HJ Sims Market Commentary: Never Forget

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by Gayl Mileszko

Almost twenty years after the 9/11 terrorist attacks that we promised to “Never Forget” we now have a prolonged pandemic that is still creating indelible memories. Many of us can still name each family member, friend, and colleague affected two decades ago. But today we can recount even more precious people and businesses lost or devastated due to COVID-19. In the financial world, we are keenly aware of the specific sectors of the stock and bond markets that were unexpectedly pummeled in March of 2020; some are thriving, others bankrupt, quite a few rescued with our tax dollars, many still crawling back. In the immediate aftermath of the World Health Organization and presidential declarations, bonds that financed food service companies, cruise lines, airports, hotels, convention centers, sports arenas, hospitals, toll roads, malls, oil and gas and mining companies, all sank in price as lockdowns directly halted revenue streams supporting debt service while causing operating expenses to surge.

Bond News this Week

We still do not know the lifecycle of this virus or its variants but, 15-plus months later, Moody’s and CNN report that the nation’s “Back-to-Normal Index” is at 94%. Summer vacation exuberance may be skewing our perspective, but we will have a much better grip on where things are for work, home and school once September arrives. For now, bond traders report that spreads, the difference in yields when compared to the highest rated credits, have more than completely recovered in most A and BBB range debt while higher yielding securities are also about 94% back to pre-COVID levels. Some sectors like education, hospitals, transportation, turnpikes and toll roads, and single- and multi-family housing still have a little way to go. But the strength of the recovery, and our new perceptions of essentiality, have generally boosted the value of water and sewer, power, utility, airports, and healthcare bonds.

Municipal Sector News

In the municipal sector, most analysts agree that senior living has been hardest hit. Life plan communities, retirement communities, independent living, assisted living, memory care and skilled nursing serve the demographic that has suffered most and facility operators have been at the forefront in the unforgettable fight against the pandemic. Since the onset, top-notch managers have employed every available expert, dedicated staffer, piece of equipment, technology, strategy, tactic, agency, grant, loan, and line-of-credit to keep residents safe. Most caregivers have literally worked around the clock to protect residents who by virtue of age and condition have been most vulnerable to community spread. As a result, fifty one percent of seniors housing properties studied by the National Opinion Research Center (NORC) at the University of Chicago experienced no COVID-19 deaths in 2020. About two-thirds of independent living (67 percent); assisted living (64 percent); and memory care (61 percent) properties had no COVID-19-related deaths, and 39 percent of skilled nursing facilities experienced no related fatalities. Nevertheless, the AARP has reported that more than 184,000 residents and staff of nursing homes and other long-term care facilities have perished as a result of COVID. The share of COVID-19 deaths attributed to long term care facilities reportedly peaked in June 2020, when almost 49% of deaths occurred there. But vaccinations first made available in December 2020 have caused dramatic declines in all the counts. The CDC reports that the rate of deaths per 1,000 residents in nursing homes has dropped from the high of 5.9 in December 2020 to 0.29 as of June 2021, and staff cases have declined from 26.38 to 0.41.

Occupancy Rates in Senior Housing

The latest surveys by the National Investment Center for Seniors Housing and Care (NIC) from June 13 show that, although seniors housing and care occupancy rates remain at historic lows, trends in the percentages of organizations reporting higher occupancy rates continue to improve; assisted living, memory care and skilled nursing are showing new pandemic era highs. Since March, there has been a rising pace of move-ins. The greatest challenge for 94% of these facilities is said to be staff shortages, a problem that affects employers across most industries; they recently posted a record 9.3 million job openings. But the need is particularly acute for certified nurse aides where open positions exceed 200,000.

HJ Sims: History of Supporting Senior Living

HJ Sims underwrote the first municipal bond to finance a long-term care community in 1965 after closely analyzing demographic data and demand projections, and we remain among the biggest supporters of senior living. We have since introduced several innovative structures including entrance fee principal redemption bonds, and have underwritten or advised on more than $27 billion of financings in this space. Including the deals we brought to market, there were only about 63 senior living deals with a combined par value exceeding $3.25 billion in the muni market in 2020. So far this year, we have seen 35 deals totaling $1.73 billion. But the number of new and refunding issues is growing by leaps and bounds as investors recognize the demand for and value inherent in the sector.

Municipal Bond Market News

This week, we are in the market with a $79 million non-rated financing for Benedictine Health System, the tenth largest not for profit senior living provider in the country which owns and operates 21 communities in Minnesota add North Dakota. This transaction is part of a $7 billion new issue calendar that includes seven senior living deals, an array of weekly offerings in this sector that has not been seen for many years. We expect that the $390 million of new money and refunding issues will be several times oversubscribed by institutional and individual investors, a clear sign that tax-exempt buyers highly value this essential public service sector. Featured borrowers cross the credit spectrum and include non-rated Friendship Village in Kalamazoo, Michigan; nonrated Colorado-based Christian Living Communities; BB+ rated Meadowlark Hills in Manhattan Kansas; BBB rated BHI Senior Living of Indiana; non-rated Ascentria Care Alliance in New England; and BBB rated Westminster in Austin which, at this writing just sold with a final maturity in 2055 priced at 4.00% to yield 2.31%.

This Week in the News/Markets

At this writing, the AAA general obligation benchmarks post yields of 0.16% for the 2-year maturity. 1.01% for the 10-year and 1.52% for the 30-year. This compares with Treasury yield curve reflecting yields ranging from 0.25% for the 2-year, 1.47% for the 10-year and 2.08% for the long bond. The 10-year Baa rated corporate bond yield stands at 3.05%. On the month, the Dow at 34,292 is down 237 points while the S&P is up 2% to 4,291and the Nasdaq is up nearly 6% to 14,528. Oil prices are up nearly 11% in June while gold and silver prices have fallen more than 7%.

It’s Time to Review Your Goals

HJ Sims representatives stand ready to assist both borrowers and investors in the senior living space. We are active in the primary as well as secondary markets and our senior bankers and financial professionals welcome your call. We are in a market that continues to be defined by heavy demand, low rates, and high relative credit quality. It continues to favor the issuer, but we are also here relentlessly working for our clients, helping you to define and execute on your income investment strategies. This week, we move into the second half of the year, so it is time to review your goals and needs. Give us a call after the holiday weekend. We note that markets close early on Friday and remain closed on Monday in observance of our nation’s 245th Independence Day. The entire HJ Sims family wishes you a safe, happy, and unforgettable Fourth.

Please contact your HJ Sims representative for information about today’s higher yielding taxable and tax-exempt offerings.

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Market Commentary: SPOCs, SPACs and Specs

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by Gayl Mileszko

The pandemic has led us all to spend more time on line, whether at work or at home, and we find ourselves using many shortcuts in our communications to save on keystrokes, avoid mis-spellings, or to prove that we are somehow in-the-know. The cause of the pandemic itself, the SARS-CoV-2 infection, has certainly seen the highest number of new abbreviations. But in social and business conversations, new emojis have been created to take the place of words and we came up with several catchy acronyms for new behaviors and sentiments. In the financial world, these included Fear of Missing Out (FOMO), Holding On For Dear Life (HODL) and Fear, Uncertainty and Doubt (FUD). There are other initialisms for investment strategies that grew in either popularity or disfavor: Financial Independence/Retire Early (FIRE), Environmental, Social and Governance (ESG), and There is No Alternative to Equities (TINA). The spectacular wizards in our information technology departments became our SPOCs – single points of contact – for the tools many of us have needed to conduct our business and remain productive from home, whether preparing specifications, proposals, recommendations, commentary, or curricula. But when we inevitably became overwhelmed by all the texts, emails, private Bloomberg IB messaging, and cloud meeting requests, we could not help but yank off our new blue light reading glasses, reach for a quarantini, and type some quick pointed replies: UNSUB! (Unsubscribe!), YAM? (Yet Another Meeting?) and N/A (Not Available).

In the bond world, high yield (HY) securities are among the most sought after. Demand is unrelenting for higher yielding corporate bonds where year-to-date volume already exceeds $271 billion. Last week, B2/B rated Royal Caribbean sold five-year bonds at par to yield 4.25% and high yield indices closed at record lows of 3.84%. Weekly inflows into high yield municipal bond funds have hit records and the limited number of new issues with tax-exempt yields over 3% are oversubscribed multiple times. Spectacular price tags accompany offerings in the primary and secondary markets. Boston College bonds with 5% coupons due in 2055 have been trading over $165. On the equity side, the pandemic and the Fed-contrived low rates have spurred a record number of initial public offerings (IPOs). Among them, Special Purpose Acquisition Companies (SPACs) have become the sensational BTR (Buy the Rumor) asset.

For those as unfamiliar with SPACs as they are with cryptocurrencies – other financial instruments that have taken off during the pandemic – SPACs are shell companies with no hard assets or sales that are created for the express purpose of accumulating a war chest of cash to effect a merger, capital stock exchange, asset acquisition, stock purchase, or reorganization with one or more yet-to-be-named private business. Less paperwork is involved, so they tend to provide startups with a fast and often easier path to going public.

Investors in a SPAC are speculating as they have no product, operations or revenue to point to. They initially rely upon the vision, track record, reputation, and networks of the management team or sponsors and the prospects of the industries or businesses it targets. More than a year may pass before the target is even identified. After a SPAC is created and funded, the blank-check firm generally has 18-36 months to identify and merge with an operating company and take it public. If the SPAC fails to complete a merger, the money from the capital raise which has been placed in trust with a third party gets returned to initial investors on a pro rata basis; after any allowable expense allocations and inflation adjustments, returns may be negative. In addition, the entity that created the blank-check firm loses the risk capital it put into the launch deal; this can be in the range of $10 million after all the legal, underwriting, regulatory, insurance and operating expenses. So sponsors are under pressure to quickly identify and arrange a merger. Investors who buy shares before a merger occurs have the option to tender them at a gain if they bought at a discount (or at a loss if purchased at an elevated price), or to become shareholders in the newly combined company

The first SPACs arrived in the 1980’s but their popularity exploded last year as those with cash looked beyond lower yielding and returning investments, willing to take on speculative risk. In 2019, 59 SPACS raised only about $13 billion. But celebrity and other high-profile sponsors including Shaquille O’Neal, Serena Williams, Alex Rodriguez, and even former House Speaker Paul Ryan have recently brought new attention to the class. New companies looking to go public work with investment bankers to explore SPACs as an alternative to an IPO or direct listing. Companies including Virgin Galactic and DraftKings accounted for half of all 494 initial public offerings in 2020, with 248 raising more than $83.3 billion. So far this year, more than 345 companies have raised an average of $313 million each, typically priced at a nominal $10 per unit, for a combined total exceeding $107 billion. The pace of issuance slowed in April when the Securities and Exchange Commission provided guidance that SPACs would need to classify their warrants as liabilities instead of equity instruments. Warrants are derivatives that give an investor the right to buy or sell a security at a certain price before expiration. SPACs are required to file a prospectus and periodic reports with the SEC

Investors interested in learning more about SPACs are to encouraged to don their spectacles and carefully review guidance issued by the SEC and FINRA as well as to speak with an HJ Sims representative. SPACs are generally most suited to ultra wealthy investors with longer investment horizons who are able to tolerate high levels of risk for potentially higher levels of reward. Access to this asset class comes in the form of direct investment in units, common stock, and warrants, or via ETFs. Market prices can wildly fluctuate, and these fluctuations may bear little if any relationship to the ultimate economic success of the SPAC. There is risk that attractive business combinations become scarce as the number of SPACs increase and that the interests of the sponsors may differ from those of investors. See all the risks outlined in any SPAC prospectus before considering an investment.

This week marks the first of summer and the last full week of June and we are online again with our spectacles and magnifying glasses, window shopping during the annual Amazon Prime Days. We are following the voting in New York City’s mayoral primary and, along with 47 million other Americans, we are making our travel plans for July 4. Wall Street is following House committee actions on various antitrust bills and remaining obsessed with the various utterances by members of what many call the Federal “Open Mouth” Committee. Last Wednesday, stocks and bonds weakened as markets reacted to the Fed increasing its inflation projection for the year and bringing forward the time frame for the next rate increases. On Friday, the St. Louis Fed President cited prospects for a hike in rates in late 2022 and three more Fed presidents offered their individual views.

The Fed Chair asked traders to please retire the use of the term “tapering” but it has been in our lexicon since 2013 and the mere talk of talk about paring back the $120 billion a month bond-buying program inevitably leads to a selloff. On Tuesday, Jerome Powell further fueled the speculation in testimony on the Fed’s response to the pandemic before the House Select Subcommittee on the Coronavirus Crisis. It could be a full-time job monitoring the Fed chatter, but our attention is also being drawn to the 49 economic data points being released this week including home sales, first quarter GDP, durable goods, consumer sentiment, jobless claims, manufacturing and services indices, inventories. We will not have June Job Openings numbers until August, but we know from recent releases that they soared to a record 9.3 million in April while about 3.5 million Americans are still receiving weekly unemployment benefits and more than 9 million are unemployed.

As of the open on Monday, U.S. Treasuries (as measured by the ICE BoAML index) have posted a year-to-date return of negative 2.65%. Investment grade corporate bonds are down 1.13%, taxable municipal bonds are up 0.81%, investment grade municipal bonds have gained 1.39%, high yield corporate bonds are up 2.99% and high yield municipal bonds are returning 5.05%. As of this writing, the 2-year Treasury yield has risen 11 basis points this month to 0.25%. The 10-year has dropped 11 basis points to 1.48% and the 30-year is down 18 basis points to 2.10%. The 10-year Baa rated corporate bond yield has fallen 17 basis points to 3.03%. So far in June, the Dow is down 2% to 33.876. The S&P 500 is nearly flat at 4,224. The Nasdaq is up 3% to 14,141. Oil prices have increased 11% to $73.66

This week in the municipal bond market, HJ Sims has a $60.3 million refunding and new money issue for Presbyterian Senior Living. The BBB+ rated bonds are structured with serial and term bonds being issued through the Pennsylvania Economic Development Financing Authority with a final maturity in 2046. In the high yield sector, there is a $91.9 million BB+ rated St. John’s Industrial Development Authority refunding for Vicar’s Landing in Ponte Vedra Beach and a $41.2 million BBB- rated Kentwood Economic Development Corporation refunding for Holland Home in Grand Rapids with a forward delivery for next February. Also on the calendar is a $57 million non-rated Public Finance Authority taxable Texas Infrastructure financing for master planned residential communities in the Dallas-Fort Worth area, a nonrated $27.6 million Michigan Finance Authority revenue and refunding bond issue for Aquinas College in Grand Rapids, an $11.6 million non-rated Louisiana Public Facilities Authority deal for Mentorship STEAM Academy in Baton Rouge, and a $30.1 million Ba1 Seminole County Industrial Development Authority issue for Galileo Schools for Gifted Learning in Sanford, Florida. Please contact your HJ Sims representative for information today’s higher yielding taxable and tax-exempt offerings.

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Market Commentary: Fed Hushpuppies

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by Gayl Mileszko

Southern farmers sitting down to supper learned long ago to quiet their howling hound dogs by tossing them small snacks, many of which were made of deep-fried cornmeal and wheat flour mixed with buttermilk, eggs, and salt. The treats known as hushpuppies have since become a tasty side dish for two-legged gluttons as well. They are typically served with other fried or barbecued foods and have savory fillings that include corn, cheese green onions, jalapeno peppers, and garlic. But no holds are barred at the Southern Hushpuppy Championships held every September in Lufkin, Texas, where fryers have their best batterballs on display and compete for bragging rights in crowds of up to 30,000. 

Central banks have been serving up their own monetary versions of hushpuppies to billions around the world ever since September 2007 and they now have $29.3 trillion of fresh, fried, and refried items on their balance sheets. To limit the economic damage from the Great Recession and then the pandemic, they have employed the standard mix of rate cuts and forward guidance as well as nontraditional recipes including negative interest rates, credit easing, relaxing regulatory requirements, creating international swap lines, backstopping money market funds, expanding repurchase agreement operations, making large scale asset purchases, and lending to banks, securities firms, major corporate employers, small- and mid-sized businesses, nonprofits, and state and local governments. A few of these unprecedented gadgets have been put back in the kitchen drawer, but the White House, Congress, Wall Street and Main Street know they are there and can be utilized again to safeguard against future market collapses or Capitol Hill paralyses. In the meantime, most of the programs are still in use by our Federal Reserve, the system created by Congress in 1913 to help stabilize the economy through price stability and maximum employment. A third unspoken mission appears to be holding down the government’s interest costs. The Wall Street Journal on Tuesday suggested that risks to the Fed’s credibility and independence are growing.

There may be shortages of labor, semiconductor chips, ammunition, chlorine, rental cars and blood supplies, but there is no shortage of economic data. In general, indicators of economic activity and employment have strengthened and sectors hit hardest by the pandemic are improving, but there are enough numbers coming in below expectations to keep markets clinging to the skirts and shirttails of the Fed. At the last meeting of the Federal Open Market Committee in late April, officials noted that the ongoing public health crisis continues to weigh on the economy and risks to the economic outlook remain. The Fed insists that inflation has been running persistently below the two percent goal, using a definition from a recipe book clearly written in a language no one else on Earth speaks. They have been hushing big players and small fry with assurances that the elevated price increases we are seeing are transitory, almost a natural result of all our pent-up demand and the supply chain lags. Not everyone sees it the same way, so some have inflation hedges in play.  Gold and silver are typical “inflation trades” and we note that since March gold prices are up more than $175 an ounce and silver up 14% to $27. Bitcoin prices are up 38% since the start of the year, oil prices are up 51%, and copper has increased by 22%.

As usual, this week’s FOMC meeting has secondary stock and bond markets in simmer mode awaiting new commentary on just how long CPI and PPI increases are expected to traumatize us. Very few traders were expecting any rate or taper action; most just wanted to have more hushpuppies in the form of assurance that no policy changes are coming in the near future, that asset purchases and low rates continue, and that the crazy prices on so many consumer staples will soon pass. The growling is bound to begin when the Fed signals the tapering of mortgage-backed securities purchases – possibly in August or September – and the howling will start with an advance notice of Treasury tapering or any dots plotting higher rates in 2022 or early 2023. How much of a battering might we expect? Well, when Chair Bernanke surprised markets with his testimony in May of 2013 that the Fed may reduce its bond-buying program, the 10-year Treasury yield rose 54% or 106 basis points from 1.96% to 3.02% and the 10-year AAA muni benchmark yield increased 51% or 94 basis points from 1.83% to 2.77% by the end of the year. The lesson on forward guidance was learned the hard way, so no such surprise is expected this time unless it involves something like a stepped-up digital dollar program. But correctional selloffs in stocks and bonds should be expected in advance of or alongside any major steps toward normalization. After all, thousands of traders and millions of investors have never known anything but abnormal, Fed-protected conditions. After 14 years, it is hard to imagine anything remotely resembling a free market.

Aside from the Fed meeting, markets are following the presidential overseas travel involving  G-7, NATO, and Vladimir Putin meetings. The focus is away from Washington, D.C. where not much is happening anyway. Vote counts reveal the unlikelihood of consensus on infrastructure, domestic or global tax reform, or pretty much anything major at this point. This does not bode well for state and local governments and nonprofit borrowers who have been hoping for the restoration of tax-exempt advance refundings and federally subsidized Build America Bonds via an omnibus budget reconciliation measure.  But the municipal bond market is humming along quite nicely. So far this month, the 2-year AAA muni general obligation bond yield has fallen another 2 basis points to 0.08%, the 10-year is down 10 basis points to 0.89% and the 30-year has decreased by 12 basis points to 1.39%. This is right in line with Treasury yields: the 10-year and 30-year yields have fallen 10 basis points to 1.49% and 2.18%, respectively.

Secondary markets may be uncertain in these first few days of the trading week, but primary markets are still on fire. Last week, HJ Sims sold $10.6 million of nonrated taxable water system revenue bonds through the Louisiana Local Government Environmental Facilities and Community Development Authority for People’s of Bastrop, LLC; the sole 2051 maturity priced at 5.625% to yield 5.802%. Among other high yield transactions, the Kentucky Economic Development Authority sold $4.3 million of non-rated bonds for Christian Care Communities structured with 2055 term bonds that priced with 5.125% coupons to yield 5.50%, and the Build New York City Resource Corporation issued $52.1 million of nonrated bonds for New World Preparatory Charter school bonds that had a 2056 maturity priced at 4% to yield 3.30%.

Although the size of this week’s $13 billion municipal calendar is met with welcome relief, the supply of bonds still remains well below levels of demand. The negative net supply was estimated at $29 billion last Friday and it is expected to grow to $40 billion by the end of August. Coupon income, as well as called and maturing bond principal far outpaces the need for tax-exempt investment product from mutual funds and ETF’s taking in record levels of new money as well as from individuals looking to reinvest all their cash to produce income. High yield munis are in greatest demand and have generated 5.04% returns so far this year; taxable munis maturing in 15 or more years are up 1.75% this month alone.

The amount of high yield municipal bonds outstanding is estimated at 13% of total muni debt, a significant increase from February of 2020, when it was below 10%. This week, borrowers look to add even more to the total. The slate includes a $132 million non-rated Yamhill County Hospital Authority refunding for the Friendsview Retirement Community in Newberg, Oregon. American Samoa has a $41 million Ba3 issue. And there are 7 charter school deals in the market including the $118.7 million non-rated Wonderful Foundations deal issued through the Wisconsin Public Finance Authority (PFA) and issuers in California and Florida; a $21.7 million non-rated financing for Santa Clarita Valley International School,  an $8 mil BB+ rated financing for The Rocklin Academy in California, a $16.5 million nonrated PFA issue for Bonnie Cone Classical Academy in Huntersville, North Carolina, a $30 million Ba1 rated transaction for Galileo Schools for Gifted Learning in Sanford, Florida, and an $11 million nonrated deal for Imagine School at North Manatee in Palmetto, Florida.

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Market Commentary: Foo Fighters

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by Gayl Mileszko

Sunshine and good news abound. Summer-like conditions prevail in many parts of the country as school vacations begin. The FDA has approved a new experimental drug Aduhelm that may help many of the 6 million Americans suffering from Alzheimer’s disease. The FBI’s new crack cyber task force wizards managed to recover more than half of the $4.4 million that Colonial Pipeline paid in ransom to hackers last month. The number of job openings has set a record at 9.3 million as the labor market has started to boom again. Madison Garden is reopening for the first time in 15 months for a full-capacity concert with the Foo Fighters, and Central Park is promoting a mega concert with other big-name performers for late August. The Transportation Security Administration screened 1.98 million air traveling passengers on Sunday, a 15-month high. Weekly hotel occupancy at 61.8% is finally back to where it was in late February 2020. The CDC has just okayed the first two cruise ships to set sail from U.S. ports in late July. Jeff Bezos, his brother, and one lucky guest will board a capsule attached to the reusable rocket Blue Origin on its first 11-minute suborbital tourist flight high above our Earth in July.

We celebrate this new season and rosy outlook, knowing that our globe’s battle against COVID-19 is by no means over. On Sunday, there were 220,684 new cases and 5,230 deaths logged around the world. In the U.S., we had 13,276 new cases and we lost another 225 to this scourge, as the debate rages on as to whether it was man-made via research that was funded with our own tax dollars, or “natural”. Our labor market, in any event, is still 7.6 million below pre-pandemic levels and, on top of precious losses and dark lockdown memories, the impacts will last for years. Struggles in one given sector had ripple effects on many others. There were 544,463 Chapter 7, 11 and 13 bankruptcy cases filed in 2020 according to the American Bankruptcy Institute; through May of 2021, another 182,655 were filed. 

The extraordinary fiscal stimulus, resurgence in demand, and ongoing supply disruptions have produced a pickup in inflation (4.2% in April) and what Barron’s described as “The Shortage of Everything” in its May 28 cover story. Lumber prices have increased 340% in the past year, and Americans looking to buy homes should expect to pay over $35,000 more for a newly built house. Tax talk has taken on a new dimension with the G-7 finance ministers’ agreement on a 15% minimum global corporate tax, but – as with the Administration’s domestic proposals – this is by no means a sure thing given the diversity of interests involved. With respect to employment, women have been disproportionately affected by job loss, burnout, and loss of income as they became – and in many cases still remain — full time caretakers and home schoolers. On the health care front, those with conditions who postponed elective procedures and those who did not seek preventive care are slowly returning to the health care system but with more acute care needs. Some who need 24/7 care have yet to enter skilled nursing facilities; occupancy is 13.2 percentage points below the February 2020 level of 84.8%. Many seniors continue to rely on family and friends for assistance with care and medications; occupancy in assisted living communities fell to a record low of 75.5% in the first quarter of 2021. The National Investment Center for Seniors Housing & Care (NIC), however, reported a small uptick in April.

The National Opinion Research Center (NORC) at the University of Chicago last week published a report funded by NIC on COVID-19’s impact on seniors housing. Contrary to what media headlines would lead seniors and/or their adult children decisionmakers to believe about the safety of congregate facilities, they found that 51% of all properties reported no coronavirus related deaths at all: 67% of independent living communities, 64% of assisted living properties, 61% of memory care communities, and 39% of skilled nursing facilities. In independent living settings, resident deaths were statistically comparable to the rates of death for older adults living in non-congregate settings in the same geographic area.

So far this year, there have been approximately 27 senior living bond issues in the municipal bond primary market for a total combined par value of $1.34 billion. These sales have been for start-ups, expansions and refinancings in California, Florida, Illinois, Indiana, Iowa, Maryland, Minnesota, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, South Carolina, South Dakota, Wisconsin, and Washington. As one of the nation’s oldest underwriters of tax-exempt senior living bonds, we are upbeat on the future of this sector and look forward to sharing our unique structuring ideas with new and valued banking clients. For our investing clients, we feature an impressive forward calendar of new money and refunding bond deals to discuss with your HJ Sims financial professional.

Since the beginning of March 2020, financial market volatility as measured by the VIX has fallen by 59%. As of this writing, the Dow is up 9,221 points or 36%, the S&P 500 is up 1,272 points or 43%, the Nasdaq has gained 5,314 points or 62% and the Russell 200 has risen by 843 points or 57%. Oil prices are up more than $24 a barrel, or 55%, to $69.23. Gold prices have gained $309 an ounce, or 19%, to $1,895. Silver prices are up 67% or $11 an ounce to $27.90. Bitcoin has skyrocketed by 318% to 35,804. In the bond market, the 2-year Treasury yield has fallen from 0.91% to 0.15%. The 10-year benchmark has, however, risen 42 basis points to 1.56%, and the 30-year long bond is up 57 basis points to 2.24%. The 10-year Baa corporate bond yield is down 6 basis points since the pandemic began.

Municipals remain in somewhat of a world of their own among bonds, performing well above their taxable counterparts given the supply/demand imbalance involving tax-exempt instruments. At this writing, Treasury bonds as measured by the BoAML indices, have a negative YTD return of 3.32%. High grade corporate bonds are down 2.41%, but preferreds are up 1.09%, high yield corporate bonds are up 2.62%, corporate convertible bonds are up 3.09%, and leveraged loans are up 3.10%. Investment grade municipal bonds are up 1.20%, while high yield municipal bonds are returning 4.48%. At the time of publication, the 2-year general obligation bond yield has dropped 64 basis points since the start of the pandemic to 0.09%, the 10- year is up 7 basis points to 0.94% and the 30-year has dropped 8 basis points to 1.44%.

Last week was shortened by the Memorial Day holiday and this week began with a commemoration of the 77th anniversary of D-Day and the Battle of Normandy when “Foo Fighter” was a term used by Allied pilots to describe mysterious UFOs seen in the skies over the European theater. The corporate bond calendar totaled $27 billion, with $21 billion coming as investment grade, 70% with maturities of seven years or less. High yield new issues came with B2 rated deals in the 5.375% range and CCCs around 7.125%. High yield corporate bonds saw outflows of $385 million while high yield muni funds took in $372 million

This week’s municipal bond calendar will also feature fast moving items that quickly vanish. It will exceed $10 billion and is dominated by $2.65 billion of Kaiser healthcare bonds that may come with taxable, corporate CUSIP and/or municipal series. Among the high yield non-rated deals this week: a $263 million taxable Maryland deal for SSA Baltimore, a $58 million green bond deal for last Stop Recycling in South Carolina, a $51 million issue for New World Prep Charter School in New York, and an $8 million sale for Maranatha Christian Academy in Kansas.

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Market Commentary: School Daze

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by Gayl Mileszko

Colby College in Waterville, Maine celebrated its 200th commencement on May 23, an event now indelible in the memories of all 513 graduates and the Colby “Mule” families who gathered in person on the Mayflower Hill campus. This past weekend, hundreds of other ceremonies were held on campuses including the U.S. Naval Academy in Annapolis and other venues across the country for scholars receiving doctoral, master’s, bachelor’s, associate and high school diplomas. Sadly, at the University of Minnesota and Southern New Hampshire University, it was the second year in a row where the celebrations were virtual due to the pandemic. But festivities went hybrid at Arizona State University, where they hosted in-person outdoor events as well as remote ceremonies in which the commencement speaker appeared as a hologram, graduates participated in the form of robot avatars, and the dean officiated from within a digital rendering of the new headquarters for Thunderbird School of Global Management, still under construction. The Academy of Seminole in Oklahoma graduated its inaugural class of charter school seniors, and Kihei Charter School in Hawaii had one student in its 20th graduating class who simultaneously received her high school diploma and an associate’s degree in electronics and computer engineering technology from the University of Hawaii Maui College. At Arkansas Virtual Academy, an on-line charter school serving K-12 students across the state, both virtual as well as in-person graduations were held in Little Rock for its 300 seniors during National Charter School Week.

Charter schools have been celebrated all year long in the municipal bond market, where $1.28 billion of bonds have been sold since January, 56% more than were issued last year by the end of May. Charter schools looking to borrow in the tax-exempt markets to acquire, expand or refinance facilities generally go through state conduits or local authorities, but in Michigan charter schools may issue debt directly. In Texas, Colorado and Utah, charter school financings are often supported with direct or moral obligation pledges. This week, Life School of Dallas is planning a $94.1 million variable rate refunding rated AAA due to the guarantee from the Texas Permanent School Fund. The Denver School of Science and Technology is also in the market with a $17.7 million Aa3 rated new money issue supported by the state’s Debt Service Reserve Fund Program and the Colorado Charter School Moral Obligation pledge. Federal stimulus has bolstered state school funding levels, keeping the vast majority of public schools on stable financial footing for the time being. And, as we know, borrowing rates are at extreme lows, making property purchases, expansions and refundings most attractive for non-profits and for-profits with big plans for start-ups and growth.

Looking back, the first charter school opened in St. Paul in 1992 with 35 students and, two years later, Congress authorized a federal charter school program. The first charter school bond issue came in 1998 for Concord Academy in Petoskey, Michigan, a $1.3 million financing with a final maturity in 2018 priced at par to yield 7.00%. Since then, issuance has increased almost every year according to Bloomberg, in part reflecting the expanding presence of these schools in the educational system. Today, 44 states have a total of 3.3 million students enrolled. As institutions, the nation’s 7,533 charter schools currently outnumber both our country’s hospitals and our colleges. In New Orleans, 98% of students attend charter schools while in other places like Massachusetts and New York expansion is prohibited by law as caps are imposed on the number of charters allowed. Maine has a statewide cap of 10 but in Iowa, the Governor just signed into law a bill expanding the ability to form more. In Florida, the legislature recently passed a law allowing colleges and universities to issue charters. New Hampshire is utilizing new federal grants to assist in creating charters to assist at-risk students. And in West Virginia, issues surrounding the first charter school application are before the state supreme court.

Since March of 2020, it has been a time of learning loss and disengagement for students from kindergarten to graduate school age. The New York Times described it as “the most disrupted American school year since World War II.” But many charter schools have benefitted from new attention and increased support during the pandemic. Seventy eight percent of North Carolina’s 200 charter schools have reported waitlists. For those charters specializing in on-line or cyber learning, students experienced many fewer issues with instruction and equipment. K12, the largest operator of virtual schools, reportedly saw enrollment grow by nearly 50,000 students. According to the National Conference of State Legislatures, charter schools have more freedom over their budgets, staffing, curricula and other operations. It appears that they were able to pivot faster than many other public schools, for example supplying students phones equipped with Wi-Fi or directing funds to parents to pay for mobile hotspots or phones. Other charters provided community-based Wi-Fi access and kept parents and students engaged with academic and personal “wellness checks”.

The terms in many charter contracts with state, university or district authorizers have allowed for night classes, longer classroom hours and longer school years; this flexibility proved critical to many parents looking for better educational options during lockdowns or family relocations. Since a good percentage of charter schools are smaller in size than traditional public schools, they have often proven more nimble in adapting to changing federal and state guidelines and directives. Charter schools were also most notably among the first to re-open to in-classroom learning and this allowed many parents to return to work. For those parents in New York and New Jersey who prefer homeschooling and virtual learning environments, charter schools and private schools may be the only alternatives available to them this coming Fall. For those parents enrolled in one of the 209 Catholic schools that have closed over the past year, charter schools may look very attractive. For ESL and special education students, the student/teacher ratios at charter schools tend to be lower, designed to provide for more personalized attention, the kind that many parents have found invaluable over the past 15 months. Parents have also been keenly attuned to labor issues in discussions over the timing of returns to in-classroom learning. Only a small percentage of charter school teachers are unionized, so strikes such as the one currently threatened at three Urban Prep charter schools in the Chicago area are rare. Charter schools boasting 100% teacher retention this past year deserve every kudo. Nationwide, charter school teachers number 220,000 and student enrollment has doubled since 2011 according to the National Alliance for Public Charter Schools. Most schools are self-managed, but some have nonprofit charter management organizations like KIPP, Uplift and IDEA, and others use for-profit educational management organizations like K12Inc, Imagine, and Charter Schools USA.

There are seventeen public elementary and secondary school financings on this week’s $4.6 billion municipal calendar and four with combined par value of $156.9 million are for charter schools. In addition to the Denver and Dallas deals, the Global Outreach Charter Academy in Jacksonville, Florida plans a $24 million non-rated refunding and the Academic Leadership Charter School in the Bronx has an $18.5 million BBB- rated financing. Last week saw $47.8 million of bond issues for BB rated Seven Generations Charter School in Emmaus, Pennsylvania, and non-rated sales for High Desert Montessori Charter School in Reno, Nevada, Twin Lakes STEM Academy in Brooklyn Center, Minnesota, and Seven Oaks Classical School in Ellettsville, Indiana. These financings illustrate some of the geographic, credit and programmatic diversity available to investors in charter schools. Global Outreach offers foreign language programs beginning in kindergarten. Academic Leadership offers small group instruction and four periods of daily literacy. Life School students wear uniforms. Seven Generations focuses on sustainable living and environmental stewardship. High Desert, which opened in 2002, offers parents before and after school care for students up to 8th grade for a monthly fee. Twin Lakes is a K-6 charter expanding to 7th and 8th grade in the Fall of 2022. Seven Oaks teaches Latin and, like quite a few charters, does not provide transportation or offer a pre-school program.

Charter schools may serve a specific student population, including those who need to work during the day, those who are homeless, those who seek language immersion, those who are deaf. For investors, recent charter school bond deals have come with maturities in ten to forty years, coupons of 4.00% to 5.25% and yields ranging from 2.65% to 5.25%. But prospective buyers need to do their due diligence on area demographics and local politics, governance, security features, enrollment, retention, fundraising, report cards, wait lists and extracurriculars. The largest charter school network in Texas, IDEA Public Schools, recently fired the CEO and COO in the wake of allegations of widespread fraud for personal enrichment. New Hampshire’s only school district-supported public charter school, PACE Career Academy, is closing on June 7 after 10 years due to shortfalls in funding, fundraising, and staffing; it was founded as an alternative high school for struggling students and last had only 62 enrolled. Data show that those with weak governance, small and declining enrollment, and poor academic performance are more likely to fail. In the last academic year for which statistics are available (2017-2018), a total of 231 charter schools closed while 373 opened. For perspective, we note that charter schools currently account for only 1.2% of the distressed and defaulted municipal bonds reported by Bloomberg Intelligence.

Including charter school financings, muni issuance was $34.2 billion in May bringing year-to-date volume to $169.4 billion, up 7 percent over last year. Taxable issuance accounted for $7 billion of the total. To take advantage of market conditions but adhere to current refunding limitations, approximately 4% of 2021 bonds have been issued with forward settlement dates. The Bloomberg Barclays Municipal Index finished the month 0.30% higher, bringing its year-to-date returns to 0.78%, while the S&P Municipal Bond Index was up 0.40% in May and 0.95% since January. For high yield munis, the Bloomberg Barclays Index is up 4.80% this year after gaining 1.15% in May; the S&P Municipal Bond High Yield Index gained 1.17% last month, raising 2021 return totals to 4.27%. High yield munis have outperformed all other muni sectors and even the red-hot corporate high yield sector at 2.25%, however tax-exempts across the board are increasingly pricier than their taxable counterparts. The yield penalty for individual investors buying an A rated municipal bond versus an A rated corporate bond is 22 basis points as last calculated by CreditSights.

Contributing to muni price inflation is the surge of cash being returned to investors from maturing and called bonds as well as coupon income. There were insufficient opportunities to re-invest the $26 billion of redemptions we saw last month. New issuance failed to keep up with demand and secondary market offerings were mostly limited to low coupon bonds with microscopic yields retreating into negative territory with each new inflation report. This month, $59.7 billion of principal and interest will be available for reinvestment by muni bondholders while the new supply is only expected to total $9 billion. This summer all told, issuers will pay out more than $165 billion, including $124 billion of proceeds from maturing and called bonds and $42 billion in interest. Blackrock sees this tidal wave as producing the largest net negative issuance period in history at negative $54 billion. We note that investors frustrated by the lack of supply of individual bonds have turned to municipal bond mutual funds and ETFs. These funds are, in turn, are pushing prices for the limited supply of mostly rock-bottom yielding bonds available in the primary and secondary even higher. Funds have seen $43 billion of inflows so far this year, the strongest demand through May on records maintained by Lipper since 1992.

Central bank policies have the world suspended in a low rate and negative rate environment for several years now. At present, however, there are no 30-year sovereign yields below zero; only Germany, Switzerland and the Netherlands still have 10-year sovereign bonds with negative yields. U.S. Treasury yields have moved within a 20 basis point range these past two months. The 10-year has averaged 1.61% and that is where it stands at this writing, down 13 basis points since the end of March. The 30-year yield has averaged 2.30% and that is just above where it currently stands, down 13 basis points from the close on March 31. The ICE BoAML Treasury Index gained 0.30% in May but year-to-date returns remain negative at -3.52%. The 10-year Baa corporate yield has been moving in a 14 basis point range in either direction and now stands at 3.20%. Investment grade corporate bond indices returned 0.70% last month, but are also negative at -2.68% since January. The 2-year AAA municipal general obligation bond yield at 0.10% has moved within an 8 basis point range, the 10-year yield at 0.90% has dropped 22 basis points and the 30-year at 1.51% has fallen 24 basis points since March 31. During this timeframe, the S&P 500 has gained nearly 6% to close May at 4,204 and the Nasdaq has risen almost 4% to 13,748. Oil prices have closed 7% higher to $66.32, gold is up 11% to $1,906, and silver prices at $28.04 have gained 15%. In overpriced and low yielding markets, we know that speculative activity has been overwhelming investing activity – and in no case has the speculation and volatility been more evident than with cryptocurency. Bitcoin prices at 37,144 have fallen 37% in the last two months but nevertheless remain 30% higher on the year.

Refinitiv Lipper reported $1.46 billion of inflows into municipal bond mutual funds last week; high yield funds took in $813.8 million of that net total. Investment grade corporate bond funds had $911 million of net investment and U.S Treasury bond funds added $980 million while domestic equity funds saw $1.74 billion of outflows and high yield corporate funds had $1.36 billion of net withdrawals. June marks the halfway point in the year, so this is the perfect time to contact your HJ Sims representative to review alternatives to fund investments and discuss any new investment needs, interests and concerns. In particular, we extend congratulations to all recent graduates and invite them to start working with us on a plan for a successful financial future.

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Market Commentary: Pleasant Paths

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by Gayl Mileszko

Twenty four centuries after the Athenian statesman leader Pericles gave his famous oration honoring the many warriors who were killed in battle after the first year of the Peloponnesian War, Commander in Chief John A. (“Black Jack”) Logan of the Grand Army of the Republic, a veterans group comprised of former Union Army soldiers, issued General Order Number 11 designating May 30 as a day to commemorate comrades who died in defense of their country in the Civil War by decorating graves “with the choicest flowers of springtime.” He urged that “We should guard their graves with sacred vigilance. … Let pleasant paths invite the coming and going of reverent visitors and fond mourners. Let no neglect, no ravages of time, testify to the present or to the coming generations that we have forgotten as a people the cost of a free and undivided republic.”

Originally called Decoration Day, the first national Memorial Day celebration took place on May 30 of 1868 at Arlington National Cemetery, where both Confederate and Union soldiers were buried. Local tributes to the fallen had been taking place for several years. Waterloo, New York, and Boalsburg, Pennsylvania, Macon, Georgia, and Richmond, Virginia are among the towns and cities that lay claim to being the first to hold an observance. At the turn of the 20th century, May 30 was re-designated as Memorial Day. After World War I, the day was expanded to honor those who have died in all American wars, and the tradition of adorning one’s clothing with a single red poppy in remembrance was born. In 2000, Congress passed “The National Moment of Remembrance Act,” calling on the people of the United States in a symbolic act of unity to pause wherever they are at 3 p.m. local time on Memorial Day for a minute of silence to remember and honor those who have died in service to the nation in the pursuit of freedom and peace.

Bond markets close early on Friday ahead of this Memorial Day, largely in acknowledgement that traders and investors will be among the 37 million Americans expected to hit the road to join family and friends to celebrate high school and college graduations and the unofficial start of summer. Red, white and blue décor will prevail at parades, speeches, barbecues, and picnics. Millions will place flags on gravesites, millions will watch the wreath-laying ceremony at the Tomb of the Unknown Soldier at Arlington National Cemetery, and millions more will be checking prices at nearby gas stations to see how much this first vacation of the season will cost them. Inflation anxieties prevail, and with good reason. Every penny increase in gasoline takes $1 billion out of the pockets of American consumers. The national average price of gasoline has fallen 1.9 cents per gallon in the past week, averaging $3.02 Monday — but they are up 14 cents from one month ago and $1.07 higher than one year ago. These increased fuel costs, along with disruptions in the reliability of transportation and labor, a general trend toward inflation, and a head-snapping surge in demand have also been factors in the recent major increase in the prices of supplies of supplies such as plywood, steel, and copper as well as foodstuffs including beef, poultry, fish, and dairy.

In addition to the rising cost of dinner itself, travel is the topic of many family dinnertime conversations. Las Vegas has always been a favorite destination and it happens to be the site of the first large, in-person trade show scheduled in the United States since the pandemic began. Conventions have historically generated about $11 billion in annual revenue for the Las Vegas area and employed tens of thousands of workers, but the pandemic has shut all this activity down for 14 months.  Without blackjack, tourists and trade shows, the Las Vegas area posted an unemployment rate of 33.5% in April 2020, and half of the 60,000 members of the Culinary Workers Local 226 still remain out of work. But state and local officials are seeing green shoots. Gambling revenue in the state totaled a whopping $1 billion in March, the highest monthly total in over eight years. Convention bookings are increasing for later this year and next year, but how quickly they resume may hinge on the success of the three-day World of Concrete convention which begins June 8 at the new $989 million addition to the Las Vegas Convention Center and its outdoor parking lot. The gathering will operate under previously approved limits of 80 percent capacity, social distancing of three feet, temperature screenings, and hand-sanitizing stations. Hundreds of major trade groups will be watching closely to see if this first convention goes off without major issues and literally paves the way for the return of business and tourism in popular convention cities like Chicago, Los Angeles and Miami.

The pandemic is not over, but during this phase life is clearly becoming more pleasant for many. New COVID-19 cases dropped to 53 on Monday and there is good news about school re-openings in the fall. There are few mandates but the return to campus, to work, to entertainment venues will place heavy reliance on the “honor system.” Honor is a watchword of the National Guard, the military reserve force dating back to 1636 which is under the dual control of state and federal governments. There were 26,000 members of the Army and Air National Guards called to the U.S. Capitol in January; two thousand troops remain but they are slated to head home this week as Members of Congress return to their own home districts. The calendar shows that only about 31 voting sessions remain until the end of the fiscal year on September 30, so that does not leave a lot of room for legislative action on spending bills, infrastructure, or many other policy priorities. The municipal bond industry is closely watching to see the contents of the Green Book on Friday; this publication will include revenue estimates and detail the Administration’s tax proposals and those in public finance hope that there will be a provision restoring advance refundings on a tax-exempt basis. There also appears to be growing bipartisan support for a new incarnation of Build America Bonds to aid in rebuilding critical infrastructure. Treasury officials may address these plans in its tax report, expected to be released during a busy week that includes three auctions involving $180 billion of bond sales.

U.S. Treasuries, municipal, and corporate bonds as well as stocks and gold have all strengthened in the past week at this writing. Bitcoin trading took a volatile path with the market value plunging about $1 trillion from a peak of $2.6 trillion earlier this month and the wild price swings gave stocks some pause. The Dow at 34,393 is up 1.5% in May and 12.4% in 2021. The S&P 500 at 4,197 is up slightly this month and 11.7% year-to-date. The Nasdaq at 13,661 is off by 2% since the start of the month but up 6% this year. The Russell 2000 at 2,227 is down 1.7% in May but up nearly 13% since the start of the year. Oil prices at $66.05 per barrel are up 4% on the month and 36% this year. Gold at $1,883 an ounce has gained more than 6% in May but nearly flat on the year.  Silver at $27.75 an ounce has risen 7% this month and 5% since January. Bitcoin at 37,403 has plunged 34% this month but is up 30% in 2021. On the bond side, Treasuries are nearly flat on the month at this point. But the 2-year Treasury at 0.14% is 2 basis points higher on the year, the 10-year at 1.60% has risen 69 basis points, and the 30-year at 2.29% is 65 basis points higher.  The 10-year Baa corporate bond yield at 3.23% has fallen 4 basis points this month, but is 58 basis points higher in 2021. For a variety of technical reasons, municipals have been less impacted by Treasury moves, inflation talk, Fed speculation, and chaotic crypto. Expectations for higher taxes, light volume, increased supply of taxable munis and nonprofit corporate CUSIP issuance, record levels of inflows into muni bond funds and ETFs for 11 straight weeks, heavy cash generated from coupon income, calls and maturities with no options for reinvestment at the same yields have all kept munis strong and fairly rangebound this year. The 2-year AAA general obligation bond yield at 0.14% is up 4 basis points this month but flat on the year. The 10-year yield at 1.01% is up 2 basis points in May and 30 basis points in 2021. And the 30-year benchmark yield at 1.57% is 2 basis points lower on the month but up 18 basis points since January. High yield municipal bond indices reflect returns of 3.90% so far this year, while leveraged loans are up 2.82%, high yield corporate bonds are up 1.93%, convertibles are up 0.93%, investment grade munis are up 0.78% and preferreds are up 0.24%. On the other hand, Treasuries are down 3.84% year-to-date, investment grade corporate bonds are down 3.17%, taxable municipal bonds are down 2.39% and mortgages are down 0.86%.

This week’s muni slate includes more high yield offerings than we have seen all year. It includes a $308 million non-rated start-up green bond financing for Enso Village in Healdsburg, California, a $150 million non-rated deal for Lutheran Services for the Aging in Salisbury, North Carolina, a $100 million non-rated Waste Pro USA solid waste disposal issue in Florida, a $70 million non-rated taxable deal for Santa Cruz Valley Regional Hospital in Arizona, a $58 million refunding for BB+ rated Lasell University in Newton, Massachusetts, a $16 million BB rated issue for Seven Generations Charter School in Emmaus, Pennsylvania, a $12 million non-rated Wisconsin Public Finance Authority deal for High Desert Montessori Charter School, and a $10 million non-rated financing for Seven Oaks Classical School in Ellettsville, Indiana. Last week, the Government of Guam sold $278 million of Ba1 rated business privilege tax refunding bonds; bonds were structured for forward settlement in October and had a 2042 maturity priced with a 4% coupon to yield 2.54%.  Grand Forks County, North Dakota brought a $120 million non-rated green financing subject to the alternative minimum tax for Red River Biorefinery; the 2043 term bonds were priced at par to yield 7.00%. The Public Finance Authority issued $67 million of BB+ rated refunding bonds for Rider University in New Jersey with a single term bond in 2048 priced at par to yield 4.50%, and a $6.4 million charter school financing for Lead Academy with a 2056 maturity priced at 5.00% to yield 4.50%. The North Carolina Medical Care Commission came to market with a $44.4 million BBB rated deal for The Forest at Duke that had a 30-year final maturity priced at 4.00% to yield 2.38%. Tipton Academy in Michigan had a $6.4 million BB rated financing priced at par to yield 4.00% in 30 years.

For current offerings, portfolio reviews, and financing options, we invite you to reach out to your HJ Sims representative this week. For the holiday weekend ahead, we wish you and your family safe journeys and pleasant paths.

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Market Commentary: Bells and Whistles for the City That Never Sleeps

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by Gayl Mileszko

The New York Stock Exchange has invited occasional guests to ring the ceremonial opening bell since 1956. The current practice is to have them stand on the marble balcony weekdays at 9:30 a.m. to mark the start of the day’s trading. At 4 p.m., they bang a gavel after the closing bell, which is sometimes met with cheers at the end of a long, hard day of loss, or boos when no one wants the day’s rally to end or if the guests inadvertently cut short the precise 15 second ritual. The 18-inch bell, specially manufactured by the G.S. Edwards Company of Norwalk, Connecticut in the late 1980s, is said to have the sound of a brass bell tuned to the pitch D with an overtone of D-sharp. It replaced several other bells and, going back to the 1870s, a Chinese gong. Since 1995, company executives with NYSE stocks or exchange-traded funds have been permitted to ring the bill, often on the day their company goes public or releases a new product. Celebrities, dignitaries, charities and other groups are also often invited or may apply for the honor. The selection process is a bit mysterious, but the lucky ones are invited to sign the wall and become a permanent part of exchange history.

On Monday, May 17, the NYSE welcomed the Madison Square Garden Sports Company and JP Morgan Chase as they virtually rang the closing bell to celebrate the New York Knicks making the playoffs. That morning, the Chairman of New York’s Metropolitan Transportation Authority had the honors of pressing the green button, activating the big silver bell and prompting cheers from the assembled floor brokers and media representatives. The bell resounded across the floor for ten seconds to mark the return of 24/7 subway service in New York City earlier that morning. The Chairman was accompanied by representatives of the authority’s front-line workers who later noted that ridership had achieved pandemic records on May 14 with 2,265,489 subway trips, 104,885 on the Long Island Rail Road, 85,684 on the Metro North Railroad, and 1,188,284 bus rides.

Prior to the pandemic, average MTA weekday ridership totals routinely exceeded 5.5 million in the subway system alone. That number fell to a low of 300,000 in April of 2020, primarily heroic healthcare workers and public safety officials. On Monday, full overnight subway service resumed for the first time since May 6, 2020 when the subway system was closed for an unprecedented cleaning regimen involving 500 stations. The return of round-the-clock service paves the way for the end of the city’s outdoor midnight curfew and lifting of limitations on restaurant capacity, but brings with it new concerns about safety on the part of riders. Violent crime and harassment remain significant fears for many, while others worry about the possibility of a new coronavirus wave as a result of travel in trains and buses often equated to sardine cans.

Taxpayers and bondholders have additional questions and concerns. Even before the pandemic, rating agencies cited the MTA’s budget imbalances, missed capital commitment goals, capital funding risks and escalating debt. That debt has more than tripled in the last 20 years and now totals $49.4 billion. Some wonder if the Authority is whistling in the wind when it comes to projections about a return to pre- pandemic ridership levels given polls showing that the majority of city office workers do not plan to return to work five days a week under any transportation scenario. More than $14.5 billion of federal aid has plugged at least two years of budget gaps and reduced the immediate need for additional deficit borrowing but questions remain about the agency’s structural deficit, its plans for funding a five-year $51.5 billion capital program, its central business district tolling program, its labor issues, debt service, escalating retiree benefit costs, and doubtful ability to raise fares for the foreseeable future.

The U.S. bond market never officially closes so there are no bells to mark its sessions. There is round-the-clock trading in U.S. Treasuries and other bonds but the bulk of activity occurs between 8 a.m. and 5 p.m. and there are plenty of whistles throughout the trading day to accompany tickets written at unusually high and low levels. The A3/BBB+/A- rated MTA is among the largest U.S. municipal bond issuers, and is very actively traded. It has been in the market seven times since the pandemic began and twice tapped the Federal Reserve’s Municipal Liquidity Facility last year. At the time of this writing, the 5% MTA Transportation Revenue Bonds due in 2042 are trading at $108.333. The 5% MTA Transportation Revenue Green Bonds due in 2044 are trading as high as $124.80. In the current market, with limited supply available to satisfy demand for tax-exemption in high-tax states like New York as well as for bonds of relatively high credit quality, these are by no means the highest prices we are seeing. Certain taxable State of California general obligation bonds are trading over $164, and taxable New Jersey Turnpike bonds over $158. Tax-exempt Massachusetts Water Resources Authority bonds are trading over $151 and Mayo Clinic bonds over $150. At the opposite end are odd lots of bonds that have defaulted. These include subordinate Puerto Rico Highway bonds trading below $14 and St. Paul Port Authority parking ramp bonds just over $25.

In the new issue municipal market last week, investors scooped up and paid up for bonds at points on the credit scale with very little compensation for the extra risk. School bells rang for the triple-A rated San Antonio Independent School District which had a $268.3 million low-cost financing structured with 2051 term bonds priced with a coupon of 2.375% to yield 2.29%. Twelve hundred miles away, the Florida Development Finance Corporation issued $89.2 million of non-rated bonds for The Glenridge on Palmer Ranch in Sarasota with a 30-year term bond that had a 5% coupon but priced to yield just 127 basis points more than San Antonio at 3.56%. The City of Forest Lake, Minnesota brought a $29 million non-rated charter school transaction for North Lakes Academy that had a 2056 maturity priced at 5.00% to yield 3.90% and the City of Woodbury, Minnesota issued $21.9 million of BB-minus rated bonds for Woodbury Leadership Academy that included a similar 35-year maturity priced at 4.00% to yield 3.15%. The Colorado Educational and Cultural Facilities Authority sold $25.1 million of Baa3 rated bonds for Aspen View Academy that had a 2061 final maturity priced with a coupon of 4.00% to yield 2.95%.

Inflation alarm bells tolled again last week after the consumer and producer price indices came in higher than estimated. All three major stock indices weakened as did Treasuries and municipals while oil, gold and silver prices climbed. Halfway through the month of May, the Dow is up over 1% to 34,327, the S&P 500 has slipped 17 points to 4,163, the Nasdaq is off by more than 4% at 13,379, and the Russell 2000 is off 39 points to 2,227. Oil prices are up 4% to $66.27, at $1,868 gold has gained more than 5% and silver is up nearly 9% to $28.19. Bitcoin prices have plummeted 25% to 42,562. The 2-year Treasury is flat at 0.15%, the 10-year yield is up 2 basis points to 1.64% and the 30-year yield is 7 basis points higher at 2.36%. The Baa corporate bond yield is flat at 3.27%. The 2-year muni yield climbed 4 basis points to 0.14% and the 10-year yield is 3 basis points higher at 1.02%. The 30-year AAA municipal general obligation bond benchmark is flat at 1.59% but valuations hit a record low against Treasuries last week. The long muni yield slipped to 68.4% of its Treasury counterpart after having averaged about 103% between 2001 and 2020. We invite you to ring your HJ Sims representative to discuss any of these developments between your own day’s opening and closing bells.

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Market Commentary: Feathers Flying

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by Gayl Mileszko

“Hope”, wrote the poet Emily Dickinson, “is the thing with feathers that perches in the soul and sings the tunes without the words.” Along with love and faith, hope has been one of the mainstays for millions upon millions of us throughout the 425 days and counting of this Pandemic, often resting in the form of doctors and nurses, paramedics, caretakers, scientists, manufacturers, deliverymen, employers or employees. Hope — with its superhuman strength — still prevails for most of us amid all the new questions surrounding the origin of the coronavirus, the effectiveness and durability of the vaccines and treatments, and the emergence of variants. Just this past week, new hopes have arrived to hover over deadly clashes in Jerusalem and Gaza, the DarkSide pipeline cyberattack, rising food and gas prices, shortages of staffing and supplies, those in search of affordable housing, honest work, and in-classroom learning. Today, this year, as always, there is no shortage of need for hope.

On Wall Street, the hope for more than 12 years has been that nothing changes, that the stock, bond, and commodity rallies go on ad infinitum. With their unprecedented interventions, the Federal Reserve and other central banks have eliminated most every semblance of a free market, virtually guaranteeing price appreciation, access to cash that is nearly free, and excessive risk-taking. In the U.S., the Fed has been buying more than $120 billion worth of bonds each month since last June and the assets on its balance sheet now exceed $7.8 trillion, a sum that represents over 34% of our gross domestic product. Included in the total is $2.18 trillion of mortgage-backed securities at a time when the housing market is setting new records for prices, competition and speed of sales. The substantial increase in housing and other prices we are experiencing is seen by many as a precursor to more widespread and escalating inflation, a plight that no poet extols.

Investors are typically spooked by the mere talk of inflation. Now, home buyers, gas pumpers, food shoppers, and car renters, among others, know that it is omnipresent, the question being how accurately it is being measured and whether its rise is transitory or non-transitory. At this writing, higher prices along with shortages in everything from microchips to rubber, chicken and diapers, lumber and gasoline have caused both stock and bond markets to sell off ahead of producer and consumer price index data releases on Wednesday. Short and intermediate U.S. Treasury yields are flat on the month at 0.15% for the 2-year and 1.60% for the 10-year. Long 30-year yields are 5 basis points higher at 2.32%, pressured somewhat by the unusually heavy auction schedule. Corporate bond yields, as measured by the 10-year Baa benchmark are up 5 basis points to 3.37%. Municipal bonds have generally strengthened so far in May with the 2-year AAA general obligation bond yield at 0.11%, the 10-year at 0.97% and the 30-year at 1.55%. On the equity side, the VIX Fear Index has risen 18% this month to 22.02 but the Dow is up 418 points to 34,293 and the S&P 500 has dipped 1% to 4,144. The Nasdaq is down 4% to 13,420. And the Russell 200 is down 2.6% to 2,206. Oil prices are up 2.6% this month to $65.21. As is typical when markets sense inflation, gold prices have risen by nearly 4% to $1,834 and silver prices are up 6% to $27.55. Bitcoin, which has again experienced sessions of extreme volatility in May, is basically flat on the month at $56,694.

In the municipal market, the widespread hope is for more tax-exempt supply. The volume coming in the primary market is light, as are dealer inventories. Buys significantly outnumber sells in the secondary market, and institutions dominate daily trading. Investors bracing for higher taxes have poured $43.1 billion into municipal bond mutual funds and exchange traded funds this year. On top of all this, a surge of bond redemptions begins in June and lasts all summer: principal from maturing and called bonds plus interest will amount to $158 billion, and issuance may not even cover half the amount required for reinvestment. Bond buyers, traders, bankers and advisers along with state and local officials, industry associations, and non-profit organizations have all come together in support of congressional action to restore the tax-exempt status of advance refundings as one solution.

The ability of state and local borrowers to refinance many bonds on a tax-exempt basis was eliminated with the 2017 Tax Cuts and Jobs Act. The Joint Committee on Taxation estimated that this would save the federal government $16.8 billion over ten years. But it does not appear that legislators considered all of the ramifications of this major change affecting their state and local counterparts and joint constituents: the inability of cash-starved cities and nonprofits to achieve debt service savings or finance other critical public works projects in an historically low rate environment, the higher interest costs that would have to be paid by state and local taxpayers, the dramatic drop in tax-exempt supply available to meet investor demand, a demand that increased in response to Act’s state and local tax deduction limits. Advance refundings were said to represent 27% of the municipal market in 2016. In 2018, investment bankers had to respond to borrower refinancing needs with structures including shorter call features, corporate bonds, federally taxable municipal bonds and “Cinderella” bonds issued as taxable but transformed into tax-exempt securities at the redemption date. On last week’s primary calendar, 42% of the par amount was issued as refunding bonds.

There have been bipartisan efforts to restore tax-exempt advance refundings since 2018. Most recently, a provision was included in the infrastructure bill that passed the House on July 1, 2020. Several measures are pending now in the 117th Congress. These include H.R. 2288 and S. 479. Both require action by the House Ways and Means Committee, chaired by Richard Neal (D-MA) who supports the effort to restore tax-exempt advance refundings, and the Senate Finance Committee, chaired by Ron Wyden (D-OR), who has in the past advocated for tax credit bonds in lieu of tax-exempts. To guide the process, all await the Biden Administration’s full 2022 proposed budget with its Treasury Department Green Book detailing the tax proposals.

We at HJ Sims continue to encourage our clients and colleagues to contact their Members of Congress to urge support for this important effort. While it is unlikely that either of the pending bills will pass on a standalone basis, we see a good possibility that authorizing language could be included in an infrastructure bill, separate tax reform measure, debt limit extension, or omnibus spending bill, with or without a sunset provision. We are following developments closely and will keep readers informed.

While still too low to meet demand, so far this year, the municipal issuance level is perched 17% higher than 2020. In large part this is due to the significant drop in market entry during the turmoil ensuing after the pandemic declaration. Tax-exempt issuance in 2021 as of last Friday totals $108 billion vs $93 billion in 2020. Taxable issuance at $47 billion is nearly $6 billion or 13% higher. Among the smattering of high yield offerings last week, Lincoln County, South Dakota sold $82.4 million of BBB-minus rated revenue bonds for Augustana University in Sioux Falls structured with 40-year term bonds priced at 4.00% to yield 3.29%. The Arlington Higher Education Finance Corporation issued $28.2 million of BB rated bonds for Wayside Schools in Austin that featured 2046 term bonds priced with a 4% coupon to yield 3.31%. This week’s calendar will likely come in under $7 billion and includes an $89 million non-rated refunding for Glenridge on Palmer Ranch in Sarasota, and financings for two Minnesota charter schools: $30 million for non-rated North Lakes Academy in Forest Lake and a $22 million for BB-minus rated Woodbury Leadership Academy.

Feathers were flying in the wake of Friday’s surprisingly low jobs report. Only 266,000 jobs were added in April, well below the estimates for 1 million. Some view the numbers as an anomaly, perhaps to be revised upward in the next release. Otherwise the economic tune is an upbeat one. First quarter GDP increased at a 6.4% rate. Job openings have just risen to a record high 8.12 million, and the number of vacancies exceeds hires by more than 2 million, the largest gap on record, in part due to COVID-19 fears, child care responsibilities, and what some consider to be overly generous unemployment benefits that may continue through September.

There has never been times like these, but there are always investment needs and goals. HJ Sims representatives welcome your contact to discuss your borrowing and investing plans. We invite you to share your portfolios, strategies, fears, doubts and hopes. Right now, the major credit reporting agencies have upwardly revised their outlooks for most sectors. Business travel is picking up, new clothes are being fitted as major firms begin bringing employees back to work in corporate offices, airlines are all filling their middle seats. Conventions, expos and state fairs are finally all going live in the coming months, and live bands singing our favorite tunes are on tour. America is on the mend and hope abounds as feathers fly.

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Market Commentary: Pay It Forward

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by Gayl Mileszko

In Raleigh, North Carolina, there is a special place on Hargett Street that opened six years ago in a building that once housed a bank and a funeral home. Building renovations took several years and, during this time, the insightful James Beard Award-winning chef/owner had plenty of time to consider what she would name the new restaurant that would occupy the space. It was, of course, inspired by Benjamin Franklin and called it Death & Taxes. But after several acclaimed seasons, this small business along with almost every restaurant in the country was forced to close temporarily due to the pandemic. Hers managed to survive while dozens and dozens of others beloved by the Triangle community closed permanently. Death & Taxes re-opened for takeout in February and now has a dining room with reduced capacity that is open four nights a week. The menu still features the “Tax Free”, a fine rye whiskey cocktail with smoked cherries and bitters, and “The Catacomb”, an unusual mix of gin, vodka, red vermouth, and cappelletti pasta.

The famous quote “In this world, nothing is certain except death and taxes” was attributed to Franklin in 1789. Since the pandemic was declared, we in the U.S. have suffered 577,845 reported COVID-19 related deaths. The world has lost 3,217,512 of its citizens at the last count of the John Hopkins Coronavirus Resource Center, which has been our first, most steady, and apolitical tracker. With respect to taxes, the latest tax filing deadline looms ten days from now. Higher brackets may be in store for next year under the Biden Administration’s proposals. We await specific details. But for now it appears that the new estate tax, a new higher capital gains rate, and the repeal of step-up in basis could bring total effective marginal rates to 61% for some, the highest level in nearly a century according to an analysis from the Tax Foundation.

On the federal level, it is unclear whether any or all of the White House proposals can pass Congress. We outlined some of the hurdles last week. But several states have already enacted hikes for the 2022 fiscal year. So accountants and financial planners are advising families to consider the impacts of various higher rates and the possible advantages of making gifts and realizing capital gains at this time. We encourage you to begin conversations with your HJ Sims financial professional. We are working hard to guide our clients through these uncertain times with a host of resources.

For most investors looking forward, there is no doom and gloom associated with stock, bond or commodity market outlooks. Equity market rallies have certainly been unprecedented since the September 2008 and March 2020 crises. The vast majority of analysts see them extending as long as the Fed continues its massive bond-buying and rate-compressing policies. But stock buyers cannot always rely upon dividends and appreciation to meet all of their investment and income needs. Bonds have represented a significant and critical percentage of family as well as institutional portfolios since at least the 17th century when England first issued debt to finance a war against France. Yes, yields have been on a long, continuous decline for more than 40 years since the 10-year Treasury peaked at 15.84% in September of 1981, forcing even many of the most conservative investors into far riskier assets while providing fantastically low rates for  non-profit and for-profit borrowers.

Since we are still at the very low end of historic yields, many–if not most–analysts see them continuing to rise alongside inflation throughout the near future. Several prominent market participants see bonds as a poor investment choice right now.  Berkshire Hathaway’s Warren Buffett recently said that fixed income investors face a bleak future. JP Morgan Chase’s Jamie Dimon recently quipped that he wouldn’t touch Treasuries with a 10-foot pole. Ray Dalio, founder of Bridgewater Associates, is quoted as saying that investing in bonds has “become stupid”. We disagree with these generalizations. We have bought, structured, and underwritten bonds throughout the course of our 86-year history and remain huge proponents of tax-exempt and taxable bonds as critical components of long-term investment portfolios. Our banking, trading, underwriting, analytic and sales teams specialize in products including Cinderella, capital appreciation, refunding, taxable, and corporate bonds. We are among the few broker dealers with expertise in non-rated and below investment grade securities, aiding many borrowers with smaller, start-up, and novel projects in securing financing and identifying suitable higher yielding opportunities for our investing clients. As you, our readers, think about your own holdings, your capital and income needs going forward, we again encourage you to contact your HJ Sims representative to discuss how bonds may work for you.

U.S. bonds should never be dismissed, particularly in a world replete with negative yielding sovereign debt. At this writing, the 5-year bonds of Japan yield negative 0.105%, Spain’s yield negative 0.245%, and those of France yield negative 0.54%. The 10-year bonds of Germany yield negative 0.24% and those of Switzerland yield negative 0.26%.  The U.S. Treasury 5-year currently yields 0.81%, the 10- year 1.58% and the 30-year 2.25%. Our 10-year A rated corporate bonds yield 2.74% and comparable 30-year bonds yield 3.51%.  Our 10-year AAA municipal general obligation bonds yield 0.99% and the 30-year yields 1.57%.  Last week, non-rated student housing bonds at Lynn University in Boca Raton were sold in the primary market with 5.00% coupons, priced at par. John Knox Village in Lee’s Summit, Missouri came to market with non-rated bonds due in 2056 priced with a coupon of 5.00% to yield 4.35%. Central Wyoming College offered non-rated bonds due in five years at 4.125%. In the secondary municipal market, Cherokee Charter Academy in Gaffney, South Carolina had bonds with a 7% coupon due in 2050 trade at $102 to yield 6.69%. Virgin Islands Water and Power Authority bonds with a 5% coupon due in 10 years traded at $90.50 to yield 6.228%.

So far this year, both individual and institutional investors have benefitted from an influx of cash via federal aid, bonds maturing, coupons and dividends paid, tenders and calls. Corporate bond buyers have had a field day with record amounts and wide arrays of investment grade and below investment grade rated issues. Municipal bond buyers have seen much less supply, as some borrowers have elected to postpone deals, refinance on a taxable basis, issue corporate bonds to take advantage of broader investor bases, or privately place debt with banks. We note a growing trend for forward delivery bonds, with sales taking place in favorable market conditions for settlement four, six, or even twelve months ahead when bonds are eligible for redemption. Current refundings on a tax-exempt basis are permitted within 90 days of the date of the refinancing. Buyers looking to lock in current rates or plan for reinvestments with cash expected from future redemptions or interest income are making commitments to buy these forwards. Borrowers are not having to pay up very much for this flexibility.

Last week, the BBB/BBB+ New Jersey Transportation Trust Fund Authority came to market with $1.58 billion of bonds in four parts. More than $893 million were for forward delivery on April 27, 2022. The 2036 maturity in the forward bonds priced with a coupon of 5.00% to yield 2.53% while the 2036 bonds settling this week yielded 2.00%. The state paid only 53 basis points more for the one year forward delivery piece, and it outperformed the market by Friday. Also last week, the city and county of San Francisco brought $178.1 million of general obligation refunding bonds in two parts; $86.9 million was issued for forward delivery in four months. The 2028 maturity in the forward deal priced with a 5.00% coupon to yield 0.80%, 19 basis points higher than the same bond maturity yielding 0.61% that settles on Friday.

Buyer willingness to wait up to a year for the delivery of their bonds is one of the many things that has changed in the past year. We are noting some positive trends in hotels, rental cars, domestic air travel, life plan communities and charter schools, all of which were hit hard last year. For investors worried about higher tax rates and looking to sell equities, you may find some good value as well as tax advantage in some of these tax-exempt sectors.

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Market Commentary: Are Tax Hikes Inevitable?

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by Gayl Mileszko

All the daily headlines lead us to believe that significant tax hikes are inevitable. There are innumerable fiscal challenges. We have spent $5.3 trillion so far in response to the pandemic-induced recession. There is serious talk of another multi-trillion infrastructure package. The balance sheet of the Federal Reserve has ballooned to $7.7 trillion. Our projected budget deficit — just halfway through the fiscal year — exceeds $1.7 trillion. The national debt now exceeds $28.2 trillion, a figure so large that it has lost meaning for most of us. The President who took office 100 days ago is seen by a good portion of the electorate as having a “mandate” to impose higher taxes on wealthy citizens and big business.

It is easy to understand why tax-exempt municipal bonds are now becoming scarcer and pricier amid all this tax hike chatter. The financial markets seem to sense a growing consensus for action based on media attention to various policymakers with platforms if not jurisdiction. Last year there was a “tax the rich” and “stick it to the corporations” campaign narrative that appeared to generate support for bogeys at around $400,000 in income, $1 million of gifts, and estates over $3.5 million. There are big bulls-eyes on companies seen as benefitting from the 2017 Trump tax cuts. Talk of retroactive applications makes the current grab for tax advantages all the more understandable.

Not a lot of opposition to the talk of tax increases has yet emerged. First of all, the specifics have not been presented, so special interest groups have nothing solid yet to analyze and object to. Some information was expected in the President’s address to the Joint Session of Congress on Wednesday, but the real details are being fleshed out and will take time. U.S. stocks nevertheless took a dive last Thursday on mere reports of plans to almost double the capital gains tax. The Dow dropped more than 320 points. The S&P 50, Nasdaq and Russell 2000 also fell, as did Treasury, corporate and muni yields.

In America, a tax rebellion is always right around the corner. And, given the changes in work and living arrangements brought about by the coronavirus, we are seeing how quickly our fellow citizens in states like New York and New Jersey now vote with their feet when informed that they must pay a higher so-called “fair share”. Companies with operations in multiple nations do not hesitate to move their headquarters, jobs, ingenious products and tax revenue to more friendly host nations. Any efforts to standardize tax laws among 195 different sovereign nations have about a zero chance of success.

We know of no legal prohibition against tax measures that apply retroactively. However, for a variety of reasons, retroactive tax provisions are not common or practical. In Washington, there are strong accounting, financial planning and litigation lobbies. There is also the simple matter of IRS logistics: printing the new forms and instructions affecting virtually every taxpayer and business, publishing the necessary regulations and guidance, educating customer service representatives and enforcement staff, and so on. If you examine past tax legislation, you will note that some provisions have different forward effective dates. Others may be temporary, with sunset dates in order to conform with the requirements of the enabling legislation. There are quite a few provisions in the 2017 Tax Reform bill that expire in 2025 without further action.

As many presidents have learned, tax reform bills are not so easy to get through Congress. They are nearly impossible if rolled out in pieces or phases. There have been at least 21 bills that increased federal tax revenues over at least one fiscal year since 1940 but the only recent major overhauls took place in 1986 and 2017. In order to succeed with cuts — never mind hikes — an administration has to draft very detailed proposals, preferably supplying specific statutory and explanatory language in its annual budget. Given the number of departments, agencies and offices involved, internal consensus is not easily obtained. The Tax Code is so unwieldy there are really no single source experts. In 2020, there were nearly 10 thousand sections. On the legislative side, numerous congressional committees and subcommittees are involved, with testimony, drafting and re-drafting, mark-ups, votes, speeches, and dialogue with constituents. As we saw in 2017, there are leaks, deep intra-party divisions, odd rules and unusual motivations. It is just plain impossible to “fast-track” anything without very heavy and sustained leadership pressure. In the process, hundreds of errors are made and so many unintended effects are revealed that there is typically at least one “technical corrections” bill required within a year or so of passage. That in and of itself can be a magnet for many unrelated and controversial provisions, and difficult to pass.

In the end, so much horse trading for votes is involved that passage of a 500+ page tax bill with an explanatory report of similar size would likely come at the price of all other major administration priorities. This time, it could possibly come at the expense of health care reform, civil rights, climate change, immigration, and infrastructure initiatives. The infrastructure details mean a lot to those of us in the municipal bond markets, most notably tax provisions involving advance refundings. But bear in mind that there are more than 12,000 active, registered lobbyists in DC and almost all of them have at least one special tax provision that they may want included or excluded. The budget committees, Congressional Budget Office, Office of Management and Budget, the Treasury, and the Joint Committee on Taxation are all involved in “scoring” the revenue impact of legislative proposals. These are not simple exercises and they are highly political. If reform is not achieved early in the honeymoon period, sophisticated vote counters and insider knowledge can lead to early pivots by certain classes of taxpayers and international/supranational corporations, significantly altering the projected revenue impacts before debate on the reforms is even over. The 1981 Reagan cuts and 1993 Clinton hikes were enacted by August of the first year in office; the 2001 Bush cuts were agreed to by May.

We will hear more debate on tax policy in Washington in the coming months as plans unfold and we encourage our readers to become involved. There are thin Democrat margins in the House and Senate, and Senate passage would entail a vice presidential tiebreaker and complete loyalty from the caucus. In the current environment, there will have to be close coordination with the Federal Reserve and monetary policy, and with the budget, taxation, and appropriations committees. If reform is enacted this year, mid-term elections may not be seen as a referendum as the full impact will not be felt by all taxpayers until forms are filed in 2023. If a tax reform bill is not signed into law by December, the odds are that tax hikes are unlikely to happen in 2022, an election year. In the meantime, 26 states and the District of Columbia had notable tax changes take effect in January, and more are on tap for new state fiscal years; in New York, the FY22 increases began this month.

In the past week, municipal bonds in high tax states have traded at extraordinarily high prices. Stanford University bonds with a 5% coupon due in 2049 traded this week at $159.792. Hamilton College bonds issued through Oneida County’s Local Development Corporation with a 5% coupon due in 2051 priced at $158.567. New York City Municipal Water Finance Authority bonds and Port Authority of New York and New Jersey bonds with 5% coupons due in 2031 are trading in the $136-$137 range. Long Island Power Authority and Monmouth County Improvement Authority bonds with a 5% coupon due in 10 years offer yields of only between 0.975% and 1.077%. Many individual and institutional investors are holding on to the bonds with federal as well as state tax exemption while looking for more to buy directly or through mutual funds and exchange traded funds. However, new supply is lacking. This week’s calendar, for example, totals only about $5.5 billion, and more than 20% is being issued for refunding purposes in federally taxable structures, and more than 20% is offered with forward settlements. Last week, the most yield we found was in a $10.9 million BB+ rated Michigan Math and Science Academy bond deal that had 2051 term bonds priced with a 4.00% coupon to yield 3.03%

This week, the Federal Open Market Committee met on Tuesday and Wednesday and kept its ultra-loose policy and near zero rates in effect, as expected. Investors are obsessed with guessing how much more economic ground has to be gained before the Fed begins tapering its monthly Treasury and mortgage bond purchases of $120 billion, and official conversations about rate increases begin. To be clear, Fed futures traders expect no changes in rates this year.

Where do you invest? We encourage you to contact your HJ Sims representative. Our banking, trading and sales executives are active in the day-to-day markets. For investors, our credit-driven strategies are designed for the outcome of income.

Is this the right time to borrow? For senior living communities, we point out that we are seeing some of the strongest lending conditions in our 86-year history. Our aim as always is to Partner Right, Structure Right and Execute Right.

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