by Gayl Mileszko
There is a form of writing going back to the 17th century known as a lipogram wherein a single letter, or a number of letters, are omitted from a work. The author’s challenge is to compose a poem, article or book without using the common letter ‘e’, for example — no easy task. In the case of this short market commentary, 889 instances of the vowel ‘e’ can be found. Imagine the difficulty involved in penning, say, a 50,000-word novel without a single use of that letter. Ernest Vincent Wright managed to do just that in his 1939 novel Gadsby about a fictional city Brandon Hills and how it is revitalized by its new mayor. With perhaps a higher degree of difficulty, Georges Perec accomplished the same feat in French with his 1969 novel La Disparition, about a group of individuals looking for a missing companion.
The Win-Loss Sparkline
These days we do not need to conjure up new challenges. We have plenty as it is just trying to get through a trading day without another loss, passing a gas station without seeing higher prices, coughing and wondering if we have the new COVID variant, turning on the TV without having a central banker tell us about the harsher dose of rate medicine we need to swallow for the next six months – or longer. Whether we teach, drive a truck, manage a nursing home, bag groceries, style hair, serve food, draft legislation, fill potholes, analyze blood or invest money for retirees, the odds feel stacked against us. It seems that not long ago, there were plenty of win-win outcomes. We have always understood win-lose propositions, but now every situation feels like it is lose-lose.
Look for What No One Else Is Seeing
To sell newspapers, to raise money for a cause or oppose a new spending program, to get a candidate elected to public office, it is always easy to go with the negative campaign. Our airwaves and social media threads are certainly full of the dark and glum of late. But we at HJ Sims look at the landscape, not for what is missing or what is lost, but for all that we have and the opportunities that no one else is seeing. As long-term income investors, we welcome a 12-month Treasury yield at 4.15%, a level not seen since April of 2001. For some clients, this year could be the biggest opportunity in a lifetime for tax-loss harvesting. For borrowers, we find that we are able to offer an incredibly innovative number of financing tools to meet timely and strategic needs.
September By the Numbers
The ninth trading month and third quarter of the year came to an end on Friday. From the perspective of total returns, there is no doubt that it was a brutal period for both stock and bond investors. In September, stock market volatility as measured by the VIX rose 18% to 31.62. The Dow lost 9.7%, the S&P 500 fell 10.3%, the Russell 2000 dropped 10.8% and the Nasdaq lost 11.7%. Oil prices fell 12.7%, gold was down $55 an ounce and Bitcoin lost another 1.6%. Bond volatility as measured by the MOVE index increased by 12% and yields have increased significantly. The 2-year Treasury closed at 4.27%, higher on the month by 78 basis points. The 10-year yield at 3.82% increased by 63 basis points. The 30-year at 3.77% rose 48 basis points. The 10-year Baa corporate bond yield at 6.72% finished 95 basis points higher. On the tax-exempt side, the 2-year AAA municipal general obligation bond yield at 3.09% increased 81 basis points. The 10-year at 3.30% closed 71 basis points higher. The 30-year at 3.90% rose by 61 basis points.
2022 Results So Far
Year-to-date, with only one quarter left in 2022, stock market volatility increased by 84%. The Dow lost 7,612 points (21%), the S&P 500 dropped 1,180 points (25%), the Russell 2000 was down 580 points (26%) and the Nasdaq fell 5,069 points (32%). Oil prices increased by about $4.28 a barrel, but gold fell by 9.2% and silver by 18.4%. Bitcoin prices plummeted by 58%. On the bond side, volatility rose by 84%. The 2-year Treasury yield surged 354 basis points, the 10-year rose 231 basis points and the 30-year has increased 187 basis points. The 10-year BAA corporate bond yield has more than doubled, increasing 352 basis points. Municipal bond yields have also risen dramatically over these past nine months. The top-rated 2-year benchmark is 285 basis points higher, the 10-year has increased 227 basis points, and the 30-year is up 241 basis points.
Tax-Exempts Look Attractive
Since August 2, municipal bond prices have been battered in all but the last two trading sessions. In terms of total return, September was the worst month for munis since 1965. However, for buyers seeking higher yields and income, opportunities abound at extremely attractive prices. Looking forward, the 30-day municipal calendar about $9.3 billion during which time investors should expect to receive about $13.8 billion in cash from maturing and called bonds. So demand continues to exceed supply, a favorable situation for investors with cash seeking tax-exempt income. Conditions remain favorable as well for those seeking to harvest tax losses. Mutual funds and exchange traded funds have been hit with more than $100 billion of withdrawals in 2022, so our traders are seeing a steady supply of higher yielding bonds at discount. Bids wanted have been averaging $1.9 billion a day this week, and trading has recently been elevated at nearly $20 billion a day, well over the year to date average of $13.8 billion. Cash that has been parked in money market and exchange traded funds can find many more productive homes in individual essential purpose municipal bonds being offered in the secondary market. Reach out to your HJ Sims representative for more information on credits we like in the senior living and charter school sectors.
HJ Sims in the Market
Volatile conditions during the last trading week of the quarter kept many nonprofit borrowers on the sidelines, severely limiting price discovery for traders, underwriters and those evaluation services charged with pricing bonds every day for portfolio managers and custodians. September primary market sales declined 43% year-over-year; taxable issuance is down by 48%. Last week, however, HJ Sims brought a $15.6 million non-rated financing for Canyon Grove Academy, a K-8 public charter school in Pleasant Grove, Utah. The non-rated bonds were issued through the state’s Charter School Finance Authority and had a 10-year maturity and were priced at par to yield 5.65%. Also on the slate, the Allentown Commercial and Industrial Development Authority issued $8.7 million of non-rated bonds for the Executive Education Academy Charter School Foundation in Pennsylvania, due in 30 years and priced at par to yield 7.00%. The Knox County Industrial Development Board in Tennessee brought a $47.1 million non-rated solid waste disposal green bond financing for Tompaul Knoxville Recycling; the 30-year term bonds subject to the alternative minimum tax were priced at par to yield 9.50%. Wisconsin’s Public Finance Authority issued $28.7 million of revenue bonds due in 2049 and also subject to the AMT for the Big Island Jet Center fixed base operation general aviation facility in Keahole, Kona, Hawaii priced at par to yield 8.00%. The conduit issuer also sold $23 million of non-rated charter school revenue bonds for Community Public Charter in Stanley, North Carolina, structured with a 10-year term bond priced at par to yield 6.35%.
Market Movers This Week
This week’s markets are being impacted by both domestic and international events. Overseas, OPEC+ meets live in Vienna for the first time in two years and members are expected to cut production by as many as 2 million barrels per day. The United Nations Conference on Trade and Development has called on the Fed and other central banks to halt interest rate increases to avoid further economic harm to developing countries. On top of mounting nuclear threats from the Russian president, North Korea’s leader launched an intermediate range ballistic missile over Japan for the first time in five years and the U.S. and South Korea responded with new missile drills. At home, the Supreme Court is back in session, the central bank is now in its second month of directing $95 billion of rolloffs from its balance sheet, 14 Federal Reserve officials will be speaking on policy matters at public events across the country, southwest Florida begins a massive disaster recovery effort, and key U.S. economic data including job openings, nonfarm payrolls and consumer credit will be released. Six Treasury auctions are scheduled as yields remain askew with yields inverted for three consecutive months; the 12-month yield at 4.16% currently exceeds that of the 2-year, 10-year, 20-year and 30-year maturities.
Less Than 60 Trading Days Left in the Year
The U.S. public debt has now surpassed $31 trillion for the first time ever, with $1 trillion added in just the past eight months, so we are perilously close to the debt ceiling that Congress imposed on borrowing, however we have managed to avoid the periodic threat of a government shutdown through at least mid-December. A continuing resolution was passed just before the House and Senate left for home districts ahead of the mid-term elections, now only 34 days away. There are less than 60 trading days left in the year, so please reach out to your HJ Sims representatives to help sort through current opportunities, finalize tax strategies for 2022, and plan for 2023.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.