HJ Sims Market Commentary: Drumbeats

by Gayl Mileszko

There is a drumbeat emanating from family kitchens and elementary school classrooms, corner restaurants and city stadiums, office buildings and grocery stores, suburban gyms and resort hotels, and it is growing louder. Tired of restrictions, nose and mouth coverings, mixed messages, lousy data, fines, and dubious claims, folks are clamoring for someone to declare an end to the pandemic. A mayor, some governors, the President, the head of the World Health Organization – someone, anyone – and soon. The good news is that case counts have now fallen well below the peak of the Omicron surge and some indoor mask mandates, including New York’s, are being dropped. The harsh reality is that we are now into a third year and the scourge, directly or indirectly, is still claiming lives, too many lives. WHO and other officials warn that we are nowhere near close to declaring this pandemic over. Exhausted doctors, nurses, paramedics and caretakers know that it is still a global outbreak causing unpredictable waves of illness. For those on the front lines, it is way too soon to downgrade it to “endemic” status, one which is no longer labeled a public health emergency, one in the same boat with seasonal colds and flu. The restlessness and desire for anything resembling 2019 “normalcy” is understandable, but the pandemic effects are indelible and the “new normal” is rife with questions and re-entry anxiety.

Waxing and Waning Waves

The United Nations health agency has been routinely convening a group of experts to review conditions ever since declaring the outbreak of the novel coronavirus a global health emergency in January 2020. We have seen four major waves with waxing and waning patterns and, though we cannot be sure what comes next, we just want it all to end. While this one may certainly be an outlier for any number of reasons, historically, most pandemics last between two and three and a half years. And, even then, the epidemic’s viruses have lived on and continued to mutate. In fact, the 1918 Spanish influenza strain is still among us; versions still circulate more than a century later.

Fingers on the Public Pulse

With fingers on the public pulse as well as mountains of data, health ministers in various parts of the world have begun to lift restrictions and adopt the mantra that societies now need to learn to live with the virus and its variants. The Beijing Winter Olympics reflect the thrill of victory and agony of defeat inherent in this endeavor. Some of the world’s finest athletes from 91 nations are enduring the host country’s harsh testing and isolation regimes without the benefit of family or fan support. They are skiing and skating over political landmines 721 miles from Wuhan, the epicenter of the epidemic, three hours from Taiwan, and 14 hours from Kyiv, Ukraine. But, as always, their individual stories and achievements are both inspirational and humbling to viewers from around the globe, perhaps never more so than this year when so many of us still remain in COVID cocoons or stuck in sheltered routines that have not varied much in 24 months.

Current Financial Market Update

The financial markets were percussed two years ago but have since been cymbals of the central banks and the incongruous but profitable risk-on behavior they have fostered. Most asset classes have beaten expectations and set new performance records. The pandemic declared in March 2020 drove the Fed into policy actions never before verbalized or actualized. With a mission that was suddenly, perhaps permanently, altered from guarding against inflation and maximizing jobs, to ensuring the stability if not profitability of U.S. stocks while keeping rates near zero for the massive amount of Treasury borrowing needed to support new domestic support programs, the Fed has helped to drive the Dow Jones Industrial Average up 51% from 23,185 to 35,091 since March 13, 2020. The S&P 500 Index has gained even more – 65% – rising from 2,711 to 4,483. The Russell 2000 has jumped 66% from 1,209 to 2,012. And the Nasdaq has skyrocketed 78% from 7,874 to 14,015. Bitcoin entered the turmoil at 5,212; its path has not been anywhere near smooth, but it is currently 749% higher at 44,248. Oil at $91.32 is up 188%, silver at $23 is 57% higher, and gold at $1,820 is up 19%. In the bond markets, tax-exempt municipals have also rallied. The 2-year AAA general obligation bond benchmark prices have risen 23% and yields have dropped from 1.12% to 0.88%. The 10-year yield has dropped 17 basis points to 1.44% and the 30-year yield is down 46 basis points to 1.86%. Although munis have taken an unusual drumming this past month, they have significantly outperformed taxable counterparts since the first lockdowns began. During this time, the 2-year Treasury yield has climbed 80 basis points from 0.49% to 1.29%. The 10-year yield, hit the hardest, has risen from 0.96% to 1.91%. And the 30-year yield is now 69 basis points higher, having risen from 1.52% to 2.21%. Ten-year Baa rated corporate bond yields are now about 10 basis points higher at 3.78%.

Municipal Market Update

Municipal and corporate borrowers have enjoyed some of the longest and most upbeat drumrolls in the debt markets these past few years. Despite a major runup in rates since the start of the year as traders have moved to incorporate somewhere between one and seven Fed rate hikes into primary and secondary market pricing, rates nevertheless remain in historically low ranges and any increases are most likely to come in tiny 25 basis point increments. Speculating on timing and adjusting to what feels like inevitably higher levels has produced a lot of discord in the markets. But rhythmic demand for tax-exempt munis and, increasingly, taxable munis, continues to lift the market. Lower than average issuance with unappealing coupons combined with higher than normal redemptions (bond calls and maturities) and heavy interest income so common at the start of the year, have left buyers with extraordinary amounts of cash that they need to put to work. 

This Week’s Bond Market

Bond market strategists are closely watching mutual fund and exchange traded fund inflows and outflows, gauging institutional and retail investor activity ahead of planned Federal Reserve rate increases, bond purchase cutbacks and balance sheet reductions. On the municipal side, analysts note that there have been three consecutive weeks of outflows in funds excluding ETFs; a fourth one this week could indicate that a new cycle has begun led by retail investors who have been spooked by the volatility, falling net asset values and negative real returns. But this selloff has been unlike other credit-driven events, such as the one in 2013 related to Detroit and Puerto Rico (which lasted 10 months), and in 2010 which lasted 6 months after Meredith Whitney’s prediction of 50 to 100 sizeable defaults. This cycle is more likely to be much shorter, fading shortly after the first Federal Reserve rate hike in March and right before tax filing season when the value of tax exemption once again becomes obvious.

The experts at the National Bureau of Economic Research, hit the gong and declared that the pandemic recession was over after only two months, from February to April in 2020. But the majority of us who have been living with real-life, real-world rising food and energy costs, job loss and other major life disruptions know that our economy is still being walloped. With inflation running in the range of 7%, some investors have turned to “Hail Mary” stock and leveraged loan trades. Others with calmer, more long-term investment perspective keep adding five percent and higher coupon income to compound in their bond portfolios. The drumbeat for high yield offerings continues to build. Recently in the new municipal issue market, the Oconee County Industrial Development Authority in Georgia sold $16 million of non-rated taxable economic development bonds for a Costco development structured with a 2048 maturity priced at 6.00% to yield 6.155%. In the secondary market, 7.50% California Public Finance Authority taxable charter school bonds due in 2024 issued for Credo High School traded at par on Friday. Wisconsin Public Authority 7.50% taxable senior living bonds issued for Bermuda Village in Bermuda Run, North Carolina due in 2034 also traded at par. Also, 7.00% tax-exempt South Carolina Jobs Economic Development Authority bonds due in 2048 issued for The Renaissance Senior Living in Due West traded at $98.20 to yield 7.151%.  In the high yield corporate new issue market, cybersecurity firm McAfee priced $2.02 billion of 8-year Caa2/CCC+ rated notes at par to yield 7.375%; the world’s largest movie theater operator, AMC Entertainment, privately placed $950 million of 7.5% first lien notes rated Caa1/B- due in 2029; and specialty chemicals company Prince International placed $756 million of Caa2/CCC+ rated senior unsecured notes at par to yield 9% in 2030.

In the Market

In the primary municipal market for the senior living sector last week, the Salem Hospital facility Authority sold $58.4 million of BBB-minus rated revenue and refunding bonds for Capital Manor retirement community in Salem, Oregon structured with 2057 term bonds priced at 4.00% to yield 3.25%. The California Municipal Finance Agency came to market with two deals:  a $43.7 million of BBB-minus rated financing for Mt. San Antonio Gardens that included a 2056 maturity priced at 4.00% to yield 3.38%, and a $23.5 million Cal-Mortgage insured refunding transaction rated AA-minus with a final maturity in 2036 priced at par to yield 3.282%. Among the nine charter schools financed last week, The Pinellas County Educational Facilities Authority brought a $15.7 million non-rated lease revenue bond issue for Discovery Academy of Science in Dunedin, Florida that featured 2056 tax-exempt term bonds priced with a 5% coupon to yield 4.10% And the Idaho Housing and Finance Association sold $9.3 million of Ba2 rated revenue bonds for Future Public School in Garden City that had a 2057 maturity priced at 4.00% to yield 4.25%.

HJ Sims 19th Annual Late Winter Conference

HJ Sims will welcome several hundred senior living and charter school operators along with their investors, advisers, analysts, and business partners to the Loews Portofino Bay Hotel at Universal Orlando for our Late Winter Conference from March 1 to March 3. Our series of keynote speakers, breakout sessions, panels and roundtables will deliver an exciting opportunity for exchanging ideas and networking. We are honored to have with us as a keynote speaker the former Federal Housing Finance Agency Director, Mark Calabria, a senior adviser to the CATO Institute and former chief economist to Vice President Mike Pence. We have also arranged for a special dinner event at The Wizarding World of Harry PotterTM – HogsmeadeTM. Please contact your HJ Sims representative for more information on our 19th annual gathering as well as on our current municipal and corporate bond offerings.

For more information on our current municipal offerings or corporate bond offerings, please contact your HJ Sims representative.

For more information on our 19th Annual Late Winter Conference for senior living, please view details here

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