By Gayl Mileszko
Market Commentary
Alphabet Soup
The acronyms and abbreviations abound this week, delighting economists, financial writers, and political pundits who love the lingo so vexing to the average Joe. The week and the month are not over, but most of us have already had our fill of acronym anxiety. There were the Federal Open Market Committee (FOMC) meetings on Tuesday and Wednesday, the Bank of Japan (BOJ) and Bank of England (BOE) rate decisions, the scheduled releases of gross domestic product (GDP), the Federal Housing Finance Agency (FHFA) House Price Index, and Personal Consumption Expenditures (PCE) data. On the Hill, Anthony Fauci took the Fifth 111 times, refusing to answer questions on Gain of Function (GOF) research, the color of his necktie, and other matters, on advice of counsel. The Senate advanced S.1241, the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026.
Wall Street began dissecting earnings reports and gauging AI-related revenue forecasts from MSFT, META, AMZN, and AAPL. The Fédération Internationale de Football Association (FIFA) announced controversial plans to form a subsidiary to raise $4.2 billion from third parties. The Nasdaq, formerly the National Association of Securities Dealers Automated Quotations, closed in correction territory on Wednesday. West Texas Intermediate (WTI) crude oil prices climbed more than 7% after President Trump announced that the U.S. would hit Iran hard. U.S. Central Command (CENTCOM) reported a heavy wave of strikes in response to the attempted surprise attacks on Tuesday.
Duck Soup
The U.S.-Iran conflict is entering its sixth month, and it is still unclear who in Tehran is making the decision to continue fighting while the nation is in such serious crisis. It is reminiscent of the 1933 Marx Brothers depiction of the inept leader of a bankrupt nation leading his country in a nonsensical war. Only this is no comedy. We have lost 18 service members and at least 624 of our military personnel have been injured. Iran has suffered thousands of deaths and untold numbers of injuries. They have a very weak currency, and triple digit inflation. At least one million jobs have been lost, and the country has suffered massive infrastructure damage. Despite the crippling international sanctions, the global isolation, and oil revenue loss, they continue to use cheap drones, missiles, and fast-attack boats to impose tolls and restrictions, choking off vital sea transit. And now, the conflict is in a phase that appears to be widening across the Middle East, beyond Yemen and Lebanon to Kuwait, Jordan, Iraq, Saudi Arabia, and Egypt.
In the Soup
Financial markets rally and sell off on daily developments in the Middle East, clearly anticipating an imminent resolution then quickly remembering that hope is not a sensible trading strategy. Oil prices are being watched more closely than the election day countdown clock. And inflation in general is the third big ingredient in the hot and sour market soup. The latest inflation data for June reflected the short-term 21% drop in Brent crude futures but reminded us that the PCE gauge has exceeded the Federal Reserve’s 2% target since March of 2021. This week, the bond market disagreed with 9 of the 12 Federal Open Market Committee voters who decided to maintain the target range between 3.5% and 3.75%. The 30-year Treasury sold off and the dollar fell on the news that the FOMC kept rates unchanged for a seventh straight month.
No Soup for You
In the classic 1995 Seinfeld episode, a mercurial soup shop owner enforces strict rules for ordering his wildly popular soups of the day, and he does not tolerate unnecessary talk from those waiting in line. Traders are starting to wonder if Kevin Warsh is modeling his chairmanship after that guy. He is not exactly putting a muzzle on his colleagues, but it is pretty quiet over there in the Eccles Building while the task forces meet. There are none of the usual menu leaks to the Wall Street Journal columnist or to Goldman Sachs as we saw in the Powell era. Mr. Warsh insists that the Fed will take all the necessary steps to bring down inflation but, to the bond market, all his tough talk so far is just hot air. The new Chairman seems to be stalling, maybe putting off an increase until after the midterms.
So, the bond markets marched into the kitchen on Wednesday and mixed the soup on their own. Borrowing costs for everything increased in a flash, arguably an overreaction that spilled over into equities. The 30-year Treasury yield jumped 12 basis points and the 10-year rose by 7 basis points. At this writing, the 1-year Treasury yield stands at 4.02% and the 2-year at 4.25%, well above the Fed Funds rate at 3.50%-3.75%. Futures trading again signals that one or more official rate hikes by year end are highly probable. The likelihood of an increase in September has risen to 59%. There is no August or November meeting scheduled this year, so the action, if any, will come in September, October, or December.
Soup to Nuts
We are well into the dog days of summer. The heat has been so intense that new words and phrases are being coined to describe it. In Japan, they now use kokushobi (“cruel heat day”) as the label when temperatures rise over 104 Fahrenheit. In China, they say we are in “barbecue mode.” (No surprise: we find ourselves dreaming about Alaska which saw 2 to 6 inches of snow on Sunday.) The U.S. House of Representatives left the steamy, swampy nation’s capital early for the August recess, giving the U.S. Senate all the spotlight for the next few weeks. U.S. Treasury auctions heated up with 10 scheduled for this week. Heightened uncertainty about war, inflation, monetary and fiscal policy have cooled a municipal bond market that has been on a tear all year long.
July is historically one of the strongest months of the year for tax-exempts due to the slowdown in issuance, large principal and interest payouts, and positive returns. But not so much this year. Investment grade index returns will likely turn negative for the year when the dust settles on Friday. Issuance is somewhat lighter, and fund flows have tapered off; high yield fund flows actually just turned negative for the first time in 15 months. Money available for reinvestment peaks once again during this huge influx between June and August, but dealer inventories and bid lists are high. While some new issues are oversubscribed, others have needed multiple repricings to clear the market. At this writing, the 2-year AAA municipal general obligation bond benchmark stands at 2.59%, the 10-year at 3.30% and the 30-year at 4.43%. These yields are 24 to 44 basis points higher than where they stood at the start of July, and 19 to 63 basis points higher than where they opened in 2026.
Soup of the Day
This week we see several deals of interest on the muni calendar. The Lancaster Port Authority of Ohio has a $39 million non-rated offering for Vivera Fairfield. The Florida Local Government Finance Commission is offering a $4 million revenue bond anticipation note for Life Care ET. The Public Finance Authority conduit is bringing an $84.7 million non-rated sale for Peapack Senior Living in New Jersey. The Arlington Higher Education Finance Corporation in the market with an $84 million AAA rated PSF-guaranteed remarketing for Life School of Dallas. The Minnesota Health and Education Facilities Authority has a $21.9 million BB+ rated placement for Bethel University in Saint Paul.
Last week, the Arlington Higher Education Finance Corporation issued $25.2 million of Aaa-rated PSF-guaranteed bonds for Imagine International Academy of North Texas; it included a 2056 maturity priced at 4.625% to yield 4.484%. The Idaho Housing and Finance Association issued $16.1 million of Aa2 rated, state-guaranteed bonds for North Star Charter School in Eagle, including a 40-year maturity priced at 5.125% to yield 5.36%. The San Luis Industrial Development Authority of Arizona sold $20.6 million of non-rated drawdown bonds for the Border Health Medical Campus of San Luis Community Hospital with a single 2033 maturity priced at 7.50% to yield 7.688%. Indiana State University’s Board of Trustees brought a $23.3 million A2 rated student housing deal structured with a 2035 final maturity that priced with a 5.00% coupon at a premium to yield 3.59%.
The Soup’s On!
Many if not most muni bond traders, bankers, analysts, and sales executives working today were not around for the market upheavals in 1994, 1997, 2001, 2008, 2010, or even 2013 and 2022. We are among the few firms with market veterans who lived through the turmoil of 15% ten-year Treasury bonds and 13% high grade muni yields back in the early 1980s and have some long-term perspective on guiding our clients through market ups and downs. Since 2002, it has been a rare day when the 10-year Treasury benchmark yield exceeded 5.00%, but today we are only 30 basis points away. Is this a new normal? Perhaps. But in any event, we will adjust and our market will thrive.
In days of yore, the muni market learned how to make the proverbial “stone soup” to get deals done. It involved contributions from many parties – working group members each with a huge stake in the success of the deal who contributed creative ideas small and large; there are still a surprising number of deals from 1997 to 2006 that are still outstanding to the delight of some bondholders taking in 14% tax-exempt coupons. Reach out to your HJ Sims representative today to review your favorite soups, your needs, your plans, your portfolio holdings, and your options for improving your assets, your income, and your returns, come what may from the Fed and our bond markets.