HJ Sims Market Commentary: Madcap Mid-Summer

by Gayl Mileszko

We are literally mid-summer and whether we are in the middle of our vacation or our workweek, we are never more than a few minutes away from a device blasting the latest headlines from every corner of the globe and even news from outer space. We have become enmeshed in tragedies from Kabul to Haiti, consumed by wildfires and drought in the western U.S., shaken by rising prices at the gas pumps and in the grocery stores, alarmed by the sight of our local community hospitals full with patients, and increasingly dependent on central bank and federal fiscal largesse for stability. We now recognize that the scourge of COVID and its variants will remain with us for a long time. But we cope with optimism, busy hands, and full hearts. In America, our minds fill with practical solutions and we go to work.

Mad Keen on Change

Many of us have returned to schools and offices while some continue to work and study from home. Yes, millions of us are still unemployed or underemployed while millions of jobs are unfilled, but the numbers are coming down as the economy evolves. Young and old have been affected, but unequally. Those in the middle — and women in particular — writes The New Yorker, are experiencing a “COVID midlife crisis” and redefining life priorities, changing careers, moving. The retired and semi-retired among us have now had 18 months to surveil the landscape and adjust long-held plans. With health and safety foremost in mind, many are parsing statistics on the spread of the COVID variants and have now come to see life plan communities as the new safe havens and best solutions for them. Independent living communities, with the highest vaccination rates among residents and staff, crisis-tested and honed protocols for dining, visitation and care, and stepped-up inspections by regulators, look particularly appealing to active seniors. Given the escalating values of family homes and retirement and investment accounts, this is a great time for many to do on-line research, on-site scouting, cash out and move in to a top-rated local or destination continuing care retirement community with activities, services, security and amenities designed like resorts.

It’s Not Mad Money It’s Your Money

At the current rate of inflation, investors had to resort to higher risk investments to obtain the income and returns needed to finance not only retirement but college, home purchase and even day-to-day needs. There has been a mad rush into stocks and high yield bonds. New offerings are oversubscribed multiple times. Proceeds from U.S. initial public offerings now exceed $89 billion and are expected to surpass the full-year record of $97 billion raised in 2000 during the dot-com boom. Municipal bond issuance is likely to exceed $500 billion, beating last year’s $484 billion high. SIFMA reports that corporate bond sales through the end of July totaled $1.2 trillion, mortgage and asset-backed issuance was at $2.71 trillion, exceeded only by U.S. Treasuries at $2.78 trillion. We call to mind the famous William Shakespeare quote from ‘Midsummer Night’s Dream’: “Lord, what fools these mortals be.” But central banks have created a world awash in cash; and households and corporations are looking for every opportunity to put it to work. Be sure to contact your HJ Sims representative to help you to avoid the madness and find bonds best suited to meet your needs and risk tolerance.

Municipal Sales Last Week: Mad Rush to Market

Needless to say, the dizzying level of issuance has dramatically elevated prices for investors but provided spectacular rates for borrowers. Last week, HJ Sims was a co-manager on the $26.8 million non-rated bond issue for WindsorMeade in Williamsburg, Virginia. Bonds were issued through the Economic Development Authority of St. James City County and the 2047 term maturity priced with a 4.00% coupon to yield 3.03%. Among other high yield financings, the Arizona Industrial Development Authority sold $21.7 million of Ba1 rated bonds for Doral Academy of Northern Nevada including a 2056 maturity that had a 4.00% coupon priced to yield 2.64%. The Detroit Service Learning Academy sold $15.3 million of BB-minus rated refunding bonds due in 2041 priced with a 4.00% coupon to yield 3.25%. California’s Community Improvement Authority brought a $230 million non-rated essential housing social bond issue that came with a 2047 term bond priced at par to yield 2.45%. The Florida Development Finance Corporation had a $17.1 million non-rated deal for Creative Inspiration Journey School of St. Cloud with non-rated bonds due in 2056 priced at 5.00% to yield 3.90%. And the Public Finance Authority issued $16.5 million of non-rated bonds due in 30 years for SLF Ripple Ranch Recovery Center in Spring Branch, Texas; the tax-exempt bonds sold with a 5.25% coupon priced at a discount to yield 5.75%.

High Yield Corporate Issuance

Higher yielding corporate bond sales this year now total $344.4 billion. Last week, 15 deals came to market with coupons ranging from 4.00% to 11.00% due between 2026 and 2032. Royal Caribbean Cruises issued $1 billion of 5.50% B-rated bonds due in 2026. Carvana sold $750 million of 4.875% Caa2/CCC+ rated bonds maturing in 2029. Seaworld Parks and Entertainment sold $725 million of 8-year notes rated Caa1/B-minus at 5.25%. This week’s slate is expected to total about $3 billion.

Market Returns Year-to-Date

Stock and bond markets look to be on track for another year-long rally. With all signals from the Federal Reserve pointing to a continuation of easing monetary policy. At the close on Friday, the S&P 500 was up 20%, the Dow 17% and the Nasdaq 15%. High yield municipal bonds have returned 6.05%, convertible bonds are up 5.32%, high yield corporate bonds +3.74%, leveraged loans +3.57%, taxable muni bonds +2.49%, preferreds +2.35%, investment grade municipal bonds +1.80%. On the commodity side, thermal coal is up 90%, steel +87%, natural gas +52%, oil +41%, aluminum +31%, and copper +23%. Federal stimulus and the rebounding economy have filled corporate and household wallets with wads of cash. Mutual funds and exchange traded funds have been inundated with new money. So far this year, $130.9 billion has flowed into investment grade corporate funds, $77.1 billion into municipal bond funds, and $11.2 billion into high yield corporate funds.

Current Market Conditions and Municipal Calendar

At this writing, the Dow is at 35,343, the S&P 500 stands at 4,448, the Nasdaq at 14,656 and the Russell 2000 at 2,177. Oil prices are at $66.59, gold at $1,782, Bitcoin at $45,670. The 2-year Treasury yields 0.21%, the 10-year is at 1.26% and the 30-year at 1.91%. The 10-year Baa rated corporate bond yields 2.94%. The 2-year municipal AAA general obligation bond benchmark yield stands at 0.08%, the 10-year at 0.88% and the 30-year at 1.50%. Volatility as measured by the Chicago Board Options is at 17.72, down from the March 2020 high of 82.69. Markets await the release of the latest minutes from the July Federal Open Market Committee meeting, a slew of corporate earnings, economic data reflecting housing starts, building permits, and jobless claims. The municipal new issue slate looks to exceed $10 billion this week and HJ Sims is serving as co-manager on a $120.4 million BBB rated financing for Lifespace Communities. The bonds are being issued through the Iowa Finance Authority and Palm Beach County Health Facilities Authority to renovate continuing care retirement communities in Florida, Illinois, Kansas and Minnesota.

Please contact your HJ Sims representative for more information, and about today’s higher yielding taxable and tax-exempt offerings.

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