by Gayl Mileszko
The 63rd Secretary of the United States Treasury, William E. Simon, ran the government and municipal bond desks at Salomon Brothers before he was lured to Washington to join the Nixon Administration in the dark and turbulent economic days of the 1970s. He was something of a reporter’s dream, always ready with a quip on any number of topics. In one of his most widely quoted comments, he said “I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it.”
After more than a decade of unprecedented stimulus and market intervention as well as more than two years of either COVID or war-related supply chain disruptions, we are deeply immersed now in our loathing of inflation and fear its continuation as much if not more than recession. The June Consumer Price Index rose 9.1% from last year, accelerating more than expected to another new four-decade high. We are now experiencing the fastest pace of inflation since December 1981. And the New York Fed’s June Survey of Consumer Expectations published Monday showed that one quarter of respondents still expect prices in three years’ time to still be rising by more than 8%, an abhorrent prospect reflecting zero faith in the abilities of our monetary and fiscal policy specialists.
Higher Rates to Quell Inflation or Damage Economy?
Some central bank officials are saying that we can get inflation back to 2% “without a lot of protracted damage” to the economy while others express understated concern that large rate hikes could backfire and be “unsettling” to households and small businesses — as if we are not already extraordinarily damaged and unsettled by the pandemic, rising social unrest, strains on our power grid, drought conditions now affecting 40 states, high food, gas and housing prices, and shrinking savings and retirement accounts. The next policy committee meeting begins in two weeks on July 26, when rates are expected to increase at least another 75 basis points. Futures trading currently reflects a more than a 48% chance of a 100 basis point hike. Counterparts at the European Central Bank, however, are not acting as aggressively; they have not yet taken action to stop asset purchases or raise rates and now, for the first time since December 2002, the exchange rate between the euro and dollar are equal. As one investment strategist cautioned this morning, “Euro Not Gonna Believe This.”
Markets are engrossed in wagers on the impact that inflation had on all the published second quarter earnings starting this week as well as on recession. Are we in one? Will it come this year or next? How bad will it be? Will the Fed actually have to cut interest rates by the end of the year? Some see indications of recession in the upside-down government yields. Prices on the shorter 2-year Treasury have tumbled, sending yields up higher than those of the 10-year since July 5. The last time the gap was so wide was 15 years ago, before the Great Financial Crisis. Furthermore, in the wake of the ugly inflation report, at this writing the 2-year yield at 3.19% is equivalent to the 30-year yield, a correlation not seen since February of 2007. Some see telltale signs in the prices of copper, down 33% since the start of the year, and oil, down 21% in the last month. Consumer sentiment is at record lows and expectations are that we will have a second consecutive quarter of negative GDP, just one of many unofficial indicators of recession. But employers continue to add a healthy number of jobs, wage growth continues in several sectors and the 3.6% unemployment rate remains extremely low. The ways in which the data are calculated and all the mixed economic signals create uncertainty, the bane of all markets.
Tame Markets So Far in July
At this writing, most equity indices are slightly positive for the month but trending downward, and volatility as measured by the VIX is up nearly 5 percent. The Dow at 30,640 is off by 0.4% but the S&P 500 at 3,789 is up 0.1%, the Russell 2000 at 1,717 is 0.6% higher, and the Nasdaq at 11,126 has gained 0.9%. In other sectors, silver at $18.93 per ounce is down 7.2% and gold at $1,722 has fallen 4.8% while Bitcoin at $19,261 is up 0.8%.
In the bond markets, the 2-year Treasury is 24 basis points higher so far in July. It is 18 basis points above the 10-year yield at 3.01%, and on par with the 30-year yield. The Baa corporate bond yield at 5.72% about flat on the month. On the tax-exempt side, yields have fallen across the curve. The 2-year AAA general obligation bond benchmark yield at 1.74% has fallen 21 basis points. The 10-year at 2.44% has dropped 28 basis points. The 30-year at 2.98% is down 20 basis points.
Very Attractive Municipal Offerings and Yields
In the past two weeks, municipal bond buyers could find a nice selection of credits with yields in the range of 6.00% in sectors ranging from solid waste to health care. In the senior living sector, HJ Sims brought a $41.1 million BB+ rated financing through the New Hope Cultural Education Facilities Finance Corporation of Texas for the Army Retirement Residence Foundation in San Antonio structured with a 2057 term bond that priced with a 6.00% coupon to yield 6.10%. New Hope also sold $197.7 million of non-rated bonds for the new Outlook at Windhaven life plan community in Plano, pricing the maximum yield bonds in 2057 at par to yield 6.875%. The Connecticut Health and Educational Facilities Authority issued $17.8 million of non-rated revenue bonds for the LiveWell Alliance community in Southington that had a single maturity in 2026 priced at par to yield 5.71%.
Charter School Focus
In the charter school sector, the Public Finance Authority of Wisconsin issued $26.9 million of non-rated revenue bonds for Dreamhouse charter school in Kapolei, Hawaii due in 2025 and priced at par to yield 5.75%. The PFA also sold $24.1 million of non-rated revenue bonds for Discovery Charter School in Las Vegas that had a final maturity in 2062 priced at 6.75% to yield 6.80%, and a $4.4 million non-rated subordinate bond sale for Bradford Preparatory School that came with a 2055 term bond priced at par to yield 5.926%. The Florida Development Finance Corporation brought a $25 million non-rated financing for the Horizon Institute Contract School for Duval County students who are academically at risk; bonds due in 2057 were priced at par to yield 6.50%. The Philadelphia Authority for Industrial Development had a $19.3 million BB+ rated transaction for Green Woods Charter School that had a final maturity in 2057 priced with a coupon of 5.375% to yield 5.40%. The Louisiana Public Facilities Authority sold $16.5 million non-rated bonds for Jefferson Rise Charter School in Harvey structured with a 40-year maturity priced at 6.375% to yield 6.45%. And the East Point Business and Industrial Development Authority of Georgia issued $14.9 million of non-rated bonds for The Rise Preparatory Charter School that had a 40-year maturity priced at par to yield 5.25%.
HJ Sims Specializes in Higher Yielding Essential Public Purpose Bonds
This week’s municipal calendar is expected to total $11 billion but with very little in the way of high yield. July tends to be one of the best for issuers and buyers as issuance tends to be light while unusually heavy reinvestment cash in the form of coupon income, called and maturing bonds becomes available. Your HJ Sims representative stands ready to help you find the right bonds to meet your income goals and capital needs this month and throughout the second half of the year. We scour the new issue market as well as secondary market offerings throughout the day, screening credits and gauging relative value. We are closely following the drop in Muni/Treasury ratios as well as direction of mutual fund, ETF and money market flows. We note the trend of massive outflows from mutual bond funds holding a plethora of 2% and 3% coupons, all devastated by rising rates and prices that have plummeted. Since we specialize in underwriting and trading in individual higher yielding bonds issued for essential public purposes including higher education, health care, charter schools, and senior living investments, we invite your call and welcome a conversation on income-generating tax-exempt and taxable municipal bonds.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.