HJ Sims Market Commentary: Mega Trillions

by Gayl Mileszko

Good. Clean. Fun. Winners Happen. Believe in Something Bigger. Just Imagine! These are just some of the many official lottery mottos for games run by 45 states, the District of Columbia, Puerto Rico and the Virgin Islands along with consortia that organize larger multi-state games with larger jackpots such as Mega Millions and Powerball. Americans have been playing lotteries for centuries. Some of the earliest ones in the American colonies actually helped to fund the Revolutionary War. Legislatures later authorized them to finance schools, roads, bridges and other public finance infrastructure. But then came the inevitable scandals and many citizens came to denounce them on moral grounds. This, of course, led to underground or illegal lotteries. Eventually, the first modern government-run U.S. lottery was launched in Puerto Rico in 1934, followed by the New Hampshire Lottery in 1964. Since then, the largest prize on record here was awarded on January 13, 2016 when three ticketholders in California, Florida and Tennessee won $1.586 billion in a Powerball drawing.

Outcome of Income

There is a lot of scratching and quick-picking going on in the financial markets of late, but very few prizes in the form of returns have been realized in 2022. After years of boom, this year is a big bust for almost every investor seeking returns. Given all the gloomy forecasts for global recession starting as soon as this year, it is hard to be positive on any market sector, although income-seeking investors holding higher yielding bonds are still happily clipping coupons. We at HJ Sims always have recommendations for those looking for better ways to invest their hard-earned money — and with better odds for an outcome of income.

Next Fed Rate Drawing in 42 Days

The Federal Reserve has long been advertising another in a series of major rate hikes, and so one more happened on Wednesday. Speculation over the potential size of the increase had about as many global headlines as the funeral for the Queen of England, while other central bank actions have garnered nary a mention: Sweden’s Riksbank just raised rates by 100 bps while the Bank of England has been debating the highest rise in 33 years. Fed Chair Jay Powell addressed Wall Street and Main Street on Wednesday afternoon, delivering the central bank’s quarterly economic forecast and fielding questions about plans for the next meeting, 42 long days away.

No More Jackpots for Now

We are not yet into October and the start of a new federal government fiscal year, and 48 days away from mid-term elections, but no agreement has yet been reached on FY23 funding. The Fed has just ramped up the reduction of its balance sheet while investors have been spooked by prospects of increasingly higher interest rates affecting credit card and mortgage rates on top of record-high food and utility inflation and volatile conditions sparked by companies with global impact who are issuing dark forecasts. There is no more talk of the type of Fed-coddling that has characterized stock and bond markets for more than 14 years. For the time being, markets are being braced for volatility and pain until prices are somehow forced down. In the U.S., economists expect the so-called “terminal rate” — the high point in this hike cycle – to increase to about 4.75%. Nomura anticipates that this will come on or before the February meeting. But Fed futures trading at this writing is still showing the highest probability of rates reaching 4.50% in March until they begin reversing in July.

Very Few Winners in September

Stocks were mixed while bond yields rose ahead of the Fed announcement and volatility as measured by the VIX and MOVE Indices remained well above the 12-month average in what has been anything but an average year. As of the close on Monday, the Dow, S&P 500, Nasdaq and Russell 2000 are all down between 1.4% and 2.4% on the month. Oil prices have fallen $3.82 a barrel, gold is down 2.6% and Bitcoin prices have dropped more than 4 percent. Bond volatility is up more than 7% since the start of September and markets have bounced around like the numbered balls in a lotto drum. Many yields remain upside down. The 12-month Treasury at 4.00% is up from 3.48% in the last 12 trading days. It is higher than the 2-year at 3.93%, the 10-year at 3.49% and the 30-year at 3.51%. Municipals which have seen a negative price trend since August 5, have been hurt more on the long-end this week as yields have risen alongside governments. The 2-year AAA municipal general obligation yield at 2.54% is up 26 basis points. The 10-year at 2.90% is 31 basis points higher. The 30-year tax-exempt benchmark yield at 3.61% has increased 32 basis points and its ratio to the comparable Treasury is 102.8%. The 30-year “A” rated taxable municipal bond, which is state tax-exempt in some states, currently yields at 5.41%, more than the comparable corporate bond at 5.38%.

Market Backdrop

This week’s focus has turned from Puerto Rico, where power has been lost due to Hurricane Fiona, to Westminster Abbey, to Moscow, where a partial military mobilization has been declared and President Putin has renewed threats to use weapons of mass destruction. The war in Ukraine will be just one of the topics addressed by world leaders gathering at the 77th United Nations General Assembly in New York as the heads of the seven largest U.S. commercial banks are grilled by House and Senate banking committees. There will be seven Treasury auctions as well as releases of key data on home building, starts, permits, existing home sales, jobless claims, and leading indicators. Mutual fund flow data is released by ICI on Wednesday and Refinitiv Lipper on Thursday. Results of a key rail worker union vote are also expected to be reported on Thursday. The tax-exempt primary market slate will total less than $2 billion; in the high yield sector, there is a $17 million BBB+ Kentucky Economic Development Finance Authority sale for BBB+ rated Carmel Manor in Fort Thomas, guaranteed by the Carmelite System Obligated Group, and a California School Finance Authority issue for the non-rated Aspen Public Schools Obligated Group. With all the uncertainty and volatility in the market, the 30-day visible supply totals only $6.5 billion while redemptions and maturities of $20.2 billion are expected.

Charter School Bond Financings

In the high yield municipal market last week, there were six public charter schools. The Industrial Development Authority of La Paz County, Arizona sold $70.5 million of fixed rate revenue and refunding bonds for Pioneer Technology and Arts Academy in Colorado Springs, Colorado structured with five series including a 2052 term bond priced at par to yield 6.58%. They also had a $58.7 million non-rated adjustable rate series initially priced at par to yield 5.92%. Among other high yield deals was the $56.8 million BB rated Chester County Industrial Development Authority for Collegium Charter in Exton Pennsylvania which had a final maturity in 30 years priced at par to yield 6.00%. The City of Ramsey, Minnesota brought a revenue and refunding transaction for BB+ rated PACT Charter School with a 10-year maturity priced at 5.00% to yield 5.10%. The Louisiana Public Facilities Authority issued $14.3 million of non-rated bonds for Geo Prep Mid-City charter school in Baton Rouge including a 40-year term bond priced at 6.25% to yield 6.38%. Okaloosa County, Florida brought an $11 million non-rated 30-year deal for Destin High School priced at par to yield 6.00%. And Telra Institute in Charlotte, North Carolina, an elementary school for advanced learners, had a $3.44 million sale through Wisconsin’s conduit Public Finance Authority structured with 2031 term bonds priced at 7.70% to yield 8.665%.

Rolling Over into the Fourth Quarter

Fall officially begins on Thursday evening and we welcome the change of season as an opportunity to speak with you about your plans and needs for the final quarter of the year. Reach out to your HJ Sims representative today. At the Kansas State Lottery, they encourage you to “Dream Bigger” but we welcome the opportunity to work with you to make those big dreams a reality.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.f

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