Market Commentary: April Showers Bring… What Next?

by Gayl Mileszko

May has arrived with its extra hours of sunlight and the excitement of imminent graduations, reunions, weddings and summer vacations. The dark days of winter and muds of early spring are in the rearview mirror, with all around us looking green and bright. Well, not everything. We just got the taxes behind us, the school year is about to end and it is prime time for enjoying baseball, basketball, hockey and the NFL draft. But, seemingly out of the blue, we have become seized by worry about our bank accounts now that we have seen three of the four largest bank failures in our history occur in the last two months. Our hopes for buying a new home have been dashed by mortgage rates that are right around the highs of 2003; the 30-year fixed rate is 6.98%. Our wish to sell our home is vexed by the limited pool of eligible buyers who have seen 134 straight months of home price increases.

Market Rallies Despite Grim Climate

Day-long news headlines remind us of the tolls still being taken by the pandemic that has plagued us for more than three years, the recession that continues to hover over us like a thundercloud, the Russo-Ukrainian War, federal debt and deficit and the string of unprecedented federal stimulus and monetary easing that has produced the 40 year-high inflation. Political discourse is toxic, consumer debt has surged, there are nuclear threats being posed, and the dollar is losing its position as the world’s global currency. Despite all this, stock market volatility is well below the 20-year average. The major indices were all up in April and are higher on the year. The Dow closed out April at 34,098, up 824 points, and is 2.9% higher on the year. The S&P 500 finished at 4,169, up 60 points on the month and is +8.6% in 2023. The Nasdaq at 12,226 has gained 16.8% over the last four months.

Taxable Bond Markets Up in April

The current level of bond market volatility, as measured by the MOVE Index, is about half of where it was in October of 2008 but it is double the 10-year average. The 3-month Treasury became the highest yielding government security, ranging from 4.71% to 5.14% during April. Even the much touted I Bond has now dropped its rate from 6.89% to 4.3% through October. The 2-year closed at 4.00%, down 2 basis points on the month and 42 basis points lower on the year. The 10-year at 3.42% ended down 4 basis points in April and was 45 basis points lower since the start of 2023. The 30-year benchmark at 3.67% finished 3 basis point higher for the month but is 29 basis points lower than where it began the year. The Baa Corporate bond index had an even stronger performance: its yield stood at 5.97% on April 28, down 16 basis points for the month and down 47 basis points year-to-date. In terms of returns, Treasuries gained 0.55% in April and are up 3.65% year-to-date. Investment grade corporates added 0.85% last month bringing their 2023 total returns to 4.32%. High yield corporates beat both sectors with April returns of 0.97% and year-to-date total of 4.72%.

High Yield Municipals Top April’s Tax-Exempt Performance

On the tax-exempt side, high yield munis led the sector’s performance in April although municipal bonds underperformed taxable counterparts. Despite having an unbelievably strong first two weeks, most gains were lost on one single day – April 18 when prices plummeted by one percent. There was no single event to explain the sudden drop. Rather it was a combination of factors that brought about the sudden correction. Shock over the sudden collapse of three banks, and extreme stress on a fourth, all of which have large muni holdings. Significant concerns related to the disposition of billions of their low-priced, low-coupon, long-duration assets. Uncertainty associated with rate action and bank sector distress at the upcoming Federal Open Market Committee meeting. Volume at $30.6 billion for the month down 24% from last April. Elevated bids-wanted. Near-record offering par. Tax Day filings. Mutual fund outflows: conventional bond funds lost $3.27 billion and muni ETFs lost $44 million; even high yield funds which are up $1 billion so far in 2023 and have seen very little new product to add to their portfolios, saw net withdrawals of $291 million in April. There were wide swings in the 7-day SIFMA Index: from 3.97% to 2.17% and back to 3.86% during the month. The yield curve has been askew since December, vexing pricing of new and refunding issues by underwriters.

Muni Yields: Taxables Outperform

The 1 -year MMD benchmark at 3.00% rose a staggering 51 basis points during the month of April. The 10-year yield rose by 8 basis points to close at 2.35%, but it has dropped 28 basis points in the last four months. The 30-year finished April at 3.39%, up 9 basis points on the month but down 19 basis points so far in 2023. The highest rated muni bonds (AA to AAA) and those with maturities in one to twelve years took the brunt of the bruising in April; the ICE Municipal Bond Index posted a loss of -0.12% while the High Yield Index gained +0.14%, the Non-Rated Index returned +0.82% and the Taxable Municipal Index added +1.20%. On a year-to-date basis, non-rated munis are +3.36%, and investment grade munis +2.70%. Taxable muni issuance, a favorite option for borrowers in refundings since 2018, is down dramatically this year as a result of higher rates, but demand remains steady and yields on some shorter maturities are notably higher than most taxable equivalent yields. So year-to-date returns are beating most other fixed income categories at +6.64%.

Crowning Achievements

This Saturday, millions around the world will tune in to watch the coronation of King Charles III, the first such ceremony in seventy years. Over on this side of the pond, the crown and scepter belong to Jamie Dimon at JP Morgan Chase. With his $3.7+ trillion of assets under management and somewhere around 15% of all U.S. deposits and growing, well exceeding previous limits with recent federal blessings, he has been dubbed an industry savior ever since 2008, an unmatched architect of deals brokered through government entities terrified of missteps that might incur massive taxpayer liabilities or disrupt global markets. After a marathon weekend involving the seizure of First Republic Bank and the bidding and negotiating with parties including the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation, his terms for substantially all the assets of First Republic Bank were accepted early Monday morning. A Wall Street Journal Editorial noted “There hasn’t been a more one-sided financial deal since the Dutch bought Manhattan from the Lenape Indians.” First Republic was reportedly the third largest bank holder of munis with $19.4 billion at last count. JP Morgan has now not only taken over Bear Stearns and the first and second largest U.S. banks ever to fail, but reportedly more than 30 other companies since 2021 alone.

Fed Week

This week, the first trading week of May, markets remain unsettled by the financial condition of regional and community banks as the Federal Open Market Committee meets to consider its next policy moves and issue statements. Last week, the Fed issued a report taking some blame for the failure of Silicon Valley Bank while pointing fingers at a previous Vice Chair and the Congress. Stock and bond markets assumed in advance another 25 basis point increase but remain somewhat divided over what comes next in June and thereafter. Futures trading at the time of this writing assumes that the May 2 increase to the target range of 5.00% to 5.25% will prove to be the final one in this cycle; cuts are anticipated to produce a year-end 2023 target of 4.25%-4.50%, and a year-end 2024 rate of 2.75%-3.00%. In the interim, economic data continue to inform the actions of investors. This week’s reporting includes construction spending, job openings, factory orders, auto sales, productivity, jobless claims, and the Treasury’s quarterly refunding announcement.

Sell in May and Go Away?

It is a popular stock market maxim suggesting that investors should just take the gains earned in the first four or so months of the year to avoid the historically weaker performance of the market from May until October then buy again in the fall. Volatility is bound to prevail until the debt ceiling crisis is resolved, rates may not fall as some predict. This year so far, earnings have not been bad but profit margins may head lower into a recession and the banking problems may intensify any number of problems. But for munis, May’s municipal performance has historically been the year’s strongest month. We encourage you to contact your HJ Sims representative for current offerings.

The Municipal Calendar

HJ Sims is bringing a $23.1 million non-rated financing for Southwest Charter Foundation through Florida’s Capital Projects Finance Authority in this first week of the month. Issuance at $6 billion is higher than expected during a FOMC meeting week. The calendar also includes a $32 million Baa2 rated Nassau County Local Economic Assistance Corporation issue for Roosevelt Children’s Academy Charter School. Last week, the Arlington Higher Education Finance Corporation sold $22.8 mil of revenue bonds for Greater Hearts America Texas charter schools guaranteed by the Texas Permanent School Fund rated Aaa and priced with a final maturity in 2058 of 4.125% to yield 4.30%. STEM Preparatory Schools also came to market with a $10.6 million issue rated BBB-minus through the California School Finance Authority structured with a 2063 maturity priced at 5.375% to yield 5.36%.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.

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