HJ Sims Market Commentary: Eyes on Teasuries

by Gayl Mileszko

We have all been crying since the day we were born. A 6-week old baby will cry for an average of 2.5 hours a day, adults less so — unless they are Treasury traders in current market conditions. It sounds incredibly high but the American Academy of Opthalmology estimates that we each produce 15 to 30 gallons of tears every year. The Cleveland Clinic enlightens us on the three different types of tears that we generate, each full of water, lipids, lysozyme, lipocalin, glucose and sodium. Basal tears keep our eyes lubricated and protect them from debris. Reflex or irritant tears come in response to physical triggers such as dust, onions or pepper spray. And, of course, emotional tears are associated with sadness, happiness and other intense emotions. Altogether, the flow slows down with age and certain health conditions, but we never run out of tears.

In Ukraine and across eastern Europe, tears continue to fall as the number of losses. injuries and refugees multiply. In China, they mourn the loss of 132 souls in the 737 jetliner crash. In Alaska and in our nation’s capital, many grieve the loss of the Dean of the U.S. House, Don Young. Interest rates are rising alongside debt and inflation has reached the level of a crying shame with no end in sight.

Rising Bond Yields and Narrowing Spreads

Bond yields, which rise when prices fall, have been climbing all year based on expectations that the Federal Reserve will raise short-term interest rates as many as seven times this year. Fed officials, who had been keeping rates near zero for nearly 14 years, have been stoking these expectations with statements and references in public appearances outside of their formal meetings. They raised rates by 25 basis points, as expected, on Wednesday. The next policy meeting is not scheduled until May 3 and a lot can happen in between now and then. Right now, the speed at which yields on short term bonds – those with maturities of two years and less – are rising is causing significant market volatility. And the gap between two- and ten-year yields has shrunk enough to spur talk of inverted yield curves, which historically precede recessions. That gap has narrowed to 22 basis points, down from 78 at the start of the year.

Eyes On Treasuries

Most long-term borrowers use the 30-year Treasury as their benchmark, but the maturities to watch in current markets are the 3-month, 2-year and 10-year. At present, the 3-month yield is at 0.53%, up from 0.03% at the start of the year. The 2-year is at 2.16%, 143 basis points higher than in January. And the 10-year is at 2.38%, having risen 56 basis points this month alone. At these levels, we are seeing some anomalies. For example, the 5-year yield at 2.38% and the 7-year yield at 2.41% are higher than that of the 10-year. And the 20-year at 2.71% yields much more than the 30-year at 2.59%.

Municipal Bonds Climb

The triple-A municipal general obligation benchmarks are up about 47 basis points across the curve this month and as much as 129 basis points year-to-date. The 2-year tax-exempt yield stands at 1.53%, the 10-year is at 2.07% (the highest since the start of the pandemic), and the 30-year is at 2.45%. The muni curve has only flattened half as much as Treasuries but the current gap between the 2-year and 10-year is 54 basis points, down from 79 at the start of 2022. Muni yields as a percentage of Treasuries have risen to 87.4% for the 10-year and 94.5% for the 30-year.

Tracking Indices, Buy/Sell Trends and Fund Flows

The VIX, or Fear Index, has fallen by 24% over the course of the month despite the day-to-day volatility in bond and stock markets. As of this writing, major stock indices this month are all up over 2% with the S&P 500 137 points or 3.1% higher. Last week, stocks closed out their best week since November 2020 despite Friday’s $3.5 trillion triple witching event and a rebalancing of benchmark indexes including the S&P 500. Oil prices have risen nearly 17% in March, gold is up $21 an ounce to $1,920 and Bitcoin prices are 3% higher at $42,627. Lower rated corporate borrowers have stayed on the sidelines for several weeks, while investment grade corporations and most municipal borrowers have forged ahead, finding good market reception from cash-laden investors. Muni bond mutual funds experienced another week of outflows totaling $2.4 billion but customers were net buyers of munis overall although the daily average of buys fell 62% from the prior week and sellers did take charge on Thursday for only the second time this year. Municipal exchange traded funds have attracted $2.92 billion of cash in the past three months, bringing total assets held by the 68 ETFs to $84 billion.

Tax-Exempt Muni Calendars

The muni calendar this week is expected to run as high as $10.8 billion with about $2.1 billion of taxable sales. It is heavy with hospital and housing bonds. Last week’s $6.8 billion calendar was dominated by three major borrowers but featured four higher yielding charter school offerings. The Utah Charter School Finance Authority sold $50.1 million of non-rated revenue and refunding bonds for Ascent Academies of Utah including long-dated discounts; the 2057 maturity was priced at 5.00% to yield 5.10%. The Florida Development Finance Corporation issued $16.7 million of Baa3 rated bonds for River City Science Academy structured with a 35-year maturity that priced with a coupon of 5.00% to yield 4.19%; they also priced a $12.85 million series for forward delivery in November with the 2057 maturity yielding 4.75%, a 56 basis point premium for the eight months of delayed settlement. Guilford Preparatory Academy in Greensboro, North Carolina brought a $12.6 million non-rated deal through the Wisconsin Public Finance Authority that also had a final maturity in 2057; these bonds priced at 5.00% to yield 4.85%. Civica Career and Collegiate Academy in Milliken came to market with a $7.9 million non-rated deal through the Colorado Educational and Cultural Facilities Authority that had a maximum yield of 4.75% in 2029.

Planning Ahead for Times with Less Uncertainty

The media bring the crises of the world home to each of us and, with scenes of war, summit talks and hypersonic weapons, we cannot help but pause. We also try to go about our days planning ahead for times with less uncertainty. But as investors, it is hard to look at portfolio statements and online accounts without weeping. Returns are negative across the board. Without accounting for inflation, as of last Friday’s close, most major indices were in the red. Nasdaq was down 11%, the S&P 500 has fallen 6%, the Dow has lost 3.8%. Treasuries are down 4.7% year-to-date, investment grade corporates have lost 7.5% and high yield corporates 4.9%. Convertibles are off by 6.5%, preferreds by 7.1%, leveraged loans by 1.1%, and mortgages by 4%. Investment grade munis are down 4.9%, high yield munis are down 3.7% and taxable munis down 8.6%. Nevertheless, amid this sea of red, our trading and sales teams hunt for and find many good income-generating opportunities away from the broad indices and major funds. We welcome your call to discuss ways to enhance your portfolio.

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

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