HJ Sims Market Commentary: Carving Up the Markets

by Gayl Mileszko

In one old Irish folktale, Stingy Jack was the kind of fellow who spent his days getting drunk and swindling people as he travelled from village to village. One night on All Hallows’ Eve, he was again quenching his thirst at a pub when he ran out of money to pay his tab. The Devil, seeing an opportunity to gain another immortal soul in cheap exchange for a few pints of ale, suddenly appeared. But wily Jack managed to turn the tables and trap the Devil not once but twice. The price for the Devil’s release was that he would leave Jack alone and never ever lay claim to his soul. As a result, Jack felt forever safe and never mended his evil ways. So, when he died, he was welcome neither in heaven nor hell, sentenced to roam the earth for eternity with nothing more than a lantern made from a carved-out turnip to light his way. Folks terrified by the prospect of the wandering soul that came to be known as Jack O’Lantern, began carving scary faces out of turnips, potatoes and mangelwurzels, placing them in windows or near entryways to scare him away. Irish immigrants brought the practice to America, the world’s eighth largest pumpkin grower, and soon every October called for us to start carving jack-o-lanterns out of this plump, orange, easily carve-able fruit.

Season of Plenty

Pumpkins go hand in hand with Halloween and Thanksgiving, and both holidays draw near. It is the season of plenty — plenty of inflation in food, bond yields, fund outflows, bearishness and fear of missing out. Candy prices are up more than 13% from a year ago, and turkey costs 17% more. October trading comes to an end this week, leaving less than forty days for investors to grow income and carve out losses for the year. It has been a volatile month for traders with intraday whipsaws in stock and bond prices as retail and institutional buyers and sellers grapple with economic uncertainty, reassess their cash needs and adjust their risk tolerances. You would never know it by looking at the stock market returns so far this month, but equity mutual funds have had 37 straight weeks of net redemptions. At this writing, the Dow is up 9.7%, the S&P 500 is 5.9% higher, the Russell 2000 up 5.0% and the Nasdaq, 3.6% in October. Bank of America just reported that its client flows into single stocks is nearing historic extremes, despite the fact that its Bull & Bear Indicator has been at maximum bearishness for five consecutive weeks. That would perhaps better explain why they have also seen four weeks of massive and accelerating inflows into the safer havens of Treasury bills and notes, certificates of deposit and debt ETFs.

Plump Treasury Yields

Treasury yields have risen to a level that they have incredible domestic as well as global appeal. Shorter maturities have been offering more yield than longer ones since early July. The 3-month bill yields 3.99% at this writing. The 12-month yield is 4.55%. The 2-year is at 4.48%, up 21 basis points since the start of the month. The 10-year at 4.18% is now at its highest points since December of 2007; it is up 36 basis points this month and offers a rate higher than the sovereign yields of Japan at 0.24%, Switzerland at 1.13%, Germany at 2.16%, France at 2.69%, and the UK at 3.61%. The 30-year Treasury yield is at its highest levels since August 2011 when S&P downgraded the U.S. credit rating during the debt ceiling crisis. At 4.33%, the long bond has risen 56 basis points in October and stands above that of Spain at 3.69% and Italy at 4.28%.

The Municipal Pumpkin Patch

Municipal bonds are outperforming everything but leveraged loans, nickel, precious metals, coal, oil and gas so far this year but that gives little consolation to bondholders staring at paper losses averaging 13 percent. Munis have erased 14 years’ worth of price gains in these past 10 months as a result of inflation and the Fed’s string of aggressive interest rate hikes. The top-rated 30-year tax-exempt general obligation bond yield stands at 4.04% and all maturities from 1-year to 29 years exceed 3%. Year to date issuance is down 17% from last year. Average daily trading volume is well above the year’s average, as is average institutional bids-wanted. The primary and customer buy-to-sell ratio remains positive at 1.61 to 1, and bondholders will see $29.5 billion of maturing and called principal starting next week. Both technical and credit conditions in the muni market are strong and now yields are extraordinarily attractive to those looking for higher tax-exempt income.

Tax-Exempt Treats

Last week, municipal issuance totaled $10.5 billion led by large sales from Massachusetts, Connecticut, Hawaii and Wisconsin. In the senior living sector, the Illinois Finance Authority brought a $99.8 million BB+ rated financing for Plymouth Place structured with a final maturity in 2058 priced at par to yield 6.75%. The Town of Hamden, Connecticut sold $18.1 million of non-rated revenue bonds for Whitney Center that included 2053 term bonds priced at par to yield 7.00%. In the charter school sector, the Florida Development Finance Corporation issued $22 million of Baa3 rated revenue and refunding bonds for Seaside Community Charter School, which featured a 2057 maturity priced at par to yield 6.00%. This week, the primary slate is expected to total $8.1 billion. The California School Finance Authority plans to bring a $26.4 million non-rated transaction for Lighthouse Community Public Schools and a $23.4 million financing for BBB-minus rated Green Dot Public Schools. The Wisconsin Public Finance Authority is bringing a $13.5 million non-rated deal for Galloway Ridge at Fearington in Pittsboro, North Carolina.

Economic and Political Hobgoblins

Pumpkin seeds are planted in early June and take between 90 and 120 days to grow. Monetary policy changes take longer. The Federal Reserve began its rate hikes on St. Patrick’s Day, not knowing how long it would take to help bring inflation under control. Its actions, so far involving increases of 300 basis points, have led to the worst bond market selloff in a generation and created new operating losses on the Fed’s own income statement, losses that the U.S. Treasury may have to cover in the same way that the U.K. Treasury plans to do for the Bank of England. Our Treasury Secretary has openly expressed concerns over episodes of illiquidity in the government market, while other cabinet secretaries have their own hobgoblins. Economic data including sticky high food and energy inflation. Declining consumer confidence. Housing prices that are seeing record deceleration as mortgage rates have doubled. GDP that has contracted for the last two quarters. A major year-long drop in commercial bank deposits. The Strategic Petroleum Reserve at a record low. Unlawful border crossings at a record high. Security assistance to the Ukraine now exceeding $20.3 billion. Court challenges to the Administration’s debt relief proposal. Ongoing tensions with China, new strains with Saudi Arabia. Converging flu, Covid-19 and respiratory virus cases. And, among others, mid-term elections, less than two weeks away, that will shift the composition of the Congress.

Amid all the challenges and uncertainties, your HJ Sims representatives stand ready to guide you through these next few months and prepare 2023 strategies for you, your family, your community, school, senior living community or foundation. Let’s carve out a time for us to talk this week.

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