By Gayl Mileszko
Making Cents
Americans have been hearing for 19 years that it costs more to make one penny than that penny is worth. In fact, it now costs about 2.69 cents more. We are increasingly using digital forms of payment, but there are plenty who still carry around assorted change in our pockets and coin purses. Some keep cookie jars full to the brim with the little Lincolns, saving for a rainy day — or, more realistically, a small cup of coffee. To pay for a Starbucks café latte with your collection of pennies, at 181 per pound you would need to cart around 3.25 pounds worth. But many of us can no longer be bothered to hang onto any pennies at all. Walk down any main street and you will find dozens that have been dropped, dirtied, and flattened by cars, buses, and 18-wheelers. No one even stoops to pick them up anymore, even though one 1943 wheat penny might be worth as much as $2.3 million to the lucky finder.
Penny Pinchers
More and more of our day-to-day transactions are moving away from physical currency. Somewhere between 80 and 87% of all transactions in the U.S. were reported to be cashless in 2024. But there remains a stubborn segment of the populace still using currency and coins. For decades now, cashiers have kept a little pile of pennies next to checkout registers, using them to round up or down a customer cash sale so we (I) don’t hold up the line while we fish around in our handbags for the elusive coppers. The Federal Reserve reports that there are about 114 billion pennies still in circulation, but others estimate that the number could be as high as 240 billion, or more than 700 for each and every American citizen. Last year, 3.2 billion new pennies were manufactured at a cost that jumped by 20% from 2023. The Mint lost $85.3 million in the process of making them. And many of these shiny new ones promptly disappear — into kiddie piggy banks, under car seats or couch cushions. Fiscal Year 2024 marked the 19th straight year of negative seigniorage. Going forward, if pennies are no longer stamped, it could take several decades to flush most of them out of the system, melt them down, and recycle them. In the meantime, we wonder: what exactly are they good for? Some casino slot machines still take them but there is no such thing as penny candy to buy anymore. The lowly copper head is not even used in heads-tails flips. For the referee’s ritual toss to kick off Super Bowl LIX, it was the Highland Mint in Melbourne, Florida that made the official NFL coin.
One Penny at a Time
On Super Bowl Sunday night, in characteristic fashion using a Truth Social post, President Trump announced that he instructed Treasury Secretary Bessent to stop producing new pennies. “Let’s rip the waste out of our great nations budget, even if it’s a penny at a time,” the President quipped. It is unclear if there is an official order, but this is just the latest in a series of DOGE-inspired, budget reduction recommendations. Secretary Bessent himself made some headlines last week when he assured the markets that the Administration was focused on keeping the 10-year Treasury yield low rather than hectoring the Federal Reserve about its fed funds rate. This was welcome news to the bond and stock markets. Readers will recall that the 10-year Treasury yield has actually risen by 93 basis points since the Federal Open Market Committee began lowering rates by 100 basis points on September 19, 2024. Fed Chair Jay Powell is on the Hill this week for his semi-annual testimony before the House and Senate banking committees, while the Treasury Secretary juggles matters ranging from de-regulation to tax policy, deficit reduction, tariffs, nine Treasury auctions, and market reaction to key small business, inflation and retail sales data.
A Penny for your Thoughts
It was way back in 1793 that the Treasury introduced the first penny. The Congress authorized its production, and to this day still specifies the size and metal content of every coin. So, it is actually unclear if President Trump was within his rights to order a hard stop on production. The Federal Reserve is involved here as well: they buy all the coins made by the U.S. Mint at face value, and store them until they receive fill orders from depository institutions. Without new pennies to meet demand from banks and retailers, prices will necessarily rise as they are rounded up to the nearest nickel. And that will only lead to another budgetary migraine. Nickels, made of 75% copper and 25% nickel, cost even more than pennies (2.5% copper and 97.5% zinc) to produce. In fact, they cost 8.8 cents more, with 11 cents of production costs and 2.8 cents attributed to administrative and distribution costs. By increasing the number of new nickels to meet new demand from retailers we would actually wipe out any savings from eliminating pennies and, ironically, increase net production costs. Consumers would have a lot to say if we got rid of both the penny and the nickel and had to round up all prices to the nearest dime (which costs only $0.0576 to make) or quarter ($0.1468). For pointers on how to handle a coin transition, we can certainly reach out to several allies: Canada stopped making its pennies in 2012, Australia and New Zealand in the 1990s. Israel, Norway and Finland are also among those who no longer circulate low denomination coins.
A Penny Saved
Over the years, the U.S. Mint has stopped the production of half-cent, two-cent, three-cent, half-dime and some dollar coins. Aside from DOGE and President Trump, who might favor wiping out the penny? Perhaps credit card companies and any firms facilitating electronic payments. Retailers trying to speed up checkouts. Environmentalists concerned with the impacts of copper and zinc mining. Coin collectors, who will begin hoarding pennies and nickels hoping that the shrinking supply will create a big jump in values. And, of course, maintenance workers who have to clean out all those fountains and wishing wells. On the other side, there are zinc miners and the so-called coinage lobby. Fans of Abraham Lincoln, whose birthday was just celebrated on February 12. Those who look upon any rounded-up prices as akin to a new tax. There are also countless retailers who are looking with dread on the thousands of tags or menus they had printed for items offered at prices ending with “99 cents”. And then there is the Fed and the Mint, who will have to take on the new task of collecting and recycling billions of castaway pennies.
Penny Ante
Traders are doing a lot of head-scratching these days. New directives from the White House are coming out at a fast and furious pace. Wall Street’s artificial intelligence and algorithms are basically stymied in trying to predict and react to the Administration’s rapid-fire policy announcements. How do you hedge DOGE? Some executive orders are being challenged in court, and Members of Congress are working to ensure that their constitutional authorities are respected and retained, so it is pretty hard to make wagers on outcomes. It has only been three weeks since Inauguration Day, but investors are already starting to understand that they will be operating in a state of frenzy and upheaval for at least the next two years. In response, we observe some flight to safety: gold prices, for example have risen $135 an ounce since Election Day and $170 an ounce since January 20. The 2-year and 10-year AAA municipal general obligation bond yields have fallen 16 basis points since the President was sworn in and now stand at 2.62% and 2.95% respectively. The MOVE Index measuring bond market volatility is down 12%. On the other hand, some investors have increased risk bets. Bitcoin prices are up 37% since Election Day, the Nasdaq is up 6.5% and the S&P 500 has risen 5%. The VIX Fear Index is down 22%.
In for a Penny
Every generation faces uncertain times, but the current level of uncertainty at present is clearly elevated. Bombshell announcements affect every market, domestic and global. Federal agencies are being shuttered; U.S. aid is being shut off. Every office and dollar is under a microscope, some for the first time by analysts from outside the Beltway. Diplomatic relations have shifted sharply. Retaliatory tariffs have been imposed. Wars drag on and nuclear weapons are threatened. Hostages remain in captivity. Food and housing inflation remain stubborn. Debt levels are at all-time highs. The cost of borrowing is prohibitive for some. Infrastructure is crumbling. Populations are divided by wealth and politics. The future of artificial intelligence and cryptocurrency mystifies. Flipflop regulatory and fiscal policies. Central bank interventions. Activist courts. Earthquakes. Hurricanes. Wildfires. Fentanyl. Tren de Aragua. Panama. Gaza. Greenland. Considering all this, financial markets are remarkably calm. Business is booming. 76% of fourth quarter earnings reports have beaten estimates and revenues are 1.1% higher than expected. Fourth Quarter GDP increased by 2.3%.
Pretty Penny
In the municipal bond market, we saw record volume in 2024 and some believe we will beat it this year. We are off to a good start: the MSRB pegs January issuance at $38.6 billion. Individual and institutional demand for tax-exempts is strong; new issues are well received, often oversubscribed and repriced at lower yields. Lipper reports net inflows into municipal bond funds and exchange traded funds at $4.4 billion so far this year. Muni investors will receive $45.8 billion of principal and interest to reinvest this month. Even taxable municipal bonds are doing well; in fact, they are outperforming U.S. Treasuries, high yield corporates and even the Nasdaq. The entire muni industry, including nonprofit borrowers, underwriters, financial advisers, bond counsel, trustees, asset managers and many more, are joining forces to educate policymakers on the critical need to preserve the tax-exempt financing tool that has been threatened for possible elimination. We encourage all readers to visit builtbybonds.com to share your stories to help demonstrate the wide array of local essential public purpose projects made possible by municipal bonds.
Worth Every Penny
Last week, there were $12.2 billion of new stories told as more new bond issues came to market. This included Great Oaks Academy, a K-8 classical charter school opened in 2020 in Farmington, Minnesota, which came with a $16.9 million non-rated financing through the City of Eagan, pricing its 2065 term bonds at 6.50% to yield 6.55%. Sunrise of Manhattan Beach, a new 88-unit rental assisted living and memory care community, sold $123 million of non-rated bonds through the California Public Finance Authority structured with a 40-year term bonds priced with a 6.75% coupon to yield 7.00%. This week’s calendar includes a $33.6 million non-rated transaction for Sycamore Creek Community Charter School, a TK-8 public school in Huntington Beach, California, and a $30.2 million Baa3 rated deal for Paterson Charter School for Science and Technology, a K-12 public school with four campuses in Passaic County, New Jersey.
Our Two Cents
The prospective elimination of the penny and/or nickel will not keep us from offering our two cents, whether in the form of general market observations or specific market entry and investment guidance for our treasured clients. In fact, we will be sharing our views on market conditions, providing some examples of our most innovative financings, and promoting a fascinating dialogue between and among a broad array of experts in the senior living, charter and private school communities two weeks from now. Our 22nd Annual Late Winter Conference will take place at The Worthington Renaissance in Fort Worth from February 25 to 27. We look forward to seeing you there!