By Gayl Mileszko
April: Cruelest or Most Beautiful Month?
In late 1922, in the aftermath of World War I, T.S. Eliot proclaimed the fourth month of the year – April — as the cruelest. More than a century later it is hard for some of us to disagree. April starts with all the foolish jokes and nasty tricks on the first, then taxes come due, and colleges send thousands of rejection letters. The seasons are changing, but sometimes not as fast as we would like. In all too many climates, it can be as likely to snow as it is to rain, ruining Easter bonnets and plaguing spring planting. Grounds are muddy, air can be humid. School vacation and holiday travel set family nerves on end and put budgets out of whack for the rest of the year. And on top of all of that, a lot of bad things tend to happen.
Ides of April
It may all be coincidence, it may have something to do with the weather or the way the moon and the planets are aligned, but it feels like there is a pattern that makes us want to hunker down every mid-April. Over the past 250 years, in the middle of April, things have tended to get ugly. 250 years ago on April 19, 1775, the American Revolution began with the shot heard round the world. On April 12, 1861, the Civil War began as Confederate forces fired on Fort Sumter. In mid-April years to follow, President Lincoln was assassinated and President Franklin Roosevelt died. A major earthquake hit San Francisco. The Great Mississippi River Flood was the most destructive on record in America. The Titanic sank, taking the lives of 1,500 passengers. The Bay of Pigs invasion failed spectacularly. The Deepwater Horizon exploded, sank, and created the largest environmental disaster in U.S. history. A major fire broke out at Notre Dame de Paris, damaged it so badly that it was closed for five years. There was the Branch Davidian massacre in Waco, we had tragic school shootings at Columbine High School and Virginia Tech, and, of course, the deadly bombings at the federal building in Oklahoma City and on the street at the Boston Marathon. During the week of April 12, 2020, the U.S. unemployment rate hit 14.8%, the highest since the Great Depression. But today, and during this holiday season, we turn our focus on all the wonderful things that are happening and have happened at this time of year. The Midnight Ride of Paul Revere in 1775. When the first American school for the deaf was founded in 1817 and when Congress abolished slavery in 1862. When America’s first astronauts were announced in 1959, and the first space shuttle was launched in 1981. And when the world was graced with the arrivals of Leonardo Da Vinci, William Shakespeare, and Charlie Chaplin, J.P. Morgan, Wilbur Wright, Clarence Darrow, and John Audobon.
“Tarrifying” Trading Sessions
On April 9, the Trump Administration’s reciprocal tariff plan took effect and produced an immediate and rapid response from friends, foes, and perhaps even a few penguins in remote regions also targeted. Main Street shrugged its shoulders, as households learned for the first time how much our own American exports are penalized country-by-country both directly and indirectly through regulations, certifications, licensing requirements and complex customs procedures. Tit-for-tat seemed only fair. But the hits were more intense than expected and financial markets roiled. A wide range of predictions about everything from inflation and recession to corporate bankruptcies and empty Christmas stockings circulated. Domestic and foreign markets began to behave as if the global economy was being upended. The media focused on the reaction from the stock market, but traders — and Administration officials — were focused on the functioning of the bond market, specifically the $29 trillion U.S. Treasury market. The sharp rise in yields pointed to leveraged hedge funds facing funding pressures. But traders also tried to gauge if investors were repricing the pre-eminent global safe haven quality of Treasuries. Buyers rushed into gold, and German bunds became sought after. In some ways, Treasury bills, notes and bonds began to trade as risk assets. A massive selloff ensued and volatility soared. The melee was extremely unusual, some say worse than during the early days of the pandemic. Forty- and fifty-year trading veterans say that they have never seen anything like the whipsaw.
90-Day Pause Calms Markets
The perception of policy chaos began to dominate talk of the tariffs themselves. Restoring confidence in our currency and our bonds, and our standing quickly became the priority. Although we came to learn that our bonds were not being dumped in quantities, at the time there was concern that foreign holders of Treasuries – accounting for 24% of our outstanding debt, with Japan, China and the UK as largest owners – were trying to sell like mad. The President then announced a 90-day pause on most of the reciprocal tariffs and the U-turn quickly accelerated market volatility in reverse. The three major stock indices experienced huge gains by the time the dust cleared on Friday. The VIX index recorded its largest single-day drop in history. Trading volume surpassed 30 billion shares for the first time in a single day. Bond trading set new records as well. A lot can — and will — happen before the pause expires – right after our Independence Day holiday weekend. But we are nowhere near any labels for “the cruelest month.”
Munis Have Not Seen This Kind of Volatility Since 1987
Municipal bonds, which almost always trail in the path of Treasuries, experienced significant selling pressure and heavy trading last week. In a market where $1 billion of daily bids-wanted is seen as unusually high, bid-wanted lists exploded to $3.01 billion last Tuesday. That followed a drop of 2.85% in one major benchmark return index on Monday, the biggest one-day drop since 1994. Municipal Market Analytics reported that April 9 saw more than 100,000 retail trades, the most on record. And institutions posted nearly 4,000 muni trades of blocks over $500,000, a record surpassed only in March 2020. We have to go back to April 1987 to find the same level of negative volatility concentrated in such a short period of time as we did last week. Yet, here we are and, despite all the uncertainty, rates are well below many historic norms. The 2-year AAA muni benchmark yield stands at 3.08%, the 10-year at 3.52% and the 30-year at 4.51% while the 2-year Treasury yield is 3.80%, the 10-year is at 4.31%, and the 30-year is at 4.77%. Again, nowhere near any “cruelest month” labels.
Markets Can Be Cruel, But All Are Functioning, and Investors are Flush with Cash
Traders could not help but worry about liquidity last week – and going forward — as tariffs are negotiated, and uncertainty over the economy, tax policy and budget cuts swirls. But markets are functioning. The high volume of trading amid the greatest turmoil of last week demonstrated that there was a buyer for most every seller. There have been no trading halts. Some stocks and credits have indeed lost value. Portfolio losses may be significant; the Chicago Teachers’ Pension Fund has reported $1.5 billion of unrealized losses year-to-date, $593 million is attributed to April market movements. But countless numbers of investors are patiently awaiting good opportunities for market entry, and they have plenty of cash to deploy. Municipal bondholders had just received $18.7 billion of principal and interest payments on April 1. In the run-up to Tax Day on April 15, households and institutions were sitting on $7 trillion in money market funds. They had $803 billion invested in conventional municipal mutual bond funds and $139 billion in municipal bond exchange traded funds. Initial reports show that muni ETFs lost $829 million last week although 35 of the largest funds reported net inflows. Unusually large ETF trading volume unquestionably contributed significantly to the volatility and major price swings last week.
Heavy Secondary Muni Trading But Many Primary Market Deals Postponed
Large general obligation bond issuers with less sensitivity to rates, like New York City, came to market but there was little price discovery for smaller and lower-rated bond issues. Buyers, however, were attracted to the secondary offerings as the ratio of 30-year municipal-to-Treasury yields hit 101%, a sign for traditional as well as crossover investors to move into munis. Our traders discovered some great bargains in the secondary market last week, and we continue to hunt for gems amid the fund disruptions, Tax Day redemptions, and unnecessarily nervous sellers. For HJ Sims and other underwriters of municipal bonds, the highly unusual conditions called for some new and refunding issues to postpone market entry last week.
What Lies Ahead for Muni Bonds?
Every municipal bond is different and requires careful analysis and surveillance, but nothing has fundamentally changed in any of the muni bond sectors. Tariffs, in general, have no direct impact on the muni bond market, although sales and property taxes, inflation, consumer spending pullbacks, and increased construction costs can certainly impact numerous credits over time. Also, the Trump Administration has cut grant funding and raised valid questions about private colleges with large endowments, for example. Should they be tax-exempt? Should they be able to borrow in the tax-exempt market? A few other borrowers, currently able to access markets at tax-exempt rates are also being scrutinized.
Saving Tax-Exempt Municipal Bonds
The Congress is out for two weeks but will tackle tax and other policy matters in the context of the reconciliation bill upon their return. While several brave and well-informed Members of Congress have gone on record in support of tax-exemption, anything can happen in the wee hours of the morning when details often get finalized. Terms can impact not only state and local governments but also those charter schools, hospitals, senior living and others under the private activity bond umbrella. So, we urge all readers to contact your elected officials, providing local examples of the unique public purpose projects, the facilities, programs, services and jobs that tax-exempt bonds have made – and continue to make — possible.
This Week in the Municipal Markets
Up to one-third of the deals on last week’s municipal calendar were pulled to await more market stability. That included two that we had on tap. This week we are back in the market with a $21.2 million Newark Higher Education Finance Corporation triple-A rated offering for the Hughen Center’s Pre3K-12 Bob Hope School campuses in Port Arthur, Beaumont and Baytown, Texas, featuring the state’s Permanent School Fund Corporation guarantee. We are also bringing a $129.6 million non-rated Florida Capital Projects Finance Authority bond issue for Millenia Orlando, a new 261-unit rental senior living community being developed by Trinity Asset Investments, a subsidiary of Trinity Broadcasting Network, the world’s largest Christian broadcasting network. Please reach out to your HJ Sims representative for more information on our new issue and secondary market offerings as well as our pipeline of senior living and education financings. We have no crystal ball but appreciate the strength and resilience of our market during stressful days and expect that April will prove to be much more good than cruel.
Beautiful Holidays
Some associate the month of April with the Roman god Aper or the Greek goddess Aphrodite, but its name likely derives from the Latin word “aperire” which means “to open” — as does a bud or flower. We look forward to opening a new discussion with you, discussing these markets, how best to position your portfolio, and when to schedule your next market entry. But this is a short week for traders, investors, and many around the world. The stock and bond markets are closed on Friday, and there is very limited bond trading expected after the early close on Thursday. We in the HJ Sims family pause along with you to observe these solemn, beautiful, and truly joyous holidays. We wish you safe travels and very happy celebrations.