Market Commentary: Mayday

by Gayl Mileszko


When repeated three times, the word “Mayday” is instantly recognized around the world as a life-threatening distress signal. It is used by pilots, sailors and others as a declaration of emergency and an urgent call for help.  A phonetic of the French m’aidez (“help me”), it was   coined by an English radioman who monitored air traffic between England and France in the early 1920s. Along with the SOS Morse code signal, it has been used internationally since 1927 whenever a situation presents a grave and imminent threat requiring immediate assistance.

Campus Protests and Crackdowns

No one ever wants to use or hear the word Mayday, yet it resounds all too often around the world. We finally heard it uttered quietly by the leadership at Columbia University on Tuesday night, 24 hours after agitators unaffiliated with the school led a takeover of an academic building. There had been two weeks of pro-Palestinian, pro-Hamas, anti-Israel protests disrupting classes and resident life, with escalating acts of violence, intimidation, and property destruction. The NYPD was finally called in to clear Hamilton Hall and the unlawful encampments. Within two hours, dozens were arrested, charged with burglary, criminal mischief, trespassing, and disorderly conduct. Police have also been called in at Tulane, Yale, and state universities in California, North Carolina, Florida, Texas, Connecticut, and Oregon. Nationwide more than 1,000 people have been arrested on more than 25 campuses. At UT-Austin, 79 people were arrested Monday; 45 had no ties to the university. 

Taking Back Control with Police Action and Concessions

Columbia University had become the poster child for schools gone amok but many other college presidents have been treating student protestors and the professional outside agitators infiltrating their property with kid gloves.  Administrators, alumni, faculty, parents, city and state officials, and Members of Congress have been strangely divided on how to respond. The if-it-bleeds-it-leads round-the-clock media coverage has arguably encouraged copycat riots on dozens of campuses and the right of free expression has been breached. To end the protest encampments, Brown University agreed to hold a vote later this year on divestment from Israel. Northwestern agreed to fund two Palestinian faculty for two years and provide full room and board for five Palestinian students. Ongoing occupations and encampments that continue may soon produce additional concessions or a “Mayday” call from college leaders fearful of videos showing the National Guard or police in riot gear with tear gas on their campus, or those petrified of facing the loss of alumni and federal funding as well as their tax-exempt status.  But most radicals, anarchists, and dark outside forces who have been involved in inciting malleable college students are likely to cry “Uncle” soon in the face of expulsion and prosecution.

Pressure from Inflation and Higher Yields

Wall Street recruits heavily from graduating classes at many of these schools and will use a whole new set of social media searches, arrest records, and interview questions to screen prospects. But for the most part, traders have been following the protests and riots from a distance.  The current obsession is with inflation, Fed policy, and Treasury yields. The 6-month government yield closed the month of April at 5.39% and the 2-year yield at 5.03%, both highs for the year; the 10-year benchmark closed at 4.67%, up 80 basis points since the start of the year, and the 30-year at 4.78%, 76 basis points higher in 2024. These increases reflect some loss of investor confidence and increased demand for a risk premium in what is viewed as the world’s safest investment. The higher yields – more than 44 basis points across these tenors in April alone — all impact mortgage rates, credit card and auto loan rates, and stock prices. The Dow lost 5% on the month, the S&P closed down 4.2%, and the Nasdaq fell 4.4%. The BAA corporate bond yield rose 42 basis points to close at 6.36%.

Municipal Market April Recap

Municipal bonds, which are sometimes uncorrelated to other assets given their tax-exempt status and technical factors such as insufficient supply, nevertheless suffered alongside their taxable counterparts in April. Yields have ended higher for seven straight weeks. Flows into municipal bond funds have been inconsistent: last week net inflows totaled $200 million, but in the previous week there were net outflows of $1.5 billion according to Lipper data. Flows into and out of conventional mutual bond funds and exchange traded funds reflect changing retail demand and can significantly impact institutional appetite for new issues, place pressure on the secondary market trading, and contribute to higher yields. The 2-year AAA general obligation benchmark at 3.22% finished April 25 basis points higher. The 10-year yield at 2.81% closed weaker by 30 basis point. And the 30-year benchmark at 3.90% increased 28 basis points. The 7-day SIFMA municipal swap index yield bounced from 3.64% to 4.35% and finally closed at 3.77% The S&P Dow Jones municipal bond index, a reflection of investment grade tax-exempt bond performance, had a negative 1.07% return in April and is down 1.16% in 2024; the high yield index fell 1.14% but is up 1.34% year-to-date.

HJ Sims and the High Yield Market

Municipal bond buyers saw 766 bond issues come to market in April, totaling $42.2 billion according to EMMA market statistics published by the Municipal Securities Rulemaking Board, up 9% from the March level and 22% higher than April 2023. But high yield buyers have been frustrated by the lack of supply. Data from Barclays cited by Bloomberg show that tax-exempt high yield muni bond issuance only totals $5.5 billion year-to-date. This includes a $925 million non-rated series of bonds issued last week through the Florida Development Finance Corporation for the Brightline Florida Passenger Rail project. These bonds, subject to the alternative minimum tax, were noncallable with a final maturity in 2032 priced with a coupon of 12% at discount to yield 12.616%. HJ Sims, a leading underwriter of higher yielding municipal bonds, also came to market last week with a $90 million BB rated deal for Westside Neighborhood school, a private K-8 school in Los Angeles with a 44-year history. We priced the 2064 term bonds issued through the California Municipal Finance Authority at par to yield 6.375%, and demand was extraordinarily strong.

Robust Demand for Senior Living and Need for More Construction

Last week, the National Investment Center for Seniors Housing and Care (NIC) released data documenting the strong nationwide demand for senior housing. In America, more older adults than ever before are residents of senior housing communities. Occupancy has increased for eleven consecutive quarters and the number of units occupied now exceeds the pre-pandemic levels of early 2020.  Unfortunately, we are not constructing enough supply to meet the need expected to be presented in the next 10 years from the 75-plus age demographic, set to increase by almost 11 million. If your organization has been contemplating a start-up, acquisition or expansion, reach out to your HJ Sims investment banker to discuss financing options.  Although rates have risen this year, they still remain at historic lows and investor demand is steady.

Market Movers These First Days of May

At this writing, we await the policy decision and statement from the Federal Open Market Committee, and nonfarm payroll data. Futures trading indicates that there is a high probability of only one rate cut this year, in September. We are at the midpoint of first quarter corporate earnings reports, with 77% of S&P 500 earnings per share coming in higher than estimates. Job openings came in 2% below surveys, the manufacturing sector and new orders showed slight contractions, the latest indications of a slowing economy. Investors are following developments Saudi Arabia, where our Secretary of State attends the World Economic Forum, and here in the mid-Atlantic where the deposits, assets and branches of Republic First Bank were taken over by Fulton Bank on Friday.      

May Day

This Wednesday, May 1, is known as May Day, a festival of ancient origin with a public holiday celebrated by many in Europe to mark the start of summer. May Day is also International Workers’ Day, a celebration of labor and the working classes and a national holiday in many European, South and Central American, and Asian locales. For American survivors of 9/11, May 1 will always be remembered as the end of a 10-year manhunt culminating in the death of mass murderer and arch-terrorist Osama bin Laden at the hands of U.S. Navy Seal Team Six. Many of our students were not yet born when our nation was attacked, and need to more closely study the global threat of terrorism. And, as we pause to commemorate the 79th anniversary of the liberation of Dachau concentration camp in southern Germany this Sunday, May 5, we all need to refresh our reading of world history so that we may never repeat its darkest days.