By Gayl Mileszko
Market Commentary
Hear the Train a-Comin’
You can feel it coming. The ground starts to vibrate, to rumble. It has a rhythm. The wind shifts. It is subtle. Then it picks up, begins to swirl. There are occasional gusts. A low hum morphs into a whoosh, and you sense that it may soon grow into a roar. The atmospheric conditions are changing. Something is coming …. a storm, a tornado, a herd of buffalo, a freight train? No, it’s just Election Day, four months away.
Revving the Engine
The media, the parties, the donors, and Wall Street are starting to pay a lot more attention to campaigns, to platforms, to domestic kitchen table issues, to winners and losers. Pundits and prediction market contracts are busy speculating on mid-term control of the House and Senate, the leading candidates for 2028. Most state primaries are over and there have been some upsets. Socialists win three seats in New York. So far 25 challengers endorsed by the President have won their primaries, but five candidates that he endorsed have lost. President Trump, holding his finger to the wind as all chief executives do at this time, dispatched the Vice President to wrap up negotiations with Iran and help the American farmers. He directs his Treasury Secretary to tell the markets that inflation, that gas prices and food costs, are about to come down, that he has confidence in Kevin Warsh, that we are on the path to big economic growth and that economic security is national security. He reportedly is having numerous private conversations with the new Fed chair to get his takes on the developments in the markets and the economy.
Flag Stops
Before he becomes a Lame Duck and possibly sees control of the House turn over, President Trump is paying new attention to Congress, twisting arms to hurry action on his priorities before the summer recess, the final campaign pushes, and November 3. Election Day has truly become a season unto itself, as early voting begins in some states on September 18, and the vote count may well continue into early December. Between now and then, the Supreme Court term ends, likely with some blockbuster rulings on presidential authority, birthright citizenship, and several other major cases. Taylor Swift will finally tie the knot. We celebrate the nation’s 250th with a series of spectacular events. We sweep up and restock the bars after the FIFA World Cup games conclude. We watch frenzied trading in trillion-dollar IPOs for Open AI and Anthropic. We take a summer vacation. We shop for school supplies. We follow the elections in Israel and Brazil. And we watch gas prices go up and down as Iran once again weasels out of its commitments.
The Conductor
Through it all, the Fed and the Treasury will closely monitor Treasury auctions and, of course, bond yields. As Secretary Bessent said on Tuesday, “bond markets have taken out more governments than howitzers,” alluding to the deadly political consequences of inflation-fueled increases in longer-term borrowing costs. One former Fed chairman, Alan Greenspan who passed away on Monday saw inflation as a toxic problem, a monetary phenomenon driven by ballooning government deficits. A trained professional musician, he was dubbed the Maestro for guiding the markets through Black Monday, the dot.com boom and the aftermath of 9/11. He orchestrated Fed actions for 18 years, from 1987 to 2006, setting a new precedent for cleaning up after Wall Street crashes, keeping Fed-watchers guessing as to his next moves, clashing with presidents and quietly advising Congress of any errors in their ways, riding an internet-fueled productivity boom , and witnessing years of financial market exuberance.. Inflation averaged 3% during his term, unemployment averaged 5.5%, and the Fed funds rate, which ranged from 3.0% to 9.8% stood at 4.29% on his last day. Two years later, this champion of financial deregulation admitted that he failed to foresee the subprime mortgage collapse, and that he was in a state of shocked disbelief that banks had taken on such self-destructive risks.
Chief Engineer
Alan Greenspan was the 13th Fed Chair, preceded by Paul Volker, and succeeded by Ben Bernanke, Janet Yellen, Jerome Powell, and now Kevin Warsh. Mr. Warsh, 56, hit the ground running last week during his first Federal Open Market Committee meeting and press conference. During his 42-minutes with the media last Wednesday, his anti-inflation, anti-forward guidance approach was made clear. He did not even contribute his dot to the plot that has been dissected every quarter for the past 14 years. Traders, accustomed to frequent, heads-up, plain English communication, did got burned by several bad Fed calls, including the labeling of post-COVID inflation as transitory. Investors have become accustomed to Fed interventions whenever What comes next is unclear. But change is afoot. Given the speed with which information circumnavigates the globe, it is impossible that the central bank will return to its old secretive ways wherein investors did not learn about rate decisions for weeks or months until meeting minutes were published. What we learned is that Mr. Warsh is setting up a task force to examine Fed communications. He also has four more groups tasked with reviewing the balance sheet, studying how it gathers and analyzes economic data, exploring the impact of AI on productivity and jobs, and revising the framework used to assess inflation. Markets were taken slightly aback a bit and dipped at first but brushed most worries aside and went back on a bit of a tear until Iran’s trash talk caused oil prices to rise.
Superheaters
Summer is upon us, this is the last active week of trading in June, the second quarter comes to an end next Tuesday and the U.S. begins its celebration of our big anniversary next week. The British prime minister resigned on the 10th anniversary of Brexit, Europe is sweltering under the Omega block heatwave, Gulf allies grow worried over falling oil prices, talk of tolls for Hormuz transit, and the fragile Iran deal. The fighting between Israel and Hezbollah, Ukraine and Russia escalate. In the sizzling U.S. corporate bond market, companies are about to issue a record amount of debt this month, including $25 billion deals by both SpaceX and Nvidia. This week alone will see $50 billion of investment grade sales. High yield debt issuance at $174 billion this year will likely exceed 2023’s annual total by next week.
Tax-Exempts Off the Rails
Municipal bond issuance is also on a record pace this year with $285 billion tallied at the end of last week. Muni index returns in 2026 are besting Treasures, corporates, mortgages, preferreds and all fixed income sectors with the exception of convertible bonds. We are at the peak of the reinvestment season with $58.4 billion of principal and interest payments made in June, another $53.6 billion expected in July, and $54.7 billion more due in August. Refinitiv Lipper reports 11 straight weeks of net flows into high yield municipal bond mutual funds. CreditSights notes that muni ETF flows are taking in record amounts of cash, $27.1 billion at last count, exceeding the $26.3 billion total for conventional mutual bond funds this year. Total assets held by muni funds now exceed $1.08 trillion.
Tracking the Data
This week, traders are following primary results in New York, Maryland, and Utah and 10 Treasury auction outcomes. We will see key economic data including the latest personal consumption expenditures price index, new home sales, durable goods orders, and bank stress test results. The latest quarterly corporate earnings reports are due out from Micron, FedEx, and Carnival. The Supreme Court may issue long awaited opinions on Thursday. At this writing, the 2-year Treasury yield stands at 4.13%, the 10-year at 4.39%, and the 30-year at 4.85%. The 2-year AAA general obligation municipal bond benchmark yield is 2.38%, the 10-year sits at 2.97%, and the 30-year at 4.25%.
Just The Ticket
Last week, HJ Sims brought an $18.1 million BBB-minus rated financing for Crescent City Schools through the Louisiana Public Finance Authority. We structured the charter school deal with four tax-exempt term bonds including a final maturity in 2066 that priced with a coupon of 5.75% to yield 5.80%. The muni calendar this week totals about $12 billion, including five non-rated senior living deals: a $312.6 million sale for Fairview retirement community in Groton, Connecticut; a $193.9 million bond issue for St. John’s United assisted living in Billings, Montana; a $48.7 million refunding for the Norris Square life plan community in Cottage Grove, Minnesota; a $9 million non-rated note deal for Enso Verde in Simi Valley, California; and a $306.8 million sustainable bond issue for the Caring Forever Obligated Group in Virginia. The Massachusetts Development Finance Agency is bringing a $298.2 million BB+ rated P3 student housing deal for Wentworth Institute. And the Florida Local Government Finance Commission has a $19.1 million non-rated private school deal for Tampa Bay Christian Academy.
Markets will slow next week ahead of the July 4 holiday. The bond markets will close at 2:00 p.m. Eastern time on Thursday, and all markets will be closed on Friday, July 3. We at HJ Sims will mark the holiday weekend by joining all Americans in celebrating our nation’s 250th birthday, our unique history, our trailblazers, innovators, dreamers and visionaries, our strong union, precious freedoms, indominable spirit, and majestic landscapes. God Bless America.