HJ Sims Market Commentary: Numbers

by Gayl Mileszko

In the course of the day, thousands of numbers fly through our brains, some random, others not to be forgotten. We quickly sort and prioritize them as we check the time, count our steps, weigh ourselves, punch in a speed dial, celebrate a birthday, sort pocket change, tally votes, measure yards to a first down, or calculate yield to the call. It is hard to imagine life without numbers but there are reportedly some cultures that lack words for all but the one to three. These are anumeric people and are said to include the Munduruku, Piraha and Arawa indigenous people of Brazil, some of whom only distinguish between “small quantity” and “large quantity”. Of the 7,000 or so languages that exist today, ones without cardinal numbers are extremely rare. For those of us who spend most of our day immersed in analyzing financial data, we cannot help but wonder how folks manage to get along without being able to precisely identify and verbalize quantities. How do they build, borrow, grow? Can they live longer and happier if the count is limited to “one”, “two”, and “many”?

The Count

At this writing, December 7th, 2021 is the 80th anniversary of the attack on Pearl Harbor. There are only 24 days left in 2021, and only eight active trading days. At $29 trillion and counting, the U.S. debt limit will likely be reached in 2 weeks. More than 100 companies are waiting for the cargo on a 574-foot ship that has been floating off the coast of Los Angeles for 54 days to unload. Approximately 40,105 new cases of COVID-19 are being reported today. The Consumer Price Index for November will come out on Friday and it is expected to rise another 0.7% to 6.7%, the 18th straight monthly increase. With its 30-day grace period expired, Chinese property developer Evergrande has so far failed to pay $82.5 million of interest on its debt and may soon trigger a cross default on $19 billion of bonds.

Market Volatility

Financial markets have been volatile since the Thanksgiving announcement of the arrival of the Covid-19 variant dubbed Omicron and the Federal Reserve Chair’s testimony on inflation before Congress. The VIX Index has had a wild swing of 30% in the last seven days. While presently back in rally mode, investors are acutely attuned to any dark headline news. It could lurk in several places: more Russian troop movements near the Ukraine border, Chinese military aggression in the Taiwan Strait, North Korea’s plans on the eve of of Kim Jong Un’s 10th anniversary, or some new black swan out of left field.

Market Yields

The 2-year Treasury yield at 0.63% has risen 8 basis points since the start of the month, but the 10- and 30-year yields have strengthened by 2 basis points to 1.43% and 1.77%, respectively. Baa rated 10-year corporate bond yields have dropped 6 basis points to 3.15%. The S&P 500, Russell 2000 and gold spot prices are basically flat in these first few days of trading, but the Dow is up more than 2% while the Nasdaq and silver spot prices are down 2%. Oil prices have risen 4% to $69 and Bitcoin at $49,013 has lost 15%.

Municipal Bonds

Municipal bonds are the shining star of fixed income. While Treasury and mortgage-backed bond returns are down more than 1% this year, and investment grade corporate bond returns are in negative territory, and preferreds are +0.48%, investment grade munis are up 1.7% in 2021, hospital and transportation bonds have gained more than 3%, taxable munis are 3.6% higher, and high yield muni returns are +6.3%. The 2-year AAA general obligation benchmark yield at 0.24% has been steady since the end of October. The 10-year yield at 1.03% and the 30-year at 1.48% remain the bane of income investors and delight of borrowers. Last month, customer buys exceeded sales by $2 billion and flows into municipal bond mutual funds and ETFs were positive for the 39th consecutive week, evidencing unrelenting demand for tax-exempts as well as for taxable municipal bonds, which are attractive to foreign buyers attracted to quality and yield as well as crossover buyers looking to diversify. Borrowers are ecstatic: even as the year winds down, they have $21 billion of sales planned for the next four weeks. And that is still not enough to meet even reinvestment demand from municipal buyers. Principal payments in December are estimated at $38.6 billion and coupon payments will exceed $14.1 billion.

To offer perspective on recent higher yielding offerings, we note that the City of Valparaiso, Indiana brought a $19.6 million non-rated financing for Green Oaks of Valparaiso structured with 20-year term bonds priced at par to yield 5.375%. The Virgin Islands Water & Power Authority had a $35 million non-rated electric system bond anticipation note issue due in 2026 that priced at par to yield 6.75%. And charter school issuance continued unabated. The Illinois Finance Authority sold $38.7 million of charter school revenue social bonds for Art in Motion which included a 2056 maturity priced with a coupon of 5.00% to yield 4.75%. The Russell Westbrook Why Not? Academy in Los Angeles had a $35 million non-rated sale with 40-year term bonds priced at 4.00% to yield 3.63%. Blackfoot Charter Community Learning Center in Idaho borrowed $15.2 million in a non-rated financing that featured 2056 term bonds priced with a 5.50% coupon to yield 4.75%. The Wisconsin Public Finance Authority came to market with a $14.5 million non-rated financing for Ocean Academy in Lakewood, New Jersey that included a 35-year maturity priced at 5.00% to yield 3.69%. Legends Academy in Orlando had a $14.1 million deal with a similar maturity and coupon yielding 4.40%.

HJ Sims in the Market This Week

HJ Sims is in the market this week with a $134.3 million BBB rated financing for John Knox Village. Bonds are being issued through the city of Pompano Beach, Florida for an expansion project at the 48-year old, 65-acre community which has 644 independent living units, 64 assisted living units and a 194 unit skilled nursing facility. Please contact your HJ Sims representative for offering details. The new issue calendar also includes 3 social bond issues, 5 green bonds, 2 sustainability bonds, 2 forward settlement deals, another 5 charter school financings, 7 higher education transactions and a $43.6 million Missouri Health and Educational Facilities Authority refunding for BBB rated Lutheran Senior Services.
As you make your plans for year-end, please be sure to check in with your HJ Sims representative for timely investment, tax swap, and strategic planning guidance. We are here crunching all the numbers for you, your families, and your organizations today, throughout these special holidays, and the market cycles ahead.

For more information on the municipal bond market and current market conditions, please contact your HJ Sims representative.

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