by Gayl Mileszko
It has been said that the word “friend” should have many, many more syllables in it to reflect all the work that goes into making and keeping one. In Ukraine, the word for friend is друг (druh). The Polish say przyjaciel. In Taiwan, friend is written as 朋友 (péngyou). The Finns say ystävä. In wartime, we learn who the true ones are and can never have enough of them. During the pandemic, neighbors we barely knew before, shelter dogs, nurses and delivery drivers became some of the most cherished. And now, as always, they can be found in classrooms and schoolyards, through eharmony, bookclubs, athletic teams, church groups, local watering holes and other more unexpected venues. In English, the Thesaurus offers 112 synonyms for friend and you can make 82 other words from its six letters.
Best Friends and High Hopes
The financial markets are still unsure as to whether Federal Reserve Chair Powell is still a friend. He and his two predecessors were Wall Street’s very best friends for a very long time, dating back to at least 2007. Mr. Powell was just reconfirmed by the Senate by a vote of 80-19 for another four-year term and has tried to reassure Wall Street that rate hikes of more than 50 basis points at a clip are off the table for now and that the Fed will use all of its tools to arrange the softest landing possible. But the harsh array of monetary policies laid out for the nation, indeed the world, have both Main and Wall Streets concerned that the focus on whipping our 8+% inflation will knock the economy into a recession. It is understood that good must sometimes borrow from its greatest foe but we still want everything that is askew fixed — no inflation, no unemployment, no shortages, no pandemic and certainly no recession — without having to endure any more pain. We Americans are a hopeful bunch with much good fortune as our lifelong friend.
Market Foes, Stock and Bond Woes
Inflation and war are decidedly not friends of the market, nor is the uncertainty accompanying both of them. Stock, bond and commodity prices whipsaw with their arrival and escalation. After last week’s 8.3% inflation report and all the news reports from Ukraine and Moscow’s Victory Day in Red Square, the twist was that Treasuries strengthened while stocks and other bonds faltered. So far this month, the 2-year government yield at 2.56% has fallen 15 basis points. The spread between the 2-year and 10-year has widened to 32 basis points from 22 basis points at the start of May. The 10-year yield has dropped 5 basis points to 2.88%. The 30-year yield at 3.09%, however, is 10 basis points higher. The Baa rated 10-year corporate bond yield at 5.30% is up 14 basis points. Market volatility as measured by the VIX has swung by 37% during the first two weeks in May. Bitcoin is down 24% while oil at $114.20 a barrel is up 9.1%. Silver prices have fallen by 5.6%, gold by 4.3%. The Dow just experienced its seventh weekly loss in a row, the longest stretch since 2001, and is down 2.3% this month. The S&P 500 had its longest losing streak in 11 years and is down by 3% in May. The Russell 2000 has fallen by 4.3% and the Nasdaq by 5.4%.
Tax-Exempt Yields and Bond Flows
In the tax-exempt sector, outflows from 542 municipal bond mutual funds have been persistent, the fifth highest since 2000, now exceeding $60 billion year-to-date. Only once during the past 10 years has Lipper recorded a longer streak of outflows: from May 2013 until January 2014 when there were 33 weeks of outflows totaling $42.3 billion, during the “Taper Tantrum”.
Much of the institutional demand upon which the market relies has fizzled as households have presented mutual funds with net withdrawal requests for 16 consecutive weeks. However, muni exchange traded funds (which now number 69) have added $8.6 billion to assets now totaling $85 billion. A wide and attractive array of bonds are being offered in the secondary market at levels not seen since the early pandemic fire sales, so good analysts and traders are worth their weight in gold. The par total of Bloomberg’s daily municipal bids-wanted jumped to $2.5 billion last Wednesday and remains at multi-year highs. We at HJ Sims are plucking out the best of the bunch for our clients. Market conditions, completely contrary to those prevailing last year, present a challenge to some firms bringing new deals. But our client-dedicated banking team and veteran underwriters continue to bring financings with some of the most competitive prices and terms. Our trading and sales teams are snatching up 5% coupons re-appearing in the primary and secondary markets for those who have been long awaiting this level of income stream. The ratio of munis to Treasuries has reached multi-year highs, and we find many non-traditional investors crossing over into the market and bolstering demand that has sagged from the open-end fund managers.
Recent Municipal Sales
On the $15.1 billion municipal calendar last week, there were 97 deals of which 21 were non-rated including the largest for the Louisiana Local Government Environmental Facilities and Community Development Authority which sold $3.19 billion of non-rated taxable bonds structured with 2039 term bonds priced at par to yield 4.475%. No senior living projects were financed but there were two charter schools. The District of Columbia issued $10.4 million of BBB rated social bonds for Inspired Teaching Demonstration Public Charter School structured with a 2052 maturity priced at 5.00% to yield 5.10%. And the Arizona Industrial Development Authority issued $6.9 million of BB+ rated bonds for Academies of Math and Science which had a 30-year term bond priced at 5.25% to yield 5.30%. Please reach out to your HJ Sims banking representative for more information on these and other types of transactions in the pipeline.
Ahead This Week
This week, the markets are prepped to parse the words of seven Fed speakers. Traders have an eye on Washington, where the House and Senate consider Ukraine aid, the baby formula shortage and gas price hikes that have brought the cost of a gallon over $4 now in every U.S. state. Economic data releases inform investors on the status of New York and Philadelphia manufacturing, retail sales, industrial production, business inventories, housing starts, existing homes sales and jobless claims. There are eight Treasury auctions and earnings reports from the retail sector. The high yield corporate calendar has been quiet for weeks, 74% below 2021’s year-to-date totals, but the investment grade slate is estimated to feature $30 billion of sales. Tax-exempt volume could come in at anywhere between $6 and $11 billion. No senior living deals are expected but there are for charter school financing planned. One is a $27.8 million Florida Development Finance Corporation deal for Ba2 rated Innovation Montessori Ocoee. The Maricopa County Industrial Development Authority is bringing a $14.4 million BB rated refunding for Choice Academies. The Arlington Higher Education Finance Corporation has a $14.2 million AAA rated state-guaranteed deal for Horizon Montessori. And the Indiana Finance Authority plans a $13 million Ba2 rated sale for the Indiana Math and Science Academy.
Markets adjust for risk throughout the day and most investors are wise to do so periodically. We invite you to contact your HJ Sims representative for a mid-year portfolio review and stress test. Ask us to show you some of the new higher yielding bonds and assess whether they fall within your risk parameters and can help meet your family’s investment goals. As they say, good friends know all your stories. Best friends are the ones who help you to create them. We always aim for best.
For more information on our municipal offerings or questions about current market conditions, please contact your HJ Sims representative.