HJ Sims Market Commentary: Peaks

by Gayl Mileszko

The past two and a half years of life in a pandemic has brought three and four generations of people, family and friends, neighbors and colleagues together in ways not seen in a century. Some living and working arrangements have been significantly altered for years to come. We have learned a lot about each other, our strengths and limits, and we have figured out what does or can work best to keep our families and communities working, studying, and supporting each other as we live, strive to protect our freedoms and pursue our happiness. It would not surprise those who preceded us a century ago and thrived in intergenerational arrangements, but we have again come to appreciate the unique abilities that we contribute to our households at virtually every age and stage.

Better, Stronger, Faster, Happier

We may not need academic confirmation, but cognitive science researchers looking at how intelligence changes as we age find that learning a second language is easiest when we are about 7 years old. Our overall brain processing power and detail memory peaks at around age 18. Our ability to learn unfamiliar names is said to be best at age 22. Strength peaks at age 25. Facial recognition abilities maximize around age 32. At about age 43, our ability to focus reaches a high point. At age 48, we become the best at identifying the emotions of others. When we turn 50, we are at our best at doing basic arithmetic and learning and understanding new information. We have our peak vocabulary skills around age 67. Life satisfaction is said to be highest at age 69. After 70, we are most comfortable with the way we look. Psychological well-being reaches a high at about 82. “At almost any given age,” MIT department of brain and cognitive sciences researcher Joshua Hartshorne reports, “most of us are getting better at some things and worse at others”.

For Better or Worse

Markets are looking to the U.S. central bank to tell us whether things are getting better or worse for all of us. Its decision on rates today, its outlook, degree of consensus on policy, and indication of intentions will quickly shape market sentiment for the remainder of the summer. The policy committee will not meet again for two months, so markets have plenty of time to digest the careful words of the Chairman and set their next direction. For now, the expectation, as reflected in current levels as well as in futures trading, is for another 75 basis point rate increase with a statement affirming Fed commitment to bring down inflation with all the tools at its disposal and without creating conditions that bring about a recession. Whether we can even define recession at this stage, agree that we are already in one or headed into one, claim to be able to limit its depth and duration, or admit to being powerless over the cycle, whether we forecast that we are at peak inflation or yet to face it, the discourse keeps political and industry spinmasters fully engaged.

Negative Yields Finally Disappear After Seven Years

The last time target rates were in the range of 2.25% to 2.50% was December of 2018. The last time the European Central Bank had rates in that range it was December of 2008 and they have declined ever since, falling into negative territory since June of 2014. Just today, rates were raised by a half point into positive territory for the first time in more than seven years. The global supply of negative yielding debt last week dropped to $2.4 trillion, well below the $18.4 trillion high mark in December 2020. At this writing, all 2-year sovereign yields are positive except for Japan (-0.08%) and Switzerland (-0.11%).

Upside Down Yields Common Ahead of Recessions

With near unanimous expectations for further Fed tightening this week, most all the pressure has been on the short end of the Treasury curve. The 2-year yield has risen from 2.95% at the start of July to 3.05% at this writing. The 30-year which currently stands at 3.01% has fallen 17 basis points in July however and the 10-year yield is down 22 basis points to 2.79%. The closely watched spread between the 2-year and 10-year has narrowed from 6 basis points to negative 22 basis points, an upside-down situation, or inversion, that has persisted for 16 trading sessions. Inverted yields curves have preceded each of the last six recessions.

Equity and Commodity Markets

In the equity markets, many traders have been brushing off the inflation-related impacts leading to some weak second quarter earnings reports. As 175 S&P 500 companies roll out their reports, major stock indices are currently all positive during the last trading week of the month. Volatility as measured by the VIX is down by more than 12% in July and the Nasdaq is up 6.8% to 11,782. The Russell 2000 at 1,817 has gained 6.4%. The S&P 500 at 3,966 is 4.8% higher. The Dow at 31,990 is up 3.9%. Among commodities, oil prices have fallen 8.6% since the start of the month to $96.70. Gold has not proven to be the traditional haven from inflation – at least as of yet; prices per ounce have dropped more than 5% to $1,718 an ounce. Silver prices at $18.44 are down 9.6%. Bitcoin prices are currently up 14.8%.

Tax-Exempts Gain in Appeal

Tax-exempt yields have been falling throughout the month. The 2-year AAA municipal general obligation benchmark yield at 1.70% is down 25 basis points. The 10-year at 2.39% has decreased by 33 basis points. The 30-year at 2.99% is 19 basis points lower. The spread between the 2-year and 10-year has narrowed from 77 basis points to 69 basis points over 15 trading sessions. As the odds of recession increase, fixed income – and tax-exempt in particular – become more attractive to investors, elevating demand and prices, while depressing yields.

Calendars in Focus

This week’s economic calendar is dominated by the Fed announcement today, GDP and jobless claims on Thursday, and personal income and consumption on Friday. There are nine Treasury auctions. The municipal bond calendar is the lightest of the year at $2 billion and the 30-day visible supply totals less than $9 billion. Bloomberg estimates the net negative supply of new municipal bonds at $17.2 billion just as we anticipate another summer peak in principal and interest payouts on August 1: $35.3 billion. Investors looking for coupon income have been adding to high yield municipal bond funds for three straight weeks and our traders are seeing renewed buyer demand for individual bonds in higher yielding essential public service sectors including charter schools and senior living.

Peeking at Some Higher Yields

In the new issue market last week, the Florida Development Finance Corporation sold $22.6 million of non-rated charter school revenue bonds for the new Idea Florida Jacksonville IV school; bonds maturing in seven years were priced at par to yield 5.25%. The City of South St. Paul, Minnesota brought a $9.6 million non-rated senior housing and healthcare revenue financing for Walker Methodist River Heights, structured with 30-year term bonds priced at a discount with a coupon of 5.0% to yield 5.20%. The South Carolina Jobs-Economic Development Authority had a $3.5 million adjustable rate draw down bond issue for Presbyterian Communities featuring 2050 term bonds initially priced at par to yield 5.59%. The interest of muni buyers this week will be piqued by a $29.1 million non-rated refunding for Confluence Academy and an $11 million non-rated Pennsylvania STEAM Academy charter school financing. We welcome your contact with an HJ Sims representative for more information on higher yielding opportunities.

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