By Gayl Mileszko
Market Commentary
Now You See It (Now You Don’t)
The White House, the Fed, the Congress, and the financial trade press are all exceptionally good at stagecraft, creating illusions, distractions, and cliffhangers. Have they learned from David Copperfield or can he learn from them? There is plenty of news deserving of top headlines this week but much of our focus this week was diverted to the Federal Reserve meeting. Major tariff agreements are being rolled out ahead of President Trump’s August 1 deadline, he just shortened his deadline for Vladimir Putin to reach a truce with Ukraine, and Thailand and Cambodia have a shaky peace after days of deadly border clashes. The Treasury has upped its quarterly borrowing estimate to $1 trillion, 150 corporations are reporting second quarter earnings, major stock indices are setting new records, asset managers are fielding questions on the new stablecoin bill, and Washington releases data on jobs, job openings, unemployment, inflation, GDP and consumer sentiment this week. But it is the press conference after the fifth interest rate meeting of the U.S. central bank that was must-see TV for the global audience.
Go Away
The drama involving the President and the Fed Chair, the pressure on Jay Powell to resign or lower rates, has taken worldwide attention away from massive trade deals, from Gaza, from Treasury auctions, even from accusations of presidential treason. The fate of the Rate Man will likely be a top story for months to come. Will Mr. Powell cave in, quit, fade away, or stand pat in his reliance on data from his system’s 24,000 employees through the last day of his term? Standing pat of course continues the tightening policy — and the economic data make a good case for this. But a lot can happen before September 17 and October 29 when the Federal Open Market Committee next meets: a government shutdown, global conflict escalations, trade deals gone bad, corporate earnings misses, toxic constitutional battles, bigger market rallies, or more consumer spending, to name a few. Debt and deficit issues have disappeared for the time being during the Congressional summer recess, but they are not going away. Larger rescission packages and another reconciliation bill are in the works, and the daily Trump Administration bombshells will not go away until we get close to the mid-term elections. We should be grateful for a small summer break.
Seeing is Believing
How will the financial markets react as we draw closer to the September 17 rate announcement and release of the new dot plot? We borrowers, lenders, and investors can only work with the data and conditions at hand. As usual, the U.S. Treasury market will tell the Fed what it should do. And they really need to listen this time. When the Fed cut rates by 100 basis points between last September and December, markets told the Fed that they made a mistake — that it was too early rather than too late. Too political. So, we saw the 2-year yield take a quick dip and the 3-month yield tumble. But we did not see yields fall across the curve. We saw the 10-year Treasury yield rise from 3.64% on September 17, one day ahead of the FOMC’s 50 basis point cut, and continue to rise again all the way to 4.79% on January 14. The 30-year yield at 3.95% remained on an upward path through May 21 when it peaked at 5.09%. The U.S. BBB corporate bond index yield jumped from 4.89% to 5.73% on January 13. The yields on AAA municipal general obligation bonds rose from 3.50% to 4.09% on January 14. Thirty-year mortgage rates increased from 6.20% in mid-September to peak at 7.04% on January 16.
Long Time No See
The average Federal Funds Effective Rate since 1955 is 4.65%, just above where it stands now at 4.33%. Prior to 2001, we had about 35 years where the rate generally exceeded 5%. But for much of the past 17 years, borrowers of all stripes became accustomed to rates below 1.00%. Fixed income investors were devastated, particularly those in the Eurozone where they had negative interest rates for more than a decade. Many traders, business owners, homeowners, and credit card holders were still in high school back in 2007 when rates were last in the 4.50% range. But in that zero-interest rate policy (ZIRP) environment, global debt — sovereign, corporate and household — skyrocketed to the point where it now totals approximately $324 trillion. Bond vigilantes may well be waiting in the wings but traders have not yet punished the vast majority of governments and corporations for excessive debt. These numbers are only growing, but we would love them vanish like magic so we can continue on our merry way.
Wait and See
Some borrowers have been overly cautious this year. There is an illusion, if not a firm belief, that rates will drop significantly. President Trump contributes to this in continuing to press for a reduction of 400 basis points in the Fed Funds rate. But there is much uncertainty about fiscal as well as monetary policy, never mind about the impact of such a dramatic cut on the economy. Markets have focused on the things at hand as the Trump Administration pulls them out of the proverbial hat: tariffs, foreign investments, government downsizing, deregulation, crypto, overseas conflicts, deportations, new NATO commitments. Fear of recession has all but disappeared in the middle of these Roaring ‘20s AI-driven dreams when the only thing on the horizon is a never-ending rally.
Seeing Stars
Retail bond buyers have been enticed by the taxable equivalent yields available in the municipal market this year while institutional demand has waxed and waned with fund flows, threats to federal tax-exemption, and credit quality concerns. The Federal Reserve’s latest report shows that households own 45% of the $4.2 trillion of municipal bond par outstanding while funds hold 25%, banks 12%, insurance companies 9%, and money market funds 3%. LSEG Lipper data tally $8.3 billion of inflows into conventional municipal bond funds and exchange traded funds so far this year, with a net of $4.6 billion directed into high yield funds and $2.1 billion into intermediate funds. Tax-exempt money market fund assets total $136 billion at present and are available to invest in longer, higher yielding bonds. Income investors are thrilled to clip 5% tax-exempt coupons and taxable muni investors are happy to see year-to-date returns in the range of 3.20%.
Oh Say Can You See
There certainly has not been a shortage of municipal supply from which to choose. Last Friday, Bloomberg Intelligence reported that year to date issuance totaled $327.3 billion, up about 20% over 2024 and more than the entire year of volume in 2014. About $306.5 billion is in the investment grade sector, $3.9 billion in high yield, and $16.7 billion non-rated. Weekly issuance has been heavy versus prior years, but most deals are being met with strong demand. In good part this has been due to the credit strength in the sector as well as to the nice net flow of reinvestment income that has come from $292 billion of maturing and called bonds as well as interest payments made to bondholders so far this year. We will see another $57.9 billion of principal and interest hit accounts in August, including $37.5 billion on Friday, August 1 and this should help to buoy the market during this popular, often quiet vacation month.
Must See: HJ Sims in the Market
Last week, HJ Sims underwrote two financings for growing charter schools in Florida and Utah. Our $202.2 million Ba1 rated transaction for BridgePrep Academy, a network of twenty K-12 schools in Florida, was structured with five term bonds and sold through the state’s Local Government Finance Commission. The final maturity in 2065 was priced at a discount with a 6.125% coupon to yield 6.35%. We also sold $13 million of AA rated bonds for Karl G. Maeser Preparatory Academy, a 7-12 charter school in Linden, Utah. The issue came through the state’s Charter School Finance Authority with the state’s credit enhancement. We priced the final maturity in 2060 with a coupon of 5.25% to yield 5.50%. This week, please reach out to your HJ Sims representative for more information on the $78.6 million California Public Finance Authority transaction we plan to price for Sunrise of Long Beach, a new 86-unit rental senior living community which is scheduled to open in April 2027.
Seeing Increased Charter School and Senior Living Issuance
Among other charter schools in the market last week was Imagine Schools at North Port in Florida which sold $73.4 million of non-rated bonds including a 40-year term priced at 6.75% to yield 6.875%; LIT Academy South Bay in Ruskin, Florida which had a $9.8 million non-rated financing structured with a 30-year maturity priced at par to yield 7.25%; and Wake Preparatory Academy in Wake Forest, North Carolina which brought a $108.9 million non-rated deal that had 35-year term bonds priced with a coupon of 6.50% to yield 6.68%. In the senior living sector last week, Oak Hammock at the University of Florida came with a $92 million BBB rated transaction that included a 2060 final maturity priced at 5.75% to yield 5.73%, and HumanGood California had a $67.2 million A rated deal featuring a 2045 term bond priced with a 5.25% coupon at a premium to yield 5.03%.
Seeing Eye to Eye
We see you and appreciate you and our relationship. We look forward to working with you in the days ahead to help review your portfolio, discuss your goals for year-end and beyond, refine your strategies, and identify investments that help to meet your goals. Please reach out to your HJ Sims representative just to check in during the next two weeks. Let us know where your vacation travels take you and what new thoughts you have to brainstorm with us so that we can continue to see eye to eye.