By Gayl Mileszko
Market Commentary
Losing Patience
We are now 159 days into this conflict with Iran. Those of us who expected a repeat of the 42-day Shock and Awe campaign during Operation Iraqi Freedom in 2003 are exhausted by the on-again-off-again peace talks and the undecidedly undiplomatic words exchanged in between. But these days, our attention span only runs about as long as one Netflix drama, if that. We want everything over and done with quickly, with or without AI, whether it involves war, DoorDash, school, workdays, marriage, childbirth, or elections. This means we live in a constant state of disappointment. Nothing happens fast enough. And then it happens too fast: summer ends, the holidays come and go, we graduate without having a job lined up, we buy SpaceX stock at the peak and watch our losses mount, we need to arrange memory care for someone we dearly love, we lose a cherished friend.
Parallel Universes
Given the magnitude of the expense of war, the depletion of our military supplies, the escalating cost of gasoline and fertilizer, the rising interest rates, the cold shoulders from our allies, it is quite stunning that the stock market is at an all-time high and climbing. It is as if parallel universes exist. One where we live paycheck to paycheck, pray for a son or daughter in the military, feel stuck in the homes we financed at 2.65% or 7.8%, and find ourselves holding a cardboard sign to protest the data center being proposed for our town. And the other where a hedge fund can lose $30 billion in one week and still attract investors, where a little chip earns you enough to afford a $100 million home without worrying about a mortgage or property tax, and where you can place tens of thousands of non-sports trades on prediction market platforms forecasting everything from wedding attendees to politician resignations and the timing of proof that aliens exist.
Starry Eyes
More than one month into the year’s third quarter, the financial markets are telling quite a story. About 70% of S&P 500 companies have reported second quarter results, with 85% exceeding analyst earnings expectations and more than 75% beating revenue forecasts. The wins are being driven to a great extent by big global companies like Alphabet and Chevron with significant overseas operations. The strong earnings seem to be outweighing pressure from rising interest rates. But bond markets are very concerned with inflation and trying to bully the Federal Reserve into raising rates. The 30-year long bond may have risen to its highest level since 2007, but the stock market has AI stars in its eyes once again and seems just fine with the status quo. Just days after the tech selloff caused the S&P to end with its first July decline since 2014, the index stands at an all-time high. That said, net retail buying of individual stocks has reportedly fallen to its lowest level since the pandemic era.
Never Bet Against America
At this writing, the dollar has weakened, in part due to uncertainty over whether the new tariffs will stick but also aggravated by U.S. plans to support the yen for the first time in three decades. The support is being routed through the euro, but some economists worry that Japan, the largest holder of U.S. debt at $1 trillion, may have to start selling Treasuries, and that could lead to a broader “Sell America” trade. New tariffs ranging from 10% to 12.5% were imposed last month just before the Trump Administration announced that it has refunded about $100 billion of the tariff revenue previously collected but deemed unauthorized in the Supreme Court’s February ruling. The amount of policy being overturned by the Trump Administration, then re-set by the courts during these past 19 months is truly mindboggling. Allies and enemies alike cannot help but wonder what comes next. But, as the world has come to see after 250 years, it is never wise to bet against America.
Ups and Downs
Volatility in U.S. stocks and bonds as measured by the MOVE Index and VIX Index peaked in late March and spiked a bit at the end of July. At this writing, bond volatility at 73 is now right at the average for the year, while the gauge for stocks is near the low for the year at 15. Oil at $75 a barrel is down 11% since the start of the month on expectations that a deal on Hormuz is near. Gold prices have risen 5% in August so far. Treasury yields have dropped 11 basis points: the 2-year stands at 4.18%, the 10-year at 4.61% and the 30-year at 5.16%. Muni benchmark yields have fallen as well but not quite as far. The 2-year AAA general obligation bond at 2.57% is down 6 basis points, the 10-year at 3.28% has dropped 9 basis points, and the 30-year at 4.48% is 3 basis points lower in August.
High Drama, High Yield
Municipal bonds have been resilient for most of the year and remain one of fixed income’s top performers. That is in spite of record high issuance, and the rise and fall of oil prices increasing and deflating our worries about inflation. We had – then lost- optimism over peace talks. Water and wastewater facilities in seven states were hacked. Heavy demand made quite a few valuations appear rich. Although it is still well below the 50-year average of 5.79%, the 10-year Treasury yield climbed throughout July and hit a 12-month high. Muni fund flows started strong but tapered off and high yield funds actually saw two consecutive months of outflows. Nevertheless, high yield muni indices are up 2.33% on the year, besting Treasuries, corporate, preferreds, mortgage-backed assets, gold, silver, natural gas, and Bitcoin.
Impatient for Higher Rates to Bring Down Inflation
Last month’s selloff took a toll on several muni sectors, most notably, taxable, and high-grade bonds. Triple-A munis are now flat on the year, the higher education index turned negative, and seven-to-twelve-year maturities have lost nearly 1%. This all happened despite the Federal Reserve holding rates steady for the fifth time. Few believed that the Federal Open Market Committee would raise rates at last week’s meeting, but the bond markets just up and did it anyway. The 2-year Treasury yield rose 18 basis points, the 10-year climbed 13 basis points, and the 30-year jumped 19 basis points. Muni benchmark yields followed along, although not as dramatically, rising about 6 basis points through month end. Investors enjoyed the higher yields and had a nice surprise when they looked at their portfolios on Monday and saw the $28 billion of principal and $9 billion of interest paid out on August 1. Another $23.1 billion will arrive later this month, and $150 billion sits in tax-exempt money market fund accounts, so there is lots of motivation to put money back to work at higher yields.
High Yield Deals Close out the Month of July
New issue volume totaled about $47 billion in July, bringing year-to-date totals to $344 billion. During the final week of trading, the Lancaster Port Authority in Ohio sold $39 million non-rated revenue bonds for Vivera of Fairfield, pricing the 20-year term bonds at par to yield 6.375%. Peapack Senior Living of New Jersey came to market with a $84.7 million non-rated financing structured with a 2061 maturity issued through the Public Finance Authority and priced with a coupon of 7.00% at discount to yield 7.10%. And the Florida Local Government Finance Commission brought a $4 million non-rated 11.5% bond anticipation note due in 2030 for Life Care ET of Jacksonville.
Hot Outlook for August
This week’s municipal calendar increase to $18 billion as borrowers and investors all look forward to a new month, one that is historically favorable and, usually, with 20% more volume and opportunity. Last month, underwriters made concessions when needed to clear bonds, including some large, high-grade issues in the primary market, but quite a few higher yielding issues were oversubscribed. We will see how this week’s deals are received. In the high yield space, the North Carolina Medical Care Commission has a $74 million non-rated sale planned for Presbyterian Homes of Charlotte/The Sharon at Southpark. The Louisiana Local Government Environmental Facilities and Community Development Authority has a $49.4 million BB+ rated financing for St. James Place of Baton Rouge. And the Utah Charter School Finance Authority is bringing a $19.2 million non-rated issue for Salt Lake Academy/Mana Academy Charter School. Please reach out to your HJ Sims representative to learn more about our hot outlook for August and how, for some borrowers and investors, patience may be a virtue, but impatience gets things done.