HJ Sims Market Commentary: Elbow Grease

by Gayl Mileszko

We are each born with approximately 270 bones that provide the structure for our bodies. By the time we reach age 21, however, some bones have fused together and the total count falls to about 206. Fifty-four of these bones are in our hand and wrist, twenty-six in each foot, ten in the shoulder and arm. Like other tissues, these bones are all alive. They are comprised of collagen, calcium phosphate, sodium and other minerals, make up 15 percent of our body weight, and come in long, short, flat and irregular shapes. Without us realizing it, each and every one is rebuilt from scratch every ten years. The stapes bone, located in the middle ear, is the smallest and lightest. The femur or thigh bone is the largest. The clavicle or collar bone is the weakest, and the most commonly broken. The sharpest point on the human body is the hinged joint made up of the humerus, ulna, and radius bones, commonly known as the elbow.

Throwing Elbows

Elbows can be devastating weapons. In some martial art styles, they are used in powerful, close-range strikes, typically targeting areas of the skull to knock out an opponent or deliver vicious cuts. In most contact sports, however, their use is prohibited. In ice hockey elbowing results in a two-minute penalty. In basketball, “throwin’ ‘bows” counts as an intentional foul. In the arena of Washington, D.C., elbow bumps became the new and safer form of backslapping when coronavirus first began to spread. Sharp-elbowed politicians, the opposite of legislative pushovers and compromisers, nevertheless abound. On Wall Street, well-heeled titans are often described as having elbowed their way to the top.

Elbow Room…for U.S. Bonds

Since the Great Recession, Main Street, Wall Street, Capitol Hill and the White House have given the Federal Reserve an unprecedented amount of elbow room. But even back in 2008, no one could have imagined how far the Fed would go to intervene in the financial markets these past 16 months. For our own good, the Fed and its European and Asian counterparts have quashed free markets for the foreseeable future. For the good of the country, if not the world, the long-term, multi trillion-dollar U.S. bond buying program is placing a heavy, Fed-sealed lid on interest rates. In Europe, central banks have negative rates prevailing in 9 countries. When inflation is factored in, all sovereign rates – including ours – are negative. In what was once normal times, the Fed would raise interest rates to slow the economy and bring inflation down. That is not happening in the new normal, where crushing many family budgets but the mission of the Fed to Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

Market News This Week

The Fed reports to Congress regularly and the Chair meets with the President on request, at least twice in the last month. So, there is no doubt that the Fed is not independent in its thinking that rates need to remain artificially low for as far as the eye can see. No one needs to give Fed officials the elbow about the need to keep rates suppressed, regardless of how high or for how long prices increase. (Consumer prices rose 5.4% year over year in June, the biggest monthly jump in 13 years.) But in direct contradiction to all the textbook market reactions to soaring inflation numbers, Treasury yields have fallen by nearly 15%. The singular power of the Fed continues to suppress all the highly unsettling inflation signs. We are told that inflation is transitory and we apparently accept this as gospel even when faced with a record U.S. indicator on top of a national debt exceeding $28.54 trillion, and interest on the debt well over $378 billion a year and rising. The federal budget deficit looks like it will easily exceed $3 trillion this year and could quickly double if a new infrastructure reconciliation package is enacted without offsets.

Elbows in the Curves

Investors who lean on the Fed without elbow pads demonstrate a lot less confidence in other public agencies, their data, and pronouncements. Serious new concerns about the Delta variant and the smothering effect which it threatens to have on the U.S. and global economic recovery have led to several market duck-and-runs of late. At this writing, since the start of the month, the VIX has jumped 42%, the Dow has lost 540 points, the S&P 500 is down 39, the Nasdaq is off 229 points, and Bitcoin has fallen 10 percent. Gold us up 2% and, for reasons including the new OPEC+ agreement, oil prices are down nearly 10 percent. U.S. Treasuries have been the biggest beneficiary, and moves in this key market are driving trades in just about every other asset class. While most analysts had expected 10-year Treasury yields to have risen to about 2% by this point in the COVID economic recovery, both the 10- and 30-year yields have fallen 28 basis points across the curve this month alone to stand at 1.18% and 1.81% respectively. Municipals have also made some serious gains across flattening yield curves as the 10- and 30-year benchmarks have fallen 18 basis points in July to 0.81% and 1.32%, respectively. Baa corporate bond yields in ten years are down 16 basis points to 2.85%.

Elbow Macaroni and Municipal Sector News

Pasta elbows which originated in Northern and Central Italy pair well with almost every type of sauce, soup, salad, and stir fry in the same way that municipal bonds meet the needs of those looking for tax-exempt investments, compounding principal and interest, taxable alternatives to corporate and mortgage-based securities, higher yielding fixed income instruments with some of the highest year-to-date returns so far, and/or risk levels on an international scale that generally rank just below those if U.S. Treasuries. More than halfway through the month, tax-exempts are on a path to gains not seen in any other July since 1990. For investors, however, trying to find yield is harder than trying to scratch your ear with your elbow. Last week, the $5 billion calendar included deals coming with below investment grade ratings in 40 years at yields under 3.00%, such as the $68.3 million California student housing deal for BB rated Sonoma County Junior College that came at 2.90%. Among non-rated deals, the Florida Development Finance Corporation brought $113.4 million of bonds for Renaissance Charter School structured with a 2051 maturity priced at par to yield 5.50%, the Public Finance Authority (PFA) sold $41 million of BB+ rated hospital revenue bonds for Carson Valley Medical Center with a 30-year term priced at 4.00% to yield 2.33%, CARTI Surgery Center came with a $40 million deal through the Arkansas Development Finance Authority with 2052 term bonds priced at 4.00% to yield 3.40%, and the St. Paul Housing and Redevelopment Authority sold a $13.7 million charter school financing for Minnesota Math and Science Academy that included 2056 term bonds priced at 4.00% to yield 3.80%.

Elbow Grease and this week in the News/Markets

Bones provide the structure for our bodies in much the same way as muni bonds provide critical infrastructure for our country. This week, investors will see a little bit of every kind of financing for essential projects ranging from water and sewer, to airport, college, hospital, multifamily housing, transit, and elementary and secondary schools. Muni investors will see more than $10 billion of supply, but Bloomberg notes that this will fall short of current demand by at least $12.3 billion. The high yield calendar includes three charter and private school financings: the Build NYC Corporation has a $65.5 million non-rated issue for Shefa School, the PFA is bringing a $6.3 million non-rated deal for the Capitol Encore Academy, and Universal Academy in Michigan plans a $9.7 million BBB-minus refunding. We expect most deals to be priced at high premiums and to be well oversubscribed by the largest municipal bond funds and Exchange Traded Funds. They have taken in $63.4 billion of net assets this year so far, bringing total net assets over $1 trillion for the first time. For borrowers looking to access this incredible market, and for investors looking to maximize yield within their risk parameters, we encourage you to contact your HJ representative. We work for you using proprietary analytics, generous applications of common sense, and lots and lots of elbow grease.

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