Market Commentary: A Port in Any Storm

The MS Westerdam is a premium cruise ship of Italian design and Netherlands registry with 10 decks that was christened in 2004 and refurbished in 2017. Operated by the Holland America Line, and owned by Carnival Corp., the ship offers a Lincoln Center stage, a BB King Blues Club, 3 restaurants, 3 pools, shopping and a casino. Right now there are 2,257 souls aboard, including 802 crew members, and they are all in limbo off the southern coast of Vietnam. They departed from Hong Kong on February 1 on a two-week journey with calls planned on Taiwan and Japan but at this writing are now just in search of a port where they can disembark. Although the operator says that it has no reason to believe that there are any cases of coronavirus on board and no passengers are restricted to quarters. Thailand is the just the latest country or territory to turn them away for fear that some passengers are infected. Japan, Taiwan, Guam and the Philippines have previously blocked requests to dock. The plight of the Westerdam epitomizes the fear, dread and uncertainty surrounding the 2019 novel coronavirus. Centers for Disease Control officials say that Americans should not panic as the risk of contracting illness here is low. However, if you are on board the Diamond Princess, another Carnival cruise ship with 3,600 currently under quarantine in the port of Yokohama, Japan, the risk is substantially higher. Officials there say that they do not have the capacity to test everyone, but there are at least 135 confirmed cases, the largest such number outside of China. In Wuhan, a city larger than New York, there is an unprecedented quarantine of nearly 60 million people in effect and the 34 year-old doctor who first tried to raise the alarm about the outbreak just became one of the 1,000 casualties of the disease now officially named Covid-19.

Federal Reserve Chair Jay Powell singled out the coronavirus as one risk threatening a U.S. economic outlook which otherwise appears durable with steady growth and unemployment near a 50-year low. In testimony before the U.S. House Financial Services Committee on Tuesday, he noted that it is too early to say whether the effect of the virus on the U.S. will be persistent and material but that the outbreak could lead to further disruptions in China that spill over. Powell was on Capitol Hill for his semi-annual monetary report to Congress. He reminded Members that the expansion is in its 11th year, the longest such period of uninterrupted growth on record, with job openings plentiful, and employment gains benefiting all ethnic and racial groups and levels of education. With the economy “in a very good place”, he indicated that no further rate cuts are being contemplated unless economic conditions change significantly, and assured Members that the Fed is monitoring developments, prepared to respond accordingly. This was welcome news to markets that have jolted up and down and moved sideways based in part on fourth quarter earnings, easing trade policy uncertainty, and Federal Trade Commission antitrust investigations but mostly in response to coronavirus developments.

The central bank chair’s testimony was given much closer scrutiny than the President’s budget proposal this week. The $4.8 trillion spending plan highlighting spending priorities for FY21 was rolled out on Monday. As happens in every administration, the bulky document quickly became a doorstop as budget and appropriations committees begin their own drafting process. But given that campaigns are in high season as the new fiscal year begins, it is highly unlikely that anything other than a continuation at current levels will be approved by September 30. Five hundred miles north of the nation’s capital, the New Hampshire primary is underway at this writing and candidates will soon be heading to Nevada for the Democratic debate next week and to South Carolina for the primary to be held February 25. Financial markets are not yet focused on the race as they need to see the field pared down, but they remain on alert for a dark horse.

The month has so far favored stocks over bonds, gold and other havens as economic reports were all strong, China announced tariff reductions, the impeachment drama came to an end, and worldwide resources were marshaled to prevent the spread of the new strain of virus. The Dow is up 1,021 points to all-time highs at this writing while oil is down $2 a barrel to $49.57 and gold is off $13 an ounce to $1,576. The 2-year Treasury yield has risen 8 basis points to 1.39%, the 10-year is up 6 basis points to 1.56% and the 30-year has added 4 basis points to yield 2.03%. 10-year Baa corporate bond yields have fallen 5 basis points to 3.36% while AAA municipal general obligation benchmarks are all up 3 basis points despite a record 57th straight week of fund inflows totaling $1.6 billion for the most recent period. The 2 year tax-exempt yield currently stands at 0.87%, the 10-year at 1.18% and the 30-year at 1.83%.

So far this month in the high yield municipal market, the Port of Greater Cincinnati Development Authority sold $5.8 million of non-rated revenue bonds for a convention center hotel and demolition project that featured bonds with a three year maturity priced at 3.00% to yield 2.00%. Also on the $6.5 billion calendar last week, Burleigh County, North Dakota sold $22.5 million of non-rated revenue bond anticipation notes for Missouri Slope North Campus- SNF, LLC structured with non-rated bonds maturing in 21 months priced at par to yield 3.00%. The Public Finance Authority of Wisconsin came to market with a $21.5 million non-rated revenue bond issue for Woodland Place Senior Living in Spartanburg, South Carolina that had a single maturity in 2024 priced at 8.800% to yield 9.121%. The California School Finance Authority issued $19.3 million of non-rated bonds due in 40 years for the Alta Public Schools Obligated Group that came with a 6.00% coupon priced at par and the City of Minneapolis had an $8.6 million non-rated charter school lease revenue bond issue for Northeast College Prep structured with 2055 term bonds priced at 5.00% to yield 4.48%.

This week HJ Sims is in the market with a $28.6 million retirement facility revenue refunding bond issue for Morningside Ministries at the Meadows and at Menger Springs, Texas. The BB+ rated financing is being issued through the New Hope Cultural Education Facilities Finance Corporation. Among other financings on the $8.3 billion slate is a $25 million bond issues for the San Francisco Port Commission. The Maryland Economic Development Authority is bringing a $42.9 million BBB-minus rated student housing revenue bond issue for Bowie State University. The Arizona Industrial Development Authority has a $41.6 million BB+ rated financing for the Cadence Campus at Pinecrest Academy of Nevada. And Florida’s Capital Trust Agency plans a $34.8 million non-rated senior living revenue bond issue for Antares of Ormond Beach. The 30-day visible supply of munis totals $13.1 billion of which approximately 36% is expected to come as taxable bonds.

Markets are closed on Monday in commemoration of Presidents’ Day, and we are less than two weeks away from the HJ Sims Late Winter Conference. We invite all who have not yet confirmed your attendance to register and join us for our insightful CFO breakfasts and panels on topics ranging from strategies for stressed communities and those serving middle-income seniors to the future of medical cannabis. There will be an informative tour of La Vida Real and an unforgettable evening at the San Diego Zoo. We look forward to having you join us.