HJ Sims Market Commentary: Dancing in the Dark

by Gayl Mileszko

In the Cherokee creation myth, when plants and animals were first made, they were told to keep awake for seven nights. The first evening, nearly all stayed alert. The next night, several fell asleep, and as the week dragged on, still more dropped off. By the seventh night, the only plants still awake were the cedar, pine, spruce, laurel and holly. These became the sacred evergreens and all others were doomed to lose their “hair” every winter. Among the animals that stayed up as instructed were the owl, panther and bat. To these were given the power to “see” in the dark.

Here in the Roaring Twenties, some investors trying to create or manage a portfolio in current market conditions count on their clear vision of the future to guide them while others feel like they are just dancing in the dark. The number of political and economic uncertainties are indeed piling up, but investors have always faced uncertainties. At present, some are familiar. For example, The Department of Homeland Security is warning that terrorists could exploit the twentieth anniversary of 9/11. The latest hurricane, Ida, caused fatalities and more than $18 billion of damage, battering Louisiana as a Category 4 storm then disrupting the Northeast with winds, tornadoes and flooding. Other uncertainties such as digital currency, are relatively new. Still others, including government responses to the pandemic, remain unprecedented. The world continues to battle the Delta variant while facing new strains. Across the country, a number of schools that opened for a new academic year have closed due to outbreaks. Major companies have delayed office re-openings to 2022. Supply chain shortages plague many industries and have fueled inflation. Recent global economic data has been disappointing and indicators are falling short of rosy post-recession forecasts. Heading into the fall and winter, U.S. companies have posted 10 million job openings but more than 8 million Americans are still unemployed and four types of enhanced benefits expired on Sunday. The Labor Department reported that states have issued a staggering $794 billion in combined state and federal unemployment benefits between March 2020 and July 2021

Washington in Focus

The Federal Reserve’s monetary policy responses remain unprecedented and the timing of “normalization” measures remains in question alongside the pace of our economic recovery. The Open Market Committee meets in two weeks and may announce a date when tapering, or reducing its $120 billion a month purchase of Treasury and mortgage-backed securities, will begin. Depending on how inflation and employment are doing, that date could come this year, or it might be linked to an announcement of the appointment or re-appointment of the Chair of the Board of Governors of the Federal Reserve. Jay Powell’s four-year term officially ends in February 2022. The mid-term elections are in November 2022 and control of the Congress is again up for grabs. In the meantime, Washington is facing what analysts describe as a “nightmare September”, full of political traps, heated fights over everything from abortion to Afghanistan, and numerous deadlines — either imminent or self-imposed — for funding the government, raising the debt limit, advancing infrastructure and debating Administration proposals including voting, green energy and taxes.

This Week in the Markets

This week is shortened by the Labor Day and Rosh Hashanah holidays, but markets are active. Companies including Home Depot, Caterpillar, Honda, John Deere, Union Pacific and Nestle are among the 21 who brought investment grade bond deals totaling $33 billion to market on Tuesday, and the week’s slate is expected to total $45 billion. High yield corporate issuance may reach $60 billion this month. There are $133 billion of Treasury auctions this week and the municipal bond calendar totals about $6 billion, including five social bond issues, three charter school deals, two hospital sales, two green bonds, and $590 million of non-rated senior housing financings.

Market Activity Leading up to Labor Day Weekend

During the last (unofficial) week of summer, it was hard for municipal bond traders to stay awake. The level of bonds changing hands every day is at a low not seen in twenty years. Yields have risen along most of the curve but remain unattractive to many buyers, and holders of tax-exempt coupons higher than 4 percent have no interest in parting with them. The AAA municipal general obligation benchmark yield closed at 0.11%, down 3 basis points year-to-date. The 10-year yield at 0.93% is 22 basis points higher and the 30-year yield at 1.52% is up 13 basis points. In the primary market, the California Community Housing Agency sold $147.3 million of non-rated essential housing revenue bonds for Summit at Sausalito Apartments with a 3% coupon to yield 3.02% in 2057. The state’s Community Improvement Authority came to market with an $81.2 million non-rated deal for Waterscape Apartments that came with a 3% coupon priced at par in 2056. The Abilene Convention Center Hotel Development Corporation sold $43 million of BBB-minus rated first lien hotel revenue bonds structured with a 2050 term bond priced at 4% to yield 2.88%. The Jefferson County Port Authority in Ohio brought a $40 million Ba2 rated financing for JSW Steel USA Ohio due in 2051 with a 3.50% coupon priced at par. And among other high yield deals, the Philadelphia Authority for Industrial Development had a $25.9 million BB rated issue for Philadelphia Electrical and Technology Charter School that included a 2056 term bond with a 4.00% coupon yielding 2.85%.

The 2-year Treasury yield closed last Friday at 0.20% and is now up 8 basis points on the year. The 10-year at 1.32% is up 41 basis points so far in 2021 and the 30-year at 1.94% is 30 basis points higher. The municipal-to-Treasury ratio stands at 70% in 10 years and 78% in 30 years. The 10-year Baa corporate bond yield finished the week at 2.92%, 27 basis points higher than where it began the year. Stocks posted slight gains again, raising the year-to-date returns of the major indices to between 15% and 21%. Commodity prices were mostly higher in the run-up to the long weekend; natural gas reached an 11-year seasonal high. Oil prices steadied mid-week after OPEC+ agreed to continue gradually increasing oil output; prices closed at $69.39 a barrel.

Focus on the Data

Last week, the Labor Department surprised markets with a payroll report that came in well below expectations: 235,000 jobs added versus the 720,000 consensus forecast. The White House Office of Management and Budget more than doubled its inflation forecast for the fourth quarter from 2% to 4.8%. The Fed reported that its balance sheet now totals $8.309 trillion, including $5.365 trillion Treasuries or 22% of the amount outstanding. Investors withdrew more than $20 billion from money market funds and took a net of $6.4 billion from equity funds, but added $5.3 billion to taxable bond funds and $1.04 billion to municipal bond funds. Stock and bond investors began receiving their August account statements last week, noting another month of gains in equities. The Dow gained 1.50%, the S&P 500 was up 3.04%, and the Nasdaq rose 4.09%. Bond buyers were disappointed for the most part. Treasury index returns were down 0.16%, investment grade corporates and taxable municipal bonds each lost 0.20%, and municipal bonds dropped 0.37%. High yield corporate bonds had the only positive returns at 0.55%, bringing the year-to-date return to 4.64%. High yield municipals still lead the fixed income pack with returns of 5.94%.

The investing landscape can appear dark from time to time, so we encourage you to reach out to your HJ Sims representative to help you hunt for higher yielding products suited to your goals and risk tolerance. We owl-ways look out for you with an outcome of income.

We encourage you to reach out to your HJ Sims representative for guidance in reviewing your portfolio.

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