by Gayl Mileszko
Here we are in the final quarter of the year trying to figure out what we may need to do to help and protect our portfolios, investment goals, families and businesses, between now and year-end. There is a big “Wall of Worry” and less than 60 trading days left, some of which could be very volatile. Do we sell some holdings to take our gains while we can? There is a lot of liquidity right now in spite of all the uncertainty. Do we stick to our long-term plan but keep our options open by keeping a lot of extra cash on hand? Millions of Americans are doing this. There are huge sums sitting in money market funds right now; at September 20, the Securities and Exchange Commission reported $5.01 trillion of net assets. If we have capital needs, do we borrow more at current levels? Rates are very, very attractive, even if they have been rising of late. Do we buy at new higher rates to put our cash to work or just wait to see what happens? This are all great questions for you to ask your HJ Sims representative this week.
Contentious Issues
Things will be a lot clearer in the rear-view mirror but right now it is easy to be confused. Our federal legislators are working on a number of major bills and progress is nearly impossible to achieve under the constant scrutiny of cable news and social media. With all the leaks and divisions, it is nearly impossible to broker any back room deals. But the really big negotiations always come down to the wire and there are some really big ones in the works. Raising or suspending the debt limit to avoid a default on debt payments. Infrastructure. Fiscal Year 2022 government funding. The Administration’s social investment proposals. In the meantime, the Supreme Court has begun a new term and its rulings on contentious issues such as religion, guns, and abortion are sure to enrage half of our already divided nation. Polls show support for most every major institution eroding. Even the Federal Reserve, superhero of the financial crisis and pandemic, has finally come under scrutiny and fire for its ethics in stock trading. But they still have most of our markets and economy in their hands.
Market Indicators
It is said that democracy is a see-saw between complete chaos and tolerable confusion. For sure our system and our leaders have been tested greatly of late by the pandemic, broken supply chains, debt, new nuclear threats, decisions about our alliances and role in the global order, and even our own election procedures. Our free markets have been upended by unprecedented central bank intervention. A few dots on a quarterly graph can now either produce billions of profits or billions of market losses in an instant. Asset purchase and credit facility policies have artificially boosted markets but policy-suppressed rates have stymied savers and those reliant upon fixed incomes; bond buyers in search of yield have ventured far beyond normal risk parameters. Millions of investors unable to evaluate and monitor credits have entrusted more and more of their hard-earned money to funds, some actively managed but others just passive and automatically selected to match an index. Given the massive size of fund holdings, any sudden future wave of withdrawals would clearly be highly disruptive.
No wonder these days are bewildering for institutional and individual investors, nevermind policymakers. The pervasive uncertainty has introduced clear elements of fear. We see it reflected, for example, in the CNN Money Fear and Greed Index, which incorporates measurements of junk bond demand, market volatility, market momentum, put and call option volume, stock price breadth and safe haven demand. Although it is not readily apparent in day-to-day trading, right now, five of the indicators point to “extreme fear”.
Inflation
Much uncertainty if not outright fear is due to the inflation we are seeing in prices for everyday items as well as for those on our wish lists: things like appliances, cars and houses. The pandemic upended global supply chains, shuttering manufacturers and many other businesses which, when re-opened, have been unable to meet the surging demands for products like lumber and semiconductors. Shipping costs have quadrupled in many cases and there are not enough truckers, dockworkers and warehouse workers to unload and move contents. The Fed’s view is that inflation is temporary and investors have mostly agreed. But consumer sentiment is changing and bond yields have begun to reflect this.
In the past 11 trading sessions, the 10-year Treasury yield has risen 12% from 1.31% to 1.47% with intraday highs of 1.56%. The 30-year Treasury is up 11% from 1.84% to 2.04%, with an intraday high of 2.10%. The 10-year Baa corporate bond benchmark yield at 3.08% is 6% higher. And municipal bond yields have also edged up in recent weeks, in a selloff tracking that of governments. The 10-year AAA muni general obligation bond benchmark yield increased 17% or 16 basis points from 1.31% to 1.47%, and the 30-year has risen 11% from 1.84% to 2.04%. Over $54 billion of bonds changed hands last week, the second-largest weekly total of the year.
Higher Rates
Many investors look favorably upon the higher rates — even though, after inflation is factored in, most real investment grade yields are negative. Billions continue to flow into bond funds and ETF’s. In the last two weeks, muni funds have taken in more than $2.5 billion. High yield taxable bond funds have added $1.1 billion and taxable investment grade funds have increased by $5.86 billion. Returns in September were negative across the board with only high yield corporate bonds eking out a gain of 0.03%. The Dow, S&P and Nasdaq lost between 4.20% and 5.27%, while investment grade corporates lost 1.05%, Treasuries were down 1.20%, and investment grade munis fell 0.76%. On the year, high yield munis are up 5.23% and high yield corporates have returned 4.66%, while the Dow and Nasdaq are up over 13% and the S&P 500 up more than 17%.
New Issue Sales Last Week
In the new issue markets this past week, the high yield corporate bond slate saw more than $15 billion price led by the $7 billion deal to finance the acquisition of B2/B+ rated Medline. Investment grade corporate sales came in at $23.8 billion, boosted by a $4 billion A3/A- rated Analog Devices transaction that had $21 billion of orders.
The muni calendar topped $12.1 billion and was led by a $1.8 billion taxable tobacco settlement offering. The high yield market saw the Vermont Economic Development Authority bringing a $49.1 million non-rated taxable financing for Wake Robin that featured a 2045 maturity priced at 4.00% to yield 3.12%. The Mississippi Development Bank came with an $86.2 million BB rated refunding bonds for Magnolia Regional Health Center with a 2041 final maturity priced at 4.00% to yield 3.40%. New York’s Oneida County Local Development Corporation issued $69.2 million of BB+ rated revenue bonds for Mohawk Valley Health System structured with two 30-year AGM-insured term bonds priced at 3.00% to yield 2.92% and 4.00% to yield 2.41%. The city of Minneapolis had a $17.6 million BB-minus rated charter school lease financing for Hennepin Schools that went out to 2056 with a term bond priced at 4.00% to yield 3.25% Wisconsin’s Public Finance Authority brought three financings: a $63.1 million non-rated hotel and conference center revenue bond deal for The Foundation of the University of North Carolina at Charlotte that included a 2056 maturity priced with a coupon of 4.00% to yield 3.60%, a $25.6 million non-rated transaction for Signature Preparatory that had a 2056 maturity priced at 5.00% to yield 3.90%, and a $12.8 million non-rated financing for Highville Charter School that had a 30-year deal priced at par to yield 6.40%.
It’s a noisy and confusing time for the financial markets, but we are here to work with you, as we have with all our valued clients since 1935, through periods of uncertainty and inflation far worse than those prevailing. Please contact us, your HJ Sims representatives, today to discuss how we can help you to address your needs, concerns, and goals as we approach year end.
We encourage you to reach out to your HJ Sims representative for guidance in reviewing your portfolio.