HJ Sims Market Commentary: Dog Days

by Gayl Mileszko

The “Dog Days” of summer are usually the most unbearably hot and humid of the season. They typically arrive between July 3 and August 11 — peak vacation time. This year, across the country, some areas have in fact experienced some of their hottest days on record right now, but it can be argued that almost none of them have been lazy, hazy or lethargic. Investor attention, as well as the country’s as a whole, remain fully riveted on the nation’s capital where the President is quarantining with COVID for a second time, the House Speaker has left her Chair to visit Taiwan in defiance of dark threats from the leader of China and federal agencies have been churning out data showing inflation running hot at a 40-year high while our economy has flamed out for two straight months.

Barking and Howling

Those inside the Beltway continue to yip and yap about whether we are in a recession while the Federal Reserve has raised short-term rates for the third time this year and is sending officials out on the talk circuit to brace us for what may come next in September. The Department of Defense just announced another $550 million drawdown of equipment from its inventories for Ukraine’s security, the seventeenth such package authorized by the Biden Administration in the past year. The future of NATO with or without Sweden and Finland lies in the hands of the Senate, as is a veterans’ health bill that would loosen the cap on discretionary spending by $390 billion. A staff parliamentarian and a Senator from Arizona have become key to the success or failure of a resuscitated $740 billion reconciliation package dubbed the Inflation Reduction Act, the loud and contentious debate over which covers election year issues ranging from taxes to immigration to prescription drug prices.

Growing US/Taiwan/China Tensions

As always, financial markets digest all this torrid activity, assign risks and hunt for opportunity. Traders appear to be dismissing the Iran’s latest threat to “turn New York into ruins” with its purported nuclear force, but there is indeed widespread concern over the escalating tensions with China and the nature of any countermeasures that may be taken in response to the arrival of a small but historically significant congressional delegation on an island claimed as the territory of China’s Communist Party. We are presently seeing equity market weakness that, to the surprise of many, did not materialize last month in response to the rate hike, inflation data, upside down Treasury market and recession chatter. The month of August has begun with new demand for safe havens assets including U.S. government, corporate and municipal bonds.

Markets Tell the Fed Where Rates Should Be

The Treasury curve has been inverted since July 5, when the 2-year yield at 2.81% closed higher than the 10-year yield at 2.80%. T-Bill and T-Bond buyers currently set the spread is 30 basis points, which was the actual yield on the 2-year bill on October 7. Since the start of the year, the 2-year has risen 215 basis points, the 10-year has increased 113 basis points and the 30-year by 110 basis points. During July, the 2-year Treasury yield fell from 2.95% to 2.88%, the 10-year dropped from 3.01% to 2.64% and the 30-year went from 3.18% to 3.00%. BAA rated corporate bond yields fell in line with governments; the 10-year fell 24 basis points from 5.73% to 5.49%. In the equity markets, volatility declined by 20% and indices were up across the board: the Dow gained 6.7% to close at 32,845. The S&P 500 finished 9% higher at 4,130. The Russell 2000 gained 10.4%, finishing at 1,885. The Nasdaq rose 12.3% to close the month at 12,390. Bitcoin prices rose nearly 25% to end July at 23,858 while gold prices fell $44 an ounce to $1,765 and oil dropped $7.14 per barrel to $98.62.

Municipal Bonds Are Outperforming

In the tax-exempt market, bond buyers experienced the best returns since 1992. Munis outperformed their taxable counterparts across the curve as a result of surging demand from heavy principal and interest payments and a light primary calendar. July issuance at $25.5 billion was down 32% year-over-year due to the significant drop in taxable issuance at only $2.9 billion and lower refunding volume at only $1.9 billion. The 2-year AAA municipal general obligation bond benchmark yield fell 35 basis points to end the month at 1.60%. The 10-year yield plunged 50 basis points to finish at 2.21%. The 30-year ended at 2.89%, down 29 basis points in July.

Market Movers This Week

Voters in Arizona, Michigan, Missouri, Washington and Ohio all went to the polls on Tuesday. For investors, the backdrop for this week’s new issuance — $6 billion in municipal bonds, $30 billion in investment grade corporate bonds, and five Treasury auctions with at least $231 billion announced so far — as well as all trading, is the extent of Chinese reaction to Speaker Pelosi’s visit to Taiwan and any extremist response to the U.S. fatal drone strike against al-Qaida’s top leader in Afghanistan. In the interim is a host of key (but lower) US headline economic data including manufacturing, construction spending, auto sales, factory orders, trade, jobless claims, job openings and, on Friday, the July jobs report. Analysts are also closely watching the spread between the 3-month Treasury and the 10-year since every recession in the past 60 years has been preceded by an inversion in this part of the curve. At this writing, the difference is only 22 basis points, down from 211 basis points at the end of April.

Recent Municipal Sales

Last week we had a light calendar but it included a number of non-rated financings. The California Community College Financing Authority sold $112.4 million of student housing revenue bonds for Napa Valley College structured with 2060 term bonds priced at 5.75% to yield 5.95%. The New York State Energy Research and Development Authority sold $25.6 million of taxable green bonds; the 2037 term bonds priced at par to yield 4.871%. New Jersey’s Bergen County Improvement Authority issued $73.7 million of county-guaranteed bonds for the Bergen New Bridge Medical project that featured a 2047 maturity priced with a coupon of 5.00% to yield 3.46%. The Palm Beach County Health Facilities Authority brought a $36.1 million of revenue bond anticipation notes for the Green Cay Life Plan Village planned for Boynton Beach; notes due in 2027 were priced at par to yield 11.50%. In the charter school sector, the St. Louis Industrial Development Authority sold $29.5 million of revenue bonds for Confluence Academy that included 2053 term bonds priced at 5.625% to yield 5.79%, and the Upper Dauphin Industrial Development Authority sold $11.2 million of revenue bonds for Pennsylvania STEAM Academy Charter School due in 2057 and priced at par to yield 6.25%.

This Week in the Muni Market

Approximately 43% of the deals on the $6 billion negotiated calendar are from Texas issuers. In the high yield sector, there are two non-rated financings carried over from last week: a $65 million Maine Finance Authority sustainability issue for Vertical Harvest, and a $40 million St Paul Port Authority Go Wild hockey offering. Build New York City has a $22.1 million BB+ rated sale planned for Global Community Charter School, an international baccalaureate World School in Harlem serving students in grades pre-K through 8.

Dies Caniculares

Our friendly Farmers’ Almanac reminds us that the references to the dog days of summer in fact point us to Sirius, the Dog Star, the brightest star in our Earth’s night sky. At this time of year, Sirius occupies the same region in the sky as our Sun; they rise and set together. Consider this a great time to contact your HJ Sims representative to confirm or revise the investment guidelines that we last set together. Reach out to us this week.

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

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