Market Commentary: Foam and Fury

by Gayl Mileszko

Foam and Fury

No matter where you turn these days, words are harsh, volumes loud, hearts heavy, and headlines large. But work in fields ranging from business to law, education and government, continues. Amid all the dust and noise, agreements are reached, decisions made, battlegrounds moved.  Our great American experiment has been a work in progress for the past 248 years and has seen some ugly days, but our creativity, productivity, and prosperity are the envy of the world. We set aside many petty differences and apply our ingenuity to repair bridges, recover from hurricanes, treat and cure disease, and so much more. As T. Boone Pickens once said, “When you blow away the foam, you get down to the real stuff.”

Finally, a FY24 Federal Budget

After six months of debate and negotiations, posturing, pleadings from interest groups, lines drawn in the sand, votes ousting the person second in line to the presidency, threats of shutdown, rules maneuvering, multiple recesses, heavy pressures, and midnight horse trading, funding for the federal fiscal year that began last October 1 was finally nailed down early on Saturday morning when the President signed the last $1.2 trillion appropriations measure, H.R. 2882, into law. Spending levels are resolved for the time being, but the foam and fury are bound to return after Labor Day just in time for Fiscal Year 2025.

Bond Appeal

The former President, after two months of furious protests over a staggering $454 million judgment in a civil matter that sparked heated reactions from the global legal, business and political communities, had the judgment paused and bond amount lowered by an appeals court just under the Monday deadline that threatened seizure of his personal and corporate assets. Mr. Trump has a 10-day breather on this one front, but his battles continue in several courtrooms.

Supreme Rulings

The Supreme Court on Tuesday began reviewing the Food and Drug Administration’s rule for dispensing the abortion pill mifepristone. There is perhaps no more emotionally divisive issue than abortion in America. In this case, the Court’s ruling may also have major ramifications for regulators, providers, and future determinations of legal standing. Earlier this year, the Court ruled that federal border patrol agents are allowed to cut razor wire deployed by Texas law enforcement at the Mexican border, fomenting protests from state’s rights advocates and elevating public safety, immigration enforcement, and constitutional disputes to new levels. That issue has faded quite a bit while, in another first, a panel of 5th Circuit Court of Appeals judges reviews the constitutionality of a state senate bill criminalizing unauthorized immigration into Texas.

Countdown to November 5

At this writing, the November elections are only 223 days away. Things are quiet now while many of the party candidates for office are still being determined. The rhetoric, accusations, attacks, promises, concerns, and surprises will not really begin in earnest until after the summer conventions when families, friends, colleagues, and neighbors start to unite or divide on issues and office seekers. There will undoubtedly be more serious questions raised on ballot integrity, and half the country will be outraged by the eventual outcomes.

Real Stuff

The real stuff in the financial markets right now is the knowledge that inflation is stubborn and that rates are likely to remain high — but probably not increase — through the rest of the year. The Federal Open Market Committee released its rate projections last Wednesday, with the majority of voters seeing three quarter point cuts in the target rate this year.  Futures trading currently reflects market expectations for 2024 to end with the rate in the range of 4.50% to 4.75%.  For state, local and non-profit borrowers, long term tax-exempt yields currently sit below historical averages dating back to 1917 per Municipal Market Analytics data. For investors, muni yields are much more attractive than in prior years. The month of April will see $26.6 billion of principal and interest returned to municipal bondholders, bringing year-to date redemption totals to $132.8 billion.  Demand for higher yielding munis comes at a time when the market is seeing the second-slowest first quarter for high yield bond sales in the past decade according to Bloomberg Intelligence. The lack of supply in the face of strong investor appetite has boosted year-to-date index returns for the high yield and non-rated muni sectors over 2.2% while investment grade muni index returns sit at negative 0.14%. In its latest report on the breakdown of municipal bond holdings, the Federal Reserve reported that households increased the par value of muni holdings by 9 percent year over year to $1.76 trillion, and mutual fund holdings increased by 4.6% to $1.09 trillion. CreditSights estimates year-to-date inflows into the 887 muni conventional and exchange-traded funds at $10.895 billion; high yield munis have seen inflows for 11 straight weeks.

News Comes Fast and Furious

Traders analyze a host of global events on a minute by minute basis and make swift decisions on big matters such as the future of cryptocurrency and artificial intelligence, as well as on the ramifications of the day’s economic data releases, the results of the morning’s Treasury auctions, the hints contained within the remarks made by Federal Reserve officials, the likelihood of an escalation of one or more wars, and the wide ranging impacts of black swan events such as a terrorist attack, a pandemic or the collapse of a bridge serving the nation’s 10th largest port. This week, the last trading week of the quarter and shortened by the Good Friday holiday, attention is on the responses to U.N. cease fire vote and the Moscow concert hall terror attack, the personal consumption expenditures price index, market reception at the 10 Treasury auctions, corporate earnings results from Walgreens, Carnival and UPS, leadership changes at Boeing, and feedback from the U.S. chief executives attending the China Development Forum in Beijing.

Current Market Indices

At this writing, the 2-year AAA general obligation yield benchmark stands at 2.91%, up 39 basis points on the year. The 10-year, still reflecting the inverted curve, yields 2.51%, up 23 basis points. The 30-year at 3.70% is 28 basis points higher.  On the taxable side, the 2-year Treasury yield stands at 4.59%, the 10-year at 4.23%, and the 30-year at 4.39%, each up about 36 basis points since the start of 2024. The 10-year BAA corporate yield at 5.99% is 20 basis points higher. The larger gains on the equity and commodity side include Bitcoin, at $87,034 up 108% in the first quarter, oil at $81.62 up 14%m the S&P at 5,203 up 9% and gold at $2,176 up 5.5%. The stock and bond markets are closed on Friday and there is very limited bond trading expected after the early close on Thursday. We at HJ Sims pause during this holy week of Easter to wish you and your families safe travels and very happy celebrations.