HJ Sims Market Commentary: Hikes

by Gayl Mileszko

Harvey “Little Man” Sutton of Lynchburg, Virginia celebrated his birthday last August without cake or ice cream, gifts or friends. He had been maskless for nearly 7 months, spending all his waking hours in the great outdoors, sleeping in a small tent with his parents who homeschooled and entertained him for 10 hours a day while they walked and walked and walked, an average of 10 miles a day. For his little legs, it was the equivalent of climbing up and down Mount Everest sixteen times. By the time he turned five, Harvey had spent a remarkable 11% of his life on the Appalachian Trail, hiking more than 2,190 miles through 14 states in 209 days, starting with his first steps up on Georgia’s Springer Mountain in January of 2021, and ending with the final celebratory steps in August atop Mount Katahdin. Harvey is adorable and may soon be the subject of a new feature film. But, for now, he has been immersed in another grand adventure:  kindergarten, where he has had to adjust to sitting still for several hours a day.

Harvey has set one type of record on the iconic trail known simply as “AT” while M.J. “Nimblewill Nomad” Eberhard, at age 83, recently set another. Since the Appalachian National Scenic Trail was established in 1937, there have been all kinds of firsts beginning with Earl Shaffer, a World War II veteran in 1948, and including Emma “Grandma” Gatewood, who completed three whole trips in 1955. This year, more than 3 million people will hike at least part of the trail, and a cadre of more than six thousand volunteers will help to maintain it.

Federal Open Market Committee

To maintain or hike is just one of the many questions also facing the Federal Open Market Committee (“FOMC”), a very special subgroup of U.S. central bank whose statements and actions drive the global markets. There are normally 12 members who vote on monetary policy: seven permanent Federal Reserve Board members, the New York Fed President, and a rotation of four regional Fed presidents. At this time, there are only nine voters – at least until the U.S. Senate confirms new nominees. And there is a lot of turnover expected going forward as mandatory retirements loom and new vacancies arise.

It seems highly unlikely that a full complement of voters will be confirmed before the next FOMC meeting in mid-March. So, the key folks handling our nation’s 40-year high inflation, skewed record low unemployment, debt-sodden financial condition, and impossibly low bank saver rates are Fed Chair Jay Powell, Vice Chair and New York Fed President John Williams, Governor Miki Bowman, Governor Lael Brainard, St. Louis Fed Bank President James Bullard, Kansas City Fed President Esther George, Philadelphia Fed President Patrick Harker, Cleveland Fed President Loretta Mester, and Governor Christopher Waller.

The Outlook on Interest Rates

The federal funds rate is the interest rate at which banks and credit unions lend reserve balances to other depository institutions overnight on an uncollateralized basis. It is one of the most important benchmarks in the world and has been hovering in the range of 0% since March 15, 2020. In fact – with a small window of exception – the rate has effectively been zero since November 2008. Recently, Fed officials have begun the most transparent signaling of higher rates on record both with public statements and release of “dot plot” projections. Investors have accepted these signals at face value and added in their own twists as a result of crazy high inflation, supply chain disruptions and fiscal policy stalemates. They have taken the prediction markets to dizzying places with forecasts of very aggressive hiking. Goldman Sachs, Deutsche Bank, Bank of America, JP Morgan, Barclays and HSBC and Bank of America see between five and seven Fed rate increases this year. Current prices of option contracts on fed funds futures infer the market’s expectations for the rate to rise to the range of 1.75%-2.00% by the end of December, after a series of increases that start in March and continue on May 4, June 15, July 27, September 21, and December 14. Although emergency meetings can always be called, there are no regularly scheduled Fed meetings in February, April, August or October.

This Week In the Markets

Financial markets have been twitchy since the start of the year and will remain so for the next month at least, given all the Fed signals on top of all so much other uncertainty that must be factored in. This includes inflation plaguing every sector of our economy, hitting Main Street in the gut with housing, food, gasoline, heating oil hardest; the lack of action on US government funding, the last simple extension of which runs out on Friday; the growing federal deficit as well as the rising interest cost on our debt.  We can all cite the various other factors:  the Russian buildup on Ukraine’s border and military exercises in Belarus; missile threats from North Korea; air threats to Taiwan; election integrity concerns heating up ahead of mid-term elections in November; lack of Fed insight on future asset sales; impending Supreme Court rulings on several key issues, and of course COVID-related cases and treatments. 

We are now a month and a half into the new year, heading into our second national federal holiday on Monday.  The VIX “Fear” index is up 65% while the Dow is down 5%, the S&P 500 has fallen more than 7%, the Russell 2000 is off 10% and the Nasdaq is down nearly 12% . So far in 2022, oil prices are up 27%, gold and silver prices are 2% higher, and Bitcoin prices (while up in mid-February) are still down more than 9% on the year.  Market analysts are focused on mutual fund and exchange traded fund flows to indicate how individual investors are positioning.  

Bond Yields

At this writing, the key 10-year Treasury yield stands at 1.98%, up 20 basis points on the month and 47 bps so far in 2022. The 2-year government yield at 1.57% is up 41 bps in February and 84 bps year-to-date. The long bond yield is 2.28%, up 18 bps so far this month and 38 bps since the start of the year.  The Baa 10-year corporate bond benchmark yield is 3.93%, up 28 bps this month and 73 bps so far this year.

Tax-Exempt Issues in the Municipal Market

On the tax-exempt side, the 2-year AAA general obligation bond benchmark is 1.05%, up from 0.91% since the start of the month and 0.24% when the year began. The 10-year muni at 1.65% is up 15 bps on the month and 62 bps so far this year. The 30-year MMD yield at 2.03% is 12 basis points higher in February and up 54bps so far in 2022. Last week, those investors looking for yield did not find much, while borrowers celebrated great rates. Kendal at Lexington had an $189 million BBB-minus rate forward refunding through Virginia’s Lexington Industrial Development Authority with 2048 term bonds priced at 4.00% to yield 3.64%.

Many Industry Firsts

Two years before the Appalachian Trail became official, HJ Sims started on a path that has also seen many industry firsts. We have thrived in markets that have varied from calm to panicked, and our seasoned professionals are here to assist individual and institutional clients, small and large amid an environment of hikes as well as reversals. We are happily known as industry innovators and, along the way, have celebrated the successes of hundreds of our clients, partners, colleagues, and employees, all of whom have become family to us. Many will gather at our next amazing conference, less than two weeks from this writing, in Orlando, Florida at the Loews Portofino Bay Hotel from March 1 to March 3. Our banking, underwriting, analytic, trading, sales, and operations team will bring together many of those interested in senior living and charter schools with our best agenda ever. We were virtual last year but look forward to convening again live with you in a warm, fantastic venue, with plenty of time for recreation and networking, It is not too late to register, so please reach out to your HJ Sims representative for all the details.

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