by Gayl Mileszko
The peacock is a resplendent bird of the pheasant family inhabiting open lowland forests and desert areas in India, Southeast Asia and central Africa. They come in three species but each flock by day in groups known as prides, and roost high in trees at night. Strictly speaking, all peacocks are male, famous for their large, intricate and iridescent tail feather plumage. They are among only a small handful of animals sporting the color blue, very rare in nature, in trains which fan out during courtship as well as in the face of predators such as wildcats. The neutral-colored female of the species is known as a peahen. Her chicks have all of their feathers when they emerge from their eggs and are able to fly roughly one week after hatching. The average lifespan of the male and female peafowl extends to 20 years, ten years longer in captivity.
March Madness Inspiration
The 20-year-old Peacocks of Saint Peter’s University and Jersey City captured the hearts of the nation last week. In one of the greatest underdog tales in college sports, the team in blue fought off the No. 2 Kentucky Wild Cats, No. 3 Purdue and No. 7 Murray State, to become the first No.15 seed to reach the NCAA Elite Eight. Their Cinderella story ended on Sunday with a loss to the University of North Carolina Tarheels but not without stoking the pride of a small, private Jesuit school, a city originally called Pavonia or “Land of the Peacock” and the entire Jersey Blue State. The plucky squad in full strut and plumage earned millions of new fans around the country over the course of eleven days, and left us all flying high with their inspiring, against-all-odds, can-do spirit.
Pressures on All Underdogs
Much of the world is supporting another underdog in the battle for Ukraine. Most unfortunately, it is not mere sport but involves life and death for scores of people in and out of uniform. Poland, Taiwan and many others from distant corners around the world watch the damage and destruction in dissipating disbelief, now thirty-five days after the Russian invasion began. The ramifications in terms of lives lost, food and energy supplies disrupted, price surges, military buildups and leadership in a world full of biological, chemical and nuclear weapons may vex us for many years. And all of this is happening alongside the pandemic battles still underway. At this writing, China has begun locking down most of Shanghai, its largest city, and mass testing its 26 million residents. Public health officials around the globe brace again for the possibility of a new, more highly transmissible, vaccine-resistant strain.
Market Strains and Volatility
Strains have been felt across the financial markets all year. The uncertainties produced by the war in Ukraine together with 40-year high inflation produced by fiscal, monetary and trade policies, supply shortages, consumer demand, war, COVID and a host of other factors have made stock, bond, money, commodity, foreign exchange, derivatives and spot markets extremely volatile. The well-telegraphed plan to raise the U.S. federal funds rate alone has sent some investors flocking to risk assets and others to roost in safe havens while things shake out. We are seeing anomalies in IPO and debt issuance, yield curves, bids and offers that may or may not have historical parallels.
Returns Mostly Down Year-to-Date Across Asset Classes
Since January, oil is up 40%, silver prices have increased nearly 8% and Bitcoin prices have inched one percent higher. But stock market indices have fallen between four and eight percent, and bond prices have plummeted. With the exception of commodities such as nickel and coal, returns are negative across the board. Real yields and returns, after inflation, are deeply negative for most assets. However, with only two trading days left in the month at this writing, stock indices are all positive in March: the S&P 500 and Nasdaq are up more than 4 percent. Oil at $105 a barrel has increased by more than 10% and Bitcoin prices have increased by nearly 15%. Bond markets, by contrast, continue to lose their strut.
Benchmark U.S. Treasury Bonds
The 2-year Treasury yield at 2.32% has risen 89 basis points this month and 159 basis points in 2022. The 10-year yield at 2.45% is up 63 basis points in March and 94 basis points since January. The 30-year yield at 2.53% is 37 basis points higher month-to-date and 63 basis points on the year. The difference, or spread, between the 2-year and 10-year yield has narrowed to 13 basis points, down from 39 basis points at the start of the month and 78 basis points since January.
Treasury Market Anomalies
This week, five-year Treasury yields climbed nine basis points to as high as 2.63% this week, rising above those on 7-year, 10-year and even 30-year bonds. They have since dropped to 2.49% but still remain above the longer-dated bond yields. These swings and anomalies, wherein yields on shorter maturities are higher than those on much longer bond maturities, are often pictured as “inversions” of the yield curve. They occur from time-to-time but, over extended periods, can be an indicator of a coming recession. History, which may or may not apply in times as unprecedented as these, show that the key inversions involve the seemingly irrational difference which produces higher yields in the 2-year versus the 10-year yields and the spread between the 3-month and 10- year yields.
Stuttering Bond Markets
Some analysts describe bond markets as stuttering. Tell that to investment grade corporations that have flooded the market with $200+ billion of new sales – perhaps one of the top five months on record. In an effort to bolster earnings reports and counter the growth inhibitors of inflation and supply chain disruptions, companies have authorized $319 billion in share buybacks this year, a record level that is almost 20% more than the amount in the comparable period last year. We also have a $10-$12 billion municipal calendar full of borrowers from across the nation happy to take advantage of rates that are still at historic relative lows while meeting with good demand.
Municipal Bond Market
On the municipal bond side, the percentage increase in yields has nonetheless astonished most analysts and strategists. This has led to a 10-week stream of mutual bond fund outflows and the cycle The 2-year yield at 1.77% has jumped 71 basis points in March and 153 basis points since the start of the year. The 10-year at 2.22% is up 64 basis points this month and 119 basis points in 2022; Municipal Market Advisors reports that this is the biggest increase for the first quarter of any of the last 40 years. The 30-year at 2.57% is 59 basis points higher since the start of the month and 108 basis points higher so far this year. The difference between the 2-year yield and the 10-year yield is still wider, or larger, than Treasuries. But the spread has narrowed from 79 basis points at the end of 2021 to 45 basis points. Issuance so far this month is only $83 billion. The number of recent bids-wanted in competition at $1.5 billion is reported to be nearly double the three-year average and raises as many liquidity concerns as it does buying opportunities. Offering par has climbed significantly, so investors need to be credit-driven diligence hawks. Downward pressure on prices will likely remain steady until funds flows reverse and turn positive but our traders find a number of credits that appear unreasonably oversold.
Recent Muni Bond Sales
Last week, HJ Sims was in the market with a $47.9 million Franklin County, Ohio refinancing for First Village Obligated Group which we structured with a 30-year term bond priced at par to yield 5.00%. The Lancaster County Hospital Authority in Pennsylvania brought a $12.4 million BB+ rated issue for Saint Anne’s Retirement Community that featured 2033 term bonds priced with a coupon of 5.00% to yield 4.14%. The California School Finance Authority sold $10.8 million of BB rated revenue bonds for River Springs Charter School that had a final maturity in 2061 that priced at 5.00% to yield 4.75%. The City of Henderson, Kentucky issued $320 million of bonds subject to the alternative minimum tax for a Pratt Paper project that had a 30-year non-rated term bond priced at par to yield 4.70%. And there were quite a number of non-rated special tax, public improvement, sales tax and multi-family transactions.
Whether it is a blessing or a curse, we live in interesting times. The Biden Administration just delivered a $5.8 trillion budget request that includes a 20% minimum tax rate on households worth more than $100 million, an increase of the corporate tax rate to 28%, and some new restrictions that appear to impact stock buybacks and other tax and financial policies. Some if not all of these proposals are unlikely to proceed but the annual debate begins and we cannot be certain where it ends; some may slightly favor the muni market. There is also talk of a potential 50-basis-point interest-rate increase at the next Federal Open Market Committee meeting in early May. This size of hike is a real possibility and, no matter how well signaled, will likely lead to more volatility as markets adjust. The consensus goal is for the economy to achieve a “soft landing” by bringing inflation down while holding unemployment steady. Historians write that the Fed was able to do this in 1965, 1984 and 1994 without precipitating recession, and many Americans are certainly rooting for our central bank to be successful this time.
Countdown to Tax Day
The month of March and first quarter of 2022 comes to an end on Thursday. In the Peacock spirit, we celebrate all investors working in a full-court press to meet and achieve their investment goals with the help of their HJ Sims brokers and advisers. Decisions you make now to buy, sell or hold, will impact your 2022 tax returns. Note that there are only ten more trading days until April 18 when tax filings are due and we all get a painfully stark reminder of how much we each pay for our federal and state policies and programs. We learn once again the value of holding tax-exempt income-producing securities and, in many cases, taxable municipal bonds that can bolster retirement accounts. This is just a great time to reach out to your HJ Sims representative for a review of the roster of your holdings and a March “Saneness” strategy review.
For more information on our municipal offerings or questions about current market conditions, please contact your HJ Sims representative