By Gayl Mileszko
Big News From All Corners
There is a lot to acknowledge, commemorate, and celebrate this week. The 80th anniversary of VE-Day. The 50th anniversary of the end of the Vietnam War. A major trade deal with the Brits that hopefully launches a series of others. A U.S. president who forecasts that our country will be like a “rocket ship that goes straight up.” A new Pope from Chicago just elected to serve the world’s 1.4 billion faithful. On Wall Street, traders await some of that white smoke from Congress on tax and spending deals, but hope for a little break in action at the White House. Major announcements are being made nearly around the clock, a pace not before experienced, producing ups and downs in expectations, sentiment and, of course, the financial markets, as potential impacts on businesses, households, institutions, and allies are assessed and reassessed.
Big Swings
Since Inauguration Day, we have seen some wild swings in market prices, often intraday. The S&P 500 Index has seen swings of 1,162 points or 23%; it stands at 5,663, still below the 110-day average of 5,727. Oil prices at $60.88 a barrel, have ranged from $57.13 to $75.89. Gold skyrocketed from $2,707 to $3,414 an ounce, and was most recently priced at $3,325. Bitcoin at $126,516 has seen a peak of $133,708 as well as a low of $95,883. The 10-year Treasury yield has swung from 3.99% to 4.64% and currently stands near the recent average at 4.37%. Municipal bond prices have also been volatile. The 2-year AAA general obligation bond yield now stands at 2.89%, but has moved between 2.45% and 3.42%. The 10-year yield at 3.31% has seen movements of 103 basis points. And the 30-year yield at 4.38% has ranged from 3.93% to 4.84%.
Challenges Ahead
The Department of Government Efficiency continues its unprecedented hunt to eliminate waste and fraud; its discoveries may well reframe our views on the proper size and role of the federal government and how the Congress decides to fund it. But the day-to-day headlines take our focus away from our macro challenges: the $140 billion trade deficit, a budget shortfall of $1.3 trillion, the $36.8 trillion national debt. To start to reduce these staggering numbers, the Administration’s budget proposal just released for the fiscal year to begin on October 1 includes cuts of about 22% to non-defense agencies. In the municipal bond world, state and local governments and nonprofits are just starting to adjust to the loss of the massive COVID era support. Some now face the elimination or reduction of funding that has supported programs they have relied upon for years. Others programs providing services deemed as priorities would continue to be funded — or see increases. The Department of Education, for example, is targeted for a reduction of $10 billion or 15% as federal activities are scheduled to wind down and responsibilities shift to the states; however, the federal charter school program would see a 14% increase. The Department of Housing and Urban Development would see its rental assistance programs converted into state-based formula grants to allow states to design their own programs. Funding for the Department of Agriculture’s $1.7 billion rental assistance grant contracts would be renewed. The budget for the Centers for Medicare and Medicaid budget would reportedly have no impact on benefits to Medicare and Medicaid beneficiaries.
Expect More Volatility, Make Your Voice Heard This Week and Next
As Congress works to produce a reconciliation bill, those of us in public finance await every sliver of news on those portions affecting education, health, housing, and taxes. This year, advocacy groups for senior living and charter schools as well as for local and state governments are more active than ever before. In particular, we at HJ Sims and our clients are advocating to preserve the municipal bond tax-exemption and the private activity bonds that finance essential public services for our nation’s most precious assets – our children and our seniors. The year-long uncertainty has certainly brought many borrowers to market faster, sometimes much earlier or more often than planned. Some non-profits, private colleges in particular, have found favorable rates and terms in the taxable corporate market. But if you have a stake in the muni market, contact your HJ Sims representative to learn how to make your voice heard loud and clear during these critical weeks of negotiations.
Focus this Week
Traders this week were tuned into the Federal Open Market Committee and the press conference with Chair Jay Powell on Wednesday afternoon. There were no surprises. As expected, future Fed actions will hinge on the next economic data, the impacts of tariffs, and the fiscal policies adopted by the Congress and President. Outside of leaks coming from the proverbial smoke-filled backrooms in the House committees drafting reconciliation language, national and indeed world attention also turns to flare-ups in the India-Pakistan conflict, the lack of apparent progress in ending the wars in Ukraine and the Middle East, and the outcome of the conclave. At home, we are closely following the latest from the White House, the outcome of Treasury auctions, some of the last of the first quarter corporate earnings reports, the latest fund flow data, and remarks from speakers at the Milliken Institute Global Conference and the Reykjavik Economic Conferences.
No Fed Rates Cuts Soon But Great Time to Come to Market
Hundreds and hundreds of corporate and municipal borrowers have come to market these past few months to take advantage of prevailing rates and investor sentiment. Municipal bond volume will likely finish at historic highs this year. So far, the MSRB reports consecutive month-to-month increases in issuance: $38.6 billion in January, $42.1 billion in February, $45.1 billion in March and $53.1 billion in April. Last week, we saw a $19.4 billion primary market, the biggest week since December 2017, just ahead of the effective date of the last tax reform bill which eliminated advance refundings. Among other financings, the Colorado Education and Cultural Facilities Authority sold $5.4 million of non-rated bonds for Global Village Academy, pricing the 2032 maturity at par to yield 6.125%. The South Carolina Jobs Economic Development Authority issued $12.5 million non-rated drawdown bonds for Cogito Academy structured with a 2032 term bond priced with a 7.50% coupon to yield 8.283%. The Public Finance Authority placed $17.4 million of non-rated bonds due in 10 years for Axl Academy in Aurora, Colorado, priced with an 8.00% coupon to yield 10.604%. And the North Carolina Medical Care Commission brought a $27.3 million BBB rated bond issue for Twin Lakes Community in Burlington that featured 2055 term bonds priced at 5.25% to yield 5.24%.
Income and Issuance Opportunities Now
We at HJ Sims are bullish on munis, celebrating the latest two weeks of net inflows into muni funds, the huge principal and interest that hit bondholder accounts on May 1, and the rates that work for borrowers and continue to attract investors. Start working with your HJ Sims representative today. We have several new charter school issues coming to market next week and invite you to contact us for information on these and other exceptional opportunities that we see in the primary and secondary market for municipals and in markets for many other income-producing products.