HJ Sims Market Commentary: CONOPS For Investors

by Gayl Mileszko

In Department of Defense terminology, CONOPS stands for a concept of operations, a statement that concisely expresses what a commander intends to accomplish and how it will be done using available resources. A PACE plan establishes the methodology for communications: Primary, Alternate, Contingency, and Emergency. In a world consumed by broadcast coverage of unprovoked airstrikes, armored tanks, fleeing refugees, and talk of nuclear and chemical weapons, we cannot help but think in military terms these days. With inflation running at the highest rate in forty years, there is also shock and awe in food prices. Paychecks have been blitzed by skyrocketing costs of living, and portfolio returns this year have been ambushed. The Federal Reserve’s Open Market Committee is meeting to raise rates for the first time since December of 2018 and that means mortgage and credit card rates will escalate. COVID is still surging around the world, and the impact from and reaction to Russian sanctions is still unclear. The words recession and depression are being dropped in little verbal bombshells by nearly every financial pundit, unsettling everyone from college seniors to seniors on fixed income. So, as the first quarter of 2022 draws to an end, on this Ides of March, 50 trading days into 2022, we see the need to create or revise our own individual investment CONOPS after some in-depth communications with our trusted financial planners, counsel, tax advisers and investment professionals.

Working with You on Strategies and Contingencies

At HJ Sims, we are working closely with our banking and investing clients to confirm long-term strategies and prepare for contingencies stemming from the daily “wall of worry”. Much of our positioning is clearly defensive right now but we also see targeted opportunities to deploy cash and we are also preparing for more stable conditions when they emerge. We look for a window right after the market adjusts to the first rate hike or two, and would of course expect rallies on news of a true ceasefire in Ukraine. In the new issue markets that we watch, some corporate borrowers await less volatile conditions, while others find their offerings well-timed and oversubscribed. The monthly tally of corporate investment grade deals currently exceeds $137 billion, beating previously cautious projections, but some investment banks are already lowering high yield supply forecasts by $100 billion or 30% for the year. In the municipal market where yields have spiked dramatically, year-to-date sales are down 8% from 2021 and institutional bid-wanted volume is heavy as mutual fund outflows of $18 billion have persisted for eight weeks. But municipal exchange traded funds have attracted a net of $2.5 billion in flows rarely seen since late 2018, and many issuers the University of Michigan were able to sell $1.2 billion of AAA rated taxable bonds due in one hundred years at par to yield 4.454%.

Municipal Bond Sales

This week’s municipal slate is only expected to total $6 billion and is heavily weighted with investment grade deals. In the high yield sector, the Utah Charter School Authority has a $49 million non-rated sale planned for Ascent Academies, the California School Finance Authority is bringing a $37.6 million BB rated deal for River Springs Charter School, and the Wisconsin Public Finance Authority has a $11 million non-rated offering for Guilford Preparatory Academy in Greensboro, North Carolina. Last week, Catholic Health System had $58.5 million B1 rated sale through the Niagara Area Development Corporation in New York that included 30-year term bonds priced with a 5.00% coupon to yield 4.47%. The Illinois Finance Authority sold $58.4 million of non-rated refunding bonds for Smith Crossing in Orland Park structured with 2044 term bonds priced at 4.00% to yield 3.78%. The Wisconsin Health and Educational Facilities Authority issued $57.4 million of non-rated bonds for Cedar Crest in Janesville that had two 2057 maturities priced at par to yield 5.125% and 4.75% to yield 4.923%. And the PFA sold $23.9 million of non-rated bonds for The Franklin School of Innovation in Asheville, North Carolina that had a maximum yield of 4.68% in 2057.

HJ Sims is thrilled to announce the addition of two senior bankers to expand our Public Finance Education team who will work on charter school financings. Welcome Richard Harmon, joining Robert Nickell.

Focus on Rates, Ratemakers and Appropriators

While global attention remains focused on the Russian invasion of Ukraine, any sign of Chinese involvement, and any unanticipated fallout from international sanctions, significant attention is being paid to Wednesday’s Fed statement on asset reductions and the dot plot showing projections for the fed funds rate. Central bank officials have refocused their mission in an effort to combat inflation, while monitoring a flattening yield curve, slowing economic growth, the velocity of money, the impacts of a possible Russian default, and market reaction to their policy decisions after so many years of kid-glove treatment. We note that there are five vacancies to be filled on the Board and one of the President’s nominees currently lacks the votes for Senate confirmation while others (including the Chair and Vice Chair) wait in limbo. No longer in limbo is the Fiscal Year 2022 appropriations bill, six months late, 2,700 pages and $1.5 trillion in total, to fund the federal government through September 30, full of earmarks, now known as community projects, for the first time in a decade as well as nearly $14 billion in aid for Ukraine and other U.S. allies in Eastern Europe.

Stock Indices Down, Bond Yields Up in March 

At this writing, the VIX or Fear Index has stood above 30 for 11 straight days, something not seen since the spring of 2020. Stock indices are having one of the six worst starts to the year. The Dow is down 2.8% on the month, the S&P 500 is 4.6% lower, the Russell 2000 is off 5.2% and the Nasdaq has lost 8.5%. Bitcoin has fallen 6.5%. Oil at $103 is up more than 7% but off its March 8 high of $123. Gold at $1,957 has gained $58 an ounce and silver is up 3% to $25.13. In the bond market, the 2-year Treasury yield at 1.86% has risen 43 basis points in March. The 10- and 30-year yields are up 31 basis points each to 2.13% and 2.47%. The difference between the 2- and 10-year yield has narrowed from 39 basis points to 27. The 7- and 10-year curve has just briefly inverted, while the 20-year/30-year yields have been upside down since late October. In line with Treasury movements, both corporate and municipal rates have risen. The 10-year Baa corporate benchmark at 4.47% is 39 basis points higher midway through the trading month. The 2-year AAA municipal general obligation bond benchmark at 1.39% is up 3 basis points. The 10-year at 1.94% is 36 basis points higher, and the 30-year at 2.36% is up 38 basis points.

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

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