds, corporate bonds, gold all began upward price swings again. A red, white and blue rally is still underway well before all the damage has been done and counted. Some of this makes sense. We understand that U.S. Treasuries are the world’s most liquid securities and that many of our stocks and bonds have unmatched global value. A 14% run-up in the price of gold since the start of the year is not a surprising increase for this safe haven, given the enormity of the upheaval. We also know how important Amazon and Domino’s Pizza and Dollar Tree have been to all of us during the shutdown. But analysts also point out something that does not sit well: that businesses are declaring bankruptcy and there are likely many more to come, yet the S&P 500 is trading at the highest price-to-earnings ratio since the peak of the dot-com bubble.

Many sectors are still being tarred with a broad brush. In some energy trades, offshore oil drillers have been lumped together with oil storage firms. Well-run airlines are trading alongside those less prepared to endure the groundings of most of their fleet for most of the year. Many well-managed senior living communities have bonds that attract no good bids despite having no cases of the virus and hundreds of staff and residents who are relieved to be safe and well supplied on their carefully tended campuses. Because of the constant clamor from governors and mayors lobbying Congress for aid now that the fat federal wallet has been flashed, some investors are most concerned about state and local bond defaults and possible bankruptcies. Their fears involve municipal authorities with the power to levy taxes and hike user fees rather than companies who never had such powers but have in fact filed for bankruptcy, like Intelsat, Neiman Marcus, J.C. Penny, and Whiting Petroleum.

More than two thirds of states are relaxing restrictions this week and America is slowly returning to work. But the timing of re-opening schools and many types of businesses is still unclear. We know that it will take longer than we would like for our economy to return. The Director of the National Economic Council says things are starting to turn. The White House Economic Adviser thinks we are looking at a very strong third quarter. The Treasury Secretary expects economic conditions to improve in the third and fourth quarters. The Chairman of the Federal Reserve says a full recovery may not happen until the end of 2021. In the meantime, Americans need to repair or shore up some of our personal finances and that means a hunt for current income as well as future returns.

When looking at stocks, the New York Times recently reported that, from 1926 through March 2020, dividends alone accounted for 40.2 percent of the total return of the S&P 500 Index. Several market strategists and asset managers contend that corporate buybacks have in fact been the only net source of money entering the stock market since the 2008 financial crisis. Now, the CARES Act precludes public companies that borrow money from buying back any of its company stock or issuing any dividends for one year after the repayment of the loan or the expiration of the loan guarantee, unless there was a pre-existing contract. There may be political pressure to extend this. Some of the companies that have already announced the reduction or suspension of dividends are Ford, Delta, Boeing, Macy’s, Marriott, and Disney. Unlike bond interest, stock dividends are always only paid at the discretion of corporations. If we assume that the coronavirus-induced recession produces dividend cuts of around 25%, that means investors could collectively lose between $100 billion and $150 billion in annual dividends on top of losses from stock price declines this year. Although the Nasdaq is up more than 2% year-to-date at the time of this writing (primarily due to Netflix, Alphabet, Amazon, and Facebook), the Dow is down 14% and the S&P 500 is down 9%. So, some big portfolio hits are in store.

As public companies announce cuts or suspension of suspend quarterly stock dividends for this year and perhaps longer, we remind ourselves that interest payments on the vast majority of municipal bonds will continue. Munis offer the opportunity to either supplement or replace those missing stock dividends with tax-exempt income. Last week saw an $800 million Baa3 rated financing for the State of Illinois featuring a 25-year maturity with a 5.75% coupon priced at a discount to yield 5.85%. This week, in addition to the $4 billion of new tax-exempt bonds expected to come to market, our municipal bond traders are also seeing $3 billion of taxable municipal bond issues, some of which feature interest exempt from state taxation for in-state residents. These include insured general obligation bonds for the City of Bridgeport, A1 rated revenue bonds of the Great Lakes Water Authority, and an A- minus rated sale for the University of Tampa. In addition, the new issue calendar includes quality municipal bonds being sold in the corporate bond market. Some examples include AA+ rated Northwestern University and AA rated Emory University. Our corporate bond trading desk monitors these sales as well as higher yielding corporate debt trading in the secondary market.

Credit analysis has never been as critical as it is now in the process of evaluating the merits of all these individual offerings. As a result of this pandemic-induced recession, outlooks, ratings, and events affecting performance and durability are changing weekly. Your HJ Sims advisor can help guide you through many of the key considerations. These include reviews of historic default rates for municipal and corporate bonds (at 0.18% and 1.74%, respectively). They include technical factors, such as mutual fund flows, inventories, bids-wanted, redemptions, and visible supply. It is equally important to consider fundamental factors including liquidity, cash flow, utilization, and debt service coverage. But this is a time in which we all need to consider broader contexts: how local and regional economies have been impacted, political leadership, community sentiment, changing demographics, direct federal stimulus whether in the form of low interest loans or block grants, and central bank liquidity facilities made available to support our primary and secondary markets. All play a role in determining the level of risk inherent in an investment and its suitability as a short- or long-term holding in your portfolio. At HJ Sims, we believe in the outcome of income. Thinking together in new ways as we define the “new normal” for our continent, we look forward to finding bond solutions that work for you.

The New Orleans Saints announced that its Hall of Famer Thomas J. Dempsey died on Saturday at age 73 from complications of COVID-19 just ten days after being diagnosed. Dempsey was a placekicker who signed with the club in 1969 as an undrafted free agent out of Palomar College. During his rookie season the following year at Tulane Stadium in a game against the Detroit Lions when his team was behind 17-16 with only second left he took a snap from Jackie Burkett and kicked a jaw-dropping 63-yard field goal that stood as an NFL record for 43 years. Over his career with the Saints, the Eagles, Rams, Oilers and Bills, the Milwaukee native aced 61.6% of his field goals and 89.4% of his extra point attempts using an old-school kicking style that differed from most others in the NFL. Instead of a soccer style boot from the laces, he preferred the straight toe approach. But, since he was born without toes on his right foot, he wore a flat-front shoe custom designed to accommodate his disability. Some thought that gave him an unfair advantage. Others shook their heads in marvel. After 11 seasons in the NFL, the good-humored man nicknamed “Stumpy” by his teammates retired in 1979 and went on to work as an oil field salesman and run a car dealership. He was diagnosed with dementia in 2012 and came to reside at the Lambeth House assisted living center in New Orleans where he was one of 50 to be stricken with coronavirus, one of 15 who has died there in quarantine, apart from his wife, sister, three children and three grandchildren except in video chats. The sad human toll of the pandemic exceeds 1.4 million cases worldwide, 400,000 in the U.S. at this writing, with more than 82,000 deaths including nearly 13,000 Americans. The economic toll mounts as well. Our nation’s spectacular 10-year expansion came to an abrupt halt in March as every aspect of society has been disrupted in the effort to contain the spread of the virus. Apart from the incalculable loss of human life, the worldwide cost may exceed $4 trillion and 4.8% of combined gross domestic product. Talk often kicks up a notch from recession to depression, but all estimates still hinge on a range of unknowns. In the meantime, most manufacturing, employment, education, and services are at a virtual standstill. Oil price wars compound the troubles. In times of uncertainty, investors turn to the safest havens but leap into risk on hopeful news: progress with a vaccine, interim measures that appear to save lives, down-ticks in case counts, timetables for the loosening of restrictions that will allow us to kick-start our lives again, the next massive government stimulus rescue package and trillion-dollar central bank intervention. Since the start of the month, stock indices have risen by as much as 3.4% on optimism for the turnaround and a return to old routines. The Dow is up 736 points, the Nasdaq up 187 points, the S&P 500 up 75. Oil prices have increased more than 17% to $23.63 a barrel. Gold prices have gained $54 an ounce. Volatility remains elevated, a function of medical, economic and fiscal pronouncements. Relative value is constantly shifting and often irrelevant in period of illiquidity caused by large institutions placing massive sell orders into markets unable or unwilling to absorb the supply and, at moments, shocked by the strategies being revealed and unwound, deleveraging and re-leveraging. Whether measured in the thousands or trillions, investment accounts are being kickboxed from week to week. There are opportunities and risks galore. The world’s safe haven, U.S. Treasuries, have lost some ground so far this month. The 2-and 10-year yields have inched up a few basis points to 0.26% and 0.71%, respectively. However, the 30-year has strengthened with yields dropping by 5 basis points to 1.29%. The corporate bond market is extremely active; firms are tapping lines of credit and issuing investment grade bonds at a breakneck pace. In spite of all the predictions for a dramatic increase in the number of “fallen angels,” or bonds dropping from BBB ratings to below investment grade as a result of pandemic-induced losses, and “sinking demons,” or bonds and leveraged loans falling from B ratings to CCC levels, the BBB-rated corporate bonds are flat on the month with 10-year yields at 4.61%. Municipal bonds are operating in almost a parallel universe from governments and corporates where there is explosive new issuance. The primary tax-exempt calendar has been quiet for weeks. Several top rated issuers are able to access the markets in negotiated and competitive sales while lower- and non-rated issuers are on hold or seeking to privately place their debt. All the action is in the secondary market where bid-wanted lists are large and trading is active. The market is sometimes schizophrenic, moving unpredictably from oversold to overpriced, with so many technical factors at play, not the least of which is speculation over the future credit quality of state and local issues in the era of COVID-19. Mutual funds have experienced $13.8 billion of outflows in the past two weeks; municipal ETFs have suffered net withdrawals for the past five. So far this month, the AAA general obligation tax-exempt muni yield has dropped by 2 basis points to 1.04%, the 10-year is up 5 basis points to 1.38% and the 30-year yield has increased by 20 basis points to 2.19%. Nontraditional buyers, called crossovers, such as insurance companies find newfound appeal in munis given the outsized ratio to Treasury yields. At this writing, the 1-year ratio is 507%, the 10-year ratio is 189%, and the 30-year ratio — with the Treasury at 1.29% and the comparable tax-exempt muni at 2.19% — is 170%. These are indeed extraordinary times. At HJ Sims, our team stands alongside you, your families, your businesses and employees. We are not on the sidelines but fully engaged in the financial markets. Our traders find pockets of opportunity in every session and our advisors have use of stress testing tools to help our clients analyze portfolios and diversify as needed. We encourage you to enhance your dialogue with your HJ Sims representative and take comfort in the strategies that we develop together. But for now we pause during this holy season of Easter and Passover to wish you safe and happy celebrations, be they at home or on line, together with those most dear.