By Gayl Mileszko
Market Commentary
NIMBY
Throughout our 250-year history, we Americans have taken to protest everything from tea taxes to unequal pay to war. We cherish our freedoms to petition, assemble, and practice our faith and, so, from time to time, occasions arise when we need to take our constitutional rights out for some exercise. We once used pitchforks and muskets, but now we generally prefer making handmade cardboard signs, sending texts and emails, and posting hashtags on social media. We have become very good at marching, rallying, and organizing to present a show of force. Petitions to the White House and Congress. Campus events designed to attract media attention. Boycotts. Hollywood movies like Silkwood, and Norma Rae. Yes, it takes quite a bit to get our dander up, to disrupt our daily routines enough to join with our neighbors, often for the first time, to fend off a threat, a bad mistake or disaster, whether real or perceived, close to home.
45 years of Protests
The first use of the phrase “Not in My Backyard” surfaced in print back in 1979. The acronym has since been used in organized demonstrations across the nation. These protests have raised awareness and hackles, pitted homeowners against major employers, and neighbors against neighbors. Most have pressured government officials to take some form of action; some matters are eventually resolved via referenda at the polls while others unfortunately crescendo to the point of extreme violence. Hot button issues vary. Toxic chemical dumps. Homeless shelters. Halfway houses. Public housing. Pollution. Prisons. Police actions. Voting and civil rights. Abortion. Methadone clinics. Nuclear power plants. Radioactive waste disposal. Wind turbine farms. Huge solar arrays. Cell towers. Now: data centers.
Data Center Lollapalooza
Since we are in what is frequently described as the fourth industrial revolution, the need for capital from AI firms is huge and growing. The velocity of change is such that it is hard for any business to plan more than six weeks ahead. McKinsey estimates that $1.4 trillion a year for data center buildouts will be spent in the next four years. About a quarter would reportedly go to electrical infrastructure, 15% to buildings and mechanical systems and 60% to chips, networking, servers, and storage. There are already hundreds of these centers now in Virginia and hubs in Ohio, Illinois, and California. By several counts, there are more than 5,000 in operation around the country. But nowhere is the sheer size of the land, the energy required, the vastness of the potential as evident as it is in Terafab, the $16.8 billion million square foot advanced semiconductor megafactory project planned by Tesla and SpaceX for Grimes County, Texas. If and when complete, it will be larger than the Pentagon, larger than every other building in the world.
Flood of AI Debt
It is not uncommon for voters to vote down a referendum on a controversial local infrastructure project. There are also several cities and counties that have approved tax abatements and bond issues for hyperscale and AI-driven facilities, part of the largest utility buildout since the nuclear wave in the latter years of the last century. Much, much more debt is to come. Last month, the Clarksville City Council in Arkansas approved the issuance of up to $55 billion of industrial revenue bonds to support a data center under construction. In March, the Independence Missouri City Council okayed $150 billion of taxable IDRBs. Last year, the Dona Ana, New Mexico Board of County Commissioners authorized up to $165 billion. Some regulatory changes favorable to data center owners, including most recently one by the SEC and another being proposed for the IRS, may expedite the sale of even more asset-backed and tax-exempt securities. A veritable flood of debt is starting to hit the corporate, municipal, asset-backed, and private credit markets. It has become clear that the amount of investment needed to build facilities to house, store and manage computer systems, servers and other networking infrastructure going forward may well crowd out that which is needed for other more conventional and essential public purpose infrastructure. We are already starting to see construction talent and materials being redirected from healthcare, school, and other facilities. But until overbuilding or new technology brings matters to a tipping point, traditional corporate, municipal, and even U.S. Treasury debt will likely feel the capital shortage and require higher yields to compete for attention.
Bans and Moratoria
More than 140 artificial intelligence data center protests of late have been documented in 42 states this year. Polls reflect that 70% of us are opposed to them, at least the ones suddenly targeting our hometowns, our literal backyards. Many of us are understandably terrified about rapid AI developments, about the massive and mysterious projects on the drawing board or under construction, the possible, the very real potential impacts on our future employment, our electrical bills, our water supplies, our very existence. Elected officials are scrambling to respond to the plans, proposals and promises — the fears about lost jobs, pollution, potential cancer clusters. The National Conference of State Legislators reports that 15 states are considering bans. Some data show that there are more than 500 local bans. The New York State legislature passed a one-year moratorium; several other states have proposed various blocks: Delaware, Georgia, Michigan, Pennsylvania, South Carolina, Vermont, and Virginia. Not surprisingly, developers are scrambling to find new sites in very rural areas in other states with less potential opposition. We cannot wait until communities start channeling some of this fantastic momentum into advocating for more charter school buildings, senior living facilities, student housing, rural health care, affordable housing, workforce housing, and other community projects on their wish lists.
Out of the Clouds, Back down on the Street
In the midst of this rapidly changing, hardly knowable new world, the financial markets invest in all these futuristic opportunities while managing the all the demands for every day, present-and-true, live, here-among-us data, and assessments of the known unknowns: the latest Treasury auction results, the jobs reports, GDP, CPI, PPI, PCE, home sales, retail sales, factory activity, mortgage rates. Critical to investment decisions in trading sessions that will soon run 22 or 23 hours a day for at least 5 days a week are developments in the Middle East, oil prices, corporate earnings, weekly and quarterly economic data, fund flows, and key political indicators ahead of the mid-term elections only 82 days away. Investors still spend an inordinate, mostly wasted, amount of time playing Fed guessing games, an exercise rendered further fruitless by the new Charman’s decision to limit commentary and abstain from dot plot and forward guidance. Alas, we cannot help ourselves. And now prediction markets have become new sirens, attracting new money, impacting futures trading, and industry reporting.
Six Ways to Sunday
In this second week of August, the mid-point of the third quarter, fixed income has rallied and sold off, in a rather circular or yoyo kind of cycle impacted in part by fund flows, issuance volume, and Treasury moves, but also by the daily headlines on Iran, oil prices, economic data that can be interpreted six ways to Sunday, midterm election speculation on the next two years of fiscal policy, 2028 presidential election calls setting the stage for potential new regulatory policy, and of course calls on the next series of Fed rate decisions.. The usual crowd of market commentators see stretched valuations and warns of bubbles and crashes, while others see blue skies as far as the eye can see. We at HJ Sims work to help you to grab the best opportunities as we see them and reduce risks as best we can for those across all tolerance levels.
Point in Time View
The Dow and S&P 500 have hit all-time highs. The Bank of America Bull & Bear Indicator gauge has hit the most bullish level since 2002. The CNN Fear & Greed Index needle has moved into Greed territory. But not everyone is in “risk-on” mode. Money market fund assets are at an all-time high of $7.9 trillion. Investment grade taxable bonds have taken in $109.4 billion so far this year, with $66.3 billion in mutual funds and $43.1 billion in exchange traded funds, bringing combined assets under management to $2.4 trillion. And municipal bond funds have seen inflows of $67.8 billion with $32.4 billion in mutual funds and $35.3 billion of ETFs, increasing combined assets under management to $1.01 trillion. Some of these investments are hedges, but many are just executed because they are wise standalone investments, producing higher relative yields with less relative risk. Convertible bonds are producing among the best returns of the year at 19.01%, below crude oil at 36%, steel at 28%, and thermal coal at 21%, but besting equities: the Dow at +13.4%, the S&P 500 at +14%, and the Nasdaq at+15%. High yield munis top the rest of fixed income, with index returns 3% higher in 2026, outperforming high yield corporates at 2.37%, mortgage-backeds at 0.60%, and Treasuries which are reporting negative returns of 0.28%.
Municipal Field Day: Rare Opportunities
At this writing, the 2-year AAA general obligation benchmark yields stand at 2.53%, the 10-year at 3.24%, and the 30-year at 4.45%. The 2-year Treasury counterpart yields 4.18%, the 10-year at 4.67%, and the 30-year at 5.23%. This is a fantastic time for investors to work with your HJ Sims advisers to move cash into suitable, individual tax-exempt securities or separately managed muni bond accounts. It is indeed a rare moment when we see such attractive tax-exempt coupon income on top of tax-adjusted returns that are currently more like equities than anything else in fixed income land. Bloomberg Intelligence reports that five percent investment grade munis today trading at or below par are a phenomenon only seen six times in the last 20 years.
Last week
The municipal slate in the sessions ended August 7 totaled $20.4 billion, a 61-week high. Buyers scooped up almost every bond offered in the primary last week, and the daily trade count last Tuesday alone was the second highest total on record, highly unusual for high summer when so many of us are on vacation or ensconced in planning for the new school year. Muni ETF flows took in a 26th straight week of inflows, and that included an 18th straight week of net investment into high yield muni ETFs. In the senior living space, the Public Finance Authority privately placed $98.4 million of non-rated securities for Citadel Housing acquisitions, structured with a single 2061 term bond priced at par to yield 6.25%. The Louisiana Local Government Environmental Facilities and Community Development Authority sold $51.7 million of BB+ rated bonds for St James Place of Baton Rouge, structured with a 2045 term bond priced at 5.125% to yield 5.17%. The North Carolina Medical Care Commission issued $71.9 million of non-rated bonds for The Sharon at Southpark structured with a 2061 maturity priced at 5.625% to yield 5.56%. And, in the private school space, the McCandless Industrial Development Authority issued $28.4 million of A rated revenue bonds for Shady Side Academy in Pittsburgh, including a 2041 final maturity priced with a coupon of 5.25% to yield 4.49%.
This Week’s Municipal Calendar
The negotiated calendar totals about $12 billion this week this week includes $43.3 million BB+ rated financing for Academies of Math & Science coming through the Arkansas Development Finance Authority. The Utah Charter School Finance Authority has a $19.2 million non-rated sale for Mana Academy Charter School, and a $71.6 AA rated state-enhanced offering for Utah Charter Academies. The Palm Beach County Health Facilities Authority is in the market with a $376.4 million non-rated start-up financing for the Green Cay Life Plan Village in Boynton Beach. And the California Infrastructure and Economic Development Authority is bringing a $116.5 million AA-minus rated transaction for The Colburn School in Los Angeles.
What Comes Next?
There are about 34 days to go until the next Fed rate-set meeting, and no one in the markets, no one looking for a mortgage, a new credit card, or a loan of any kind, will fail to bet on and react to the decision. It is normally a gathering in which a quarterly dot plot and economic projections are released, but markets are braced for having less information from the Chair and less info overall as task forces are dedicated to important queries. Futures trading currently reflects a 62% probability of a 25 bp rate hike in September, increasing higher through the next two meetings. But, given the latest weak jobs report and mild inflation read, the pressure from the White House, and all the all incumbents up for re-election as well as candidates running on inflation-fighting platforms, nothing is really expected to change next month or in the month before the November elections unless the geopolitical world is turned on its axis or there are shocking economic data releases.
Sum- Sum- Summertime
August is typically a strong month for munis, and so far, so good. Muni benchmark yields are down six to ten basis points across the curve in August. Over the past two decades of shock and calm, we at HJ Sims have worked with savvy borrowers, wise investors, informed traders, and well-advised borrowers to prepare for any number of scenarios that lie ahead while securing long-term above average high yield income as well as appreciation reflected in returns. We tend to stick to long-term plans that take advantage of great opportunities as they arise, but we work with all strategies to secure the best sums — the best income, returns, and outcomes for all of our investing and banking clients. Reach out to your HJ Sims representative, as always for guidance — these weeks before Labor Day are most unusually active this year!