By Gayl Mileszko
Market Commentary
Open Sesame
A poor woodcutter in Persia long ago happened upon a group of thugs entering the mouth of a cave that had been sealed by a huge rock. The rock moved and the mouth opened when the magic words “open sesame” was said. A vast treasure awaited those with access. The story of Ali Baba and the Forty Thieves is one of most famous in the One Thousand- and One-Night’s collection, and makes us dream of all the doors that we would like to open like magic.
Treasure
It is hard to know what exactly constitutes a treasure these days when debt and the market cap of Nvidia are measured in the trillions, one old Hermes handbag sells for $10 million at auction, and somewhere around twenty thousand different cryptocurrencies are stored with passwords in digital wallets. As far as the government goes, the Congress is said to control the purse strings. But it sure does not seem that way today. The Trump Administration has taken an aggressive approach to reallocating and rescinding select funding as well as imposing various new levels of tariffs. Customs duties in June amounted to $27 billion alone in the month of June. This money is deposited with the U.S. Treasury, managed by Scott Bessent who has done a very good job of calming traders on Wall Street who have been stunned by the pace and extent of policy change during the first six months of executive orders and Congressional action.
The Treasury Secretary and the Fed Chair
The turmoil has spilled over to the Federal Reserve, home to a treasure of $6.6 trillion. The open White House chatter about ousting the current Chair, Jay Powell, has been very unsettling to the financial markets. His removal, or even his resignation, would cause volatility to spike. The dollar and U.S. Treasuries could be hit very hard, raising rates instead of lowering them. Major players view an independent Fed as extremely important, if not essential. But the two top likely successors to Powell are calling for regime change. Secretary Bessent has tried to quell talk of a forced resignation or firing for cause, i.e. possibly misleading Congress over the details of his $2.5 billion D.C. building renovation project. He has suggested that Powell depart when his term as chair expires next May, even though he is eligible to remain on the Board as a governor until 2028. Mr. Powell has been under extreme pressure from the President to lower rates from 4.25% to 1%. He no doubt looks forward to saying “close sesame” to the Fed boardroom door sooner rather than later.
Rock and a Hard Place
The Fed next meets on July 30 and 31. There is almost no chance that they will lower the Fed target rate at that meeting, given the latest inflation and employment data. The June unemployment rate fell to 4.1%. The June inflation indicator, CPI, increased 0.3% from May and notched up to 2.7% year over year, in line with expectations. However, Wall Street still expects to see an acceleration in inflation due to the new tariffs in place and the many still being negotiated. If so, there is the possibility that the Fed could RAISE rates instead of cutting 25 basis points in September and December as futures trading currently projects.
Moving Parts
There are quite a few market movers this week. In addition to CPI, PPI, the Beige Book, retail sales, housing starts and consumer sentiment. It is “Crypto Week” in Washington, with as many as three bills aimed at establishing a regulatory framework and prohibiting the Fed from issuing a central bank digital currency. Investors are still digesting the provisions in the tax reform bill, gauging elevated asset prices, and following the latest tariff proposals. Bank earnings are out, we just issued a 50-day deadline to Russia to reach a peace deal with Ukraine or face steep sanctions, and we agreed to send weapons to our European allies to transfer to Kyiv.
Yields Higher
Inflation and tariff talk as well as debt and deficit concerns raised anew by the reconciliation bill and questions over the Fed’s independence have caused Treasury yields to move higher this month. The 10- and 30-year Treasury auctions had strong reception last week. But the 2-year at 3.87% is up 10 basis points in July. The 10-year at 4.48% is 24 basis points higher. The 30-year yield is now over 5.00%, up 26 basis points. Municipals have outperformed Treasuries in July but long yields have also risen. The 2-year AAA general obligation benchmark yield at 2.46% has dropped 12 basis points. The 10-year yield at 3.26% is flat. The 30-year at 4.62% has risen 8 basis points. Tax-exempt borrowers have not hesitated to come to market at these levels, despite all the goings on in the nation’s capital. This week’s economic data, the start of second quarter corporate earnings season, the six Treasury auctions and four Fed speaker narratives are not expected to deter sales. Year-to-date municipal issuance is over $300 billion, more than the entire calendar year in 2014. And momentum from strong technicals support underwriting. Municipal bond fund flows as reported by LSEG Lipper took in a net of $432 million last week as investors worked to put $40.5 billion of July 1 principal and interest payments to work. This week will see another $9.9 billion hitting accounts, available for reinvestment.
HJ Sims in the Market
Last week’s $15 billon municipal slate included our $72.5 million non-rated financing for Legacy Midtown Park in Dallas which came through the New Hope Cultural Education Facilities Finance Corporation. We structured the deal with three term bonds, including a 2056 maturity priced with a 7.125% coupon to yield 7.15%. This week’s $10 billion calendar features our $94.8 million Ba1 rated transaction for 6 of 38 Renaissance Charter Schools managed by Charter Schools USA. Bonds are being issued through the Florida Development Finance Corporation. Contact your HJ Sims representative for more information.
An Opening for You
Mid-summer is a great time to reach out to your HJ Sims representative. Our doors and phone lines are open to discuss your goals. There are only 167 days and nights remaining in 2025. We look forward to brainstorming and providing the right solutions to meet your needs and take care of all that you treasure.