by Gayl Mileszko
Toccata and Fugue in D minor – Johann Sebastian Bach (listen)
Johann Sebastian Bach’s Toccata and Fugue in D minor is one of the most famous pieces of Baroque organ music ever written and its opening notes still send chills up the spines of Halloween party-goers. At this writing, however, no traders are humming these unforgettably eerie notes as we head into month-end and All Hallows’ Eve. October has been one of the most feared months on the financial calendar for more than a century. But this year, despite the worst pandemic in more than 100 years, inflation, political divides, and uncertainty on so many fronts, things are looking and sounding pretty good.
More than 30% of the S&P 500 and Dow companies are reporting third quarter earnings during this last trading week of October, including Apple, Microsoft, Alphabet, Facebook, Amazon, Boeing, Merck, McDonald’s Caterpillar and Coca Cola. If they follow on the heels of early filers, about 84% will beat estimates and boast of results that are 35% higher than last year. There have been a few notable exceptions, such as Intel and Snap, but investors have generally been relieved to see evidence of strong consumer demand and successful efforts on the part of management to maneuver around supply disruptions. The VIX volatility index has dropped 74% since the start of the pandemic as the Dow has gained 54%, the S&P 500 is up by 68%, the Russell 2000 by 91% and the Nasdaq by 93%. Stock indices hit new record highs last week, Tesla became the lowest revenue company to hit a trillion-dollar valuation, and the move into risk assets squeezed bond prices.
Bond Arpeggio
Treasury yields are reflecting the recent shift in sentiment. The 30-year yield rose 5 basis points in the past week to 2.08% and is up 4 basis points on the month. The 10-year yield is up 15 basis points in October, adding 3 basis points in the past week. Corporate bond yields have also increased; the 10-year Baa corporate bond benchmark has climbed 15 basis points so far this month, up 3 basis points in the last week. Top-rated municipal bond yields have recently risen 5 to 8 basis points across the curve: the 2-year stands at 0.23%, the 10-year at 1.24%, and the 30-year at 1.73%.
The Washington Symphony
The month comes to a close for investors on Friday with all eyes again on Washington where the pressure on Congress to produce infrastructure and reconciliation bills intensifies ahead of the President’s trip to Rome for the G20 summit. The CNN/Moody’s Back To Normal Index indicates that we are 94% back to pre-pandemic economic conditions but inflation is running very high at 5.4% and third quarter GDP being released on Thursday is estimated by the Atlanta Federal Reserve Bank to drop dramatically to 0.5% from 6.7% in June. The Federal Open Market Committee holds its penultimate meeting of the year next Tuesday and Wednesday and, despite sudden and significant drops in U.S. economic growth estimates, officials are expected to begin reducing the $120 billion-per-month purchase of Treasury and mortgage-backed securities by $15 billion. Fed funds futures contract prices indicate consensus market expectations for no 25 basis point rate increase until the meeting on June 15, 2022.
Tuned In Borrowers and Buyers: This Week in the Market
In the new issue market this week, we expect heavy investor demand. Investment grade corporate sales may exceed $15 billion, bringing the October total over $100 billion. The high yield corporate slate looks to include more than $4 billion of sales, lifting month-to-date volume over $30 billion. Last week marked the sixth week of $50 billion+ investment grade issuance in 2021; there was $51 billion of par led by the $21 billion nine-part AerCap Holdings deal, the second largest issue of the year which drew an astonishing $75 billion or orders. The Baa3 rated senior unsecured bonds due in 2041 with a 3.85% coupon priced at $99.765. There were also 11 high yield sales totaling $8.8 billion, including a $700 million financing for Summit Midstream with 8.50% bonds due in 2026 priced at $98.50.
HJ Sims Brings $398 Million NY Purchase Senior Learning CCRC Bonds
HJ Sims is in the market this week with the largest high yield deal on the $8.7 billion municipal bond calendar. We are the sole managing underwriter for the $398 million Purchase Senior Learning Community financing to construct 288 independent living, assisted living and memory care units with a set-aside for affordable apartments on leased land sited directly on the campus of SUNY Purchase College in New York. Non-rated tax-exempt and taxable bonds in $100,000 denominations are being issued through the Westchester County Local Development Corporation in five series. Please contact your HJ Sims representative for specific offering details exclusively available to qualified institutional buyers and accredited investors. Among other financings on the high yield slate are a $33.4 million non-rated financing for The Cabana at Jensen Dunes in Jensen Beach, Florida, a $232 million non-rated Provident Group Falcon Properties hotel project along with an $85 million non-rated USAF visitor’s center in Colorado Springs, a $50 million non-rated Legacy Traditional Schools Texas issue, and a $47.4 million BB rated refunding for the College of Saint Rose in Albany, New York.
HJ Sims Underwrites $264 Million Searstone CCRC Bonds
Last week, HJ Sims brought $264 million of Public Finance Authority financings for Searstone continuing care retirement community in Cary, North Carolina. The bonds were issued in several series with eight maturities. The maximum yield bonds for regular settlement were structured with a 4% coupon to yield 4.20%. The Series 2022A bonds settling in March of 2022 and due in 2049 were priced at 4.00% to yield 4.35%. The Series 2023A bonds settling in March of 2023 had a final maturity in 2052 and priced with a 5.00% coupon to yield 4.75%. It was the largest high yield deal of the week on the $13 billion calendar that included a $10.4 million financing for Beacon Hill at Eastgate in Grand Rapids with revenue and refunding bonds due in 2055 priced at 5.00% to yield 3.32%. In addition, there was a $71 million non-rated Utah MIDA Golf and Equestrian Center transaction came with a 2057 term bond priced at par to yield 4.625%. And LaGrange College in Georgia sold $38.5 million of non-rated revenue refunding and improvement bonds with a final maturity in 2052 that came with a 5% coupon yielding 5.125%. Muni secondary market trading at $10 billion was roughly average for the year, but bid-wanted activity set a new high for the past 12 months.
BCA Research: Maximum Overweight Muni Exposure
There is no doubt that the lengthy rally in munis pushed prices to dizzying highs, so a modest pullback and a third straight month of minor losses have been expected. Uncertainty over the politics affecting the Plan of Adjustment in the Puerto Rico bankruptcy case has introduced new volatility into that one sector of the high yield market, but credit and default concerns are not widespread given the massive level of stimulus and accommodative monetary policy. Muni/Treasury ratios are down from the record highs last year and record lows earlier this year, and look to be in the process of normalizing; the 10-year is 75.8% and the 30-year is 82.9%. Rates have been rising since August as the likelihood of major tax increases has faded and markets move toward acceptance of two Fed hikes next year. But conditions sustaining the low rate environment are still highly favorable for borrowers. Buyers have a lot of cash and are more willing to buy sub-5% coupons which now represent more than 70% of new issues this year. The long term demand/supply imbalance still prevails: on November 1, muni bondholders will receive $23.1 billion of principal and interest payments for reinvestment and the 30-day visible supply is only $13.2 billion. Flows into municipal bond mutual funds have been net positive for 33 weeks, averaging $1.9 billion a week. For investors, buy-to-sell ratios have been positive since last December; for institutions, the recent ratio was 1.96 and for individuals it was 1.23. One prominent firm, BCA Research, just increased its recommended exposure to long-maturity municipal bonds to a “maximum overweight.” For many of our valued clients, we could not agree more.
Please contact your HJ Sims representative to discuss how to remove the fugue from your portfolios.