By Gayl Mileszko
Market Commentary
Rising Above the Noise
The founding father of Total Quality Management and other innovative business philosophies, W. Edwards Deming, is perhaps best known for saying “In God we trust. All others must bring data.” Well, he would be shocked by the mountains of data circulating at our fingertips today. News and numbers circumnavigate the globe as fast as lightning, although not all of it is market moving. We are skeptical of some, but others should shake us to the core. Have we grown immune to shocks? Granted, we have certainly seen plenty this century and this decade: central banks making unprecedented interventions, war, recession, pandemic, terrorism, sovereign downgrades, staggering deficits, impeachment. But there has certainly been an extraordinary stream of disruptive headlines of late, and we can only shake our heads when we see record-setting rallies in the financial markets as investors wave them off in the firm belief that asset prices will continue to rise no matter how noisy or chaotic things become.
Munis: A Quiet Market Sector About to Get Noisy
The municipal bond market, in particular, has been remarkably stable and attractive of late amid some very shocking events and announcements. This is a market that has been slow to adapt to new technologies, an industry that has often been ineffective at lobbying, a class that is not known for innovation. Because it is mostly an over-the-counter market dominated by retail investors using telephones, some trading is slow and not suited to instant reporting and quick settlements. But public finance bankers and other inventors have nevertheless produced some very popular products over time: capital appreciation bonds, tender option bonds, exchange traded funds, money market funds, century bonds, variable rate demand obligations, entrance fee redemption bonds, auction rate securities, and public private partnership project bonds to name just a few. And now, more products, new processes, and flashing lights are about to hit the market, presenting a whole new range of opportunities and challenges to buyers, sellers, and all those who help to bring the two together.
Regulators See Major Structural Change and Risk Ahead
In a compliance outreach program hosted by market regulators last week, bankers and traders heard that the muni market is on the cusp of some major structural change. AI, tokenization, and digital settlement will no longer be technologies that only apply to the equity and commodity markets. Representatives from the Financial Industry Regulatory Authority, the Securities and Exchange Commission and the Municipal Securities Rulemaking Board shared thoughts on how these tools will help to boost efficiency and liquidity in a market that occupies a distinctive place in our financial system, one that connects investor capital to schools, hospitals, senior living facilities, student housing and much more. The regulators also underscored some of the risks accompanying the general loss of human oversight and advised much closer scrutiny on the part of broker dealers and supervisors when it comes to credit analysis, disclosure, and cybersecurity.
Demand Solid Amid Record High Issuance
Investors, foreign and domestic, flock not only to the haven of U.S. Treasuries in times of great uncertainty and crisis. The massive increase in tax-exempt and taxable muni issuance is attracting a lot of attention. The last two years have set records: the MSRB reports $533 billion of new issuance in 2024 and $610 billion in 2025. For a variety of reasons – infrastructure needs large and small, reductions in federal funding, call features, low relative rates, sound credits — this year may see another high. There is still a surplus of demand as investors delight in tax-exempt yields. At this writing, the 2-year AAA general obligation muni benchmark yield stands at 2.24%, the 10-year at 2.67% and the 30-year at 4.21%. Demand is not expected to be impacted by the new tax law taking effect this year. Tax refunds are said to be 30% to 50% larger than usual, but in the first 3 weeks of 2026, muni mutual funds and ETF’s have taken in a net of $3.58 billion. Redemptions always fuel an impetus to replace called and maturing bonds. More than $37 billion of principal and interest was paid out this month and $20 billion more will hit accounts on February 1. And muni index returns are outperforming; non-rated munis are up 0.75%, beating high yield corporates at +0.65% and Treasuries at +0.06%. We note that the appeal of munis right now is not just limited to U.S. investors. The Fed reports that the level of foreign investment in U.S. municipals has risen significantly in recent years; last year outstanding par held overseas exceeded $125 billion.
Deal Calendar
Last week was shortened by the Martin Luther King holiday but $12 billion new issues came to market, led by highly rated water and power bonds from New York City, Los Angeles and Massachusetts. Most of the world’s attention was focused on Davos and developments unfolding over Greenland. The high yield market was quiet, but that changes this week, the last trading week of January. The Saint Paul Housing and Redevelopment Authority plans a $9.8 million non-rated sale for the Metro Deaf School. The City of Burbank, Illinois has $20.3 million non-rated financing for the Intercultural Montessori language School. And the Miami Dade County Development Authority plans a $245.9 million BB+ rated student housing transaction for PRG CASA Properties at Florida International University. The slate is relatively small at under $5 billion, but that is common during the week when the Federal Open Market Committee meets.
The Central Bank Clamor
The Federal Reserve has been receiving an unusually heavy amount of ink. Whereas they once met quietly in smoke-filled rooms and did not release policy statements for weeks, the central bank now appears in the daily headlines and press conferences involve intense grillings. In the past, the general public might recognize the name of the chairman but would be hard pressed to name any other Fed members. Now, Fed officials are on the road giving speeches nearly every day and individual votes, no longer unanimous, are being followed. In his pressure campaign for lower rates, President Trump has been merciless in his attacks on Jay Powell, the very chairman he nominated in 2017. Then, there is Mr. Trump’s efforts to fire Governor Lisa Cook, and the grand jury subpoena served last week by the Department of Justice related to testimony on building cost overruns. There is considerable public interest in outcomes here. Prediction markets like Polymarket and Kalshi have taken in $667 million of bets on the timing and amount of rate cuts, $348 million on the President’s next nominee, and $12 million on the future of Lisa Cook.
Vote to Pause
The Fed met this week during another series of heavy news days and during a record-setting week for the markets. The next “dot plot” and set of quarterly economic projections will not be made until March, but Chair Powell fielded questions on inflation, labor, data dependency, the dollar, his plans, timelines for policy action, affordability, AI, job creation, and a host of topics circling around independence. He downplayed dissents from two voters and deferred comments on many matters, to no one’s surprise, but noted that inflation and uncertainty about the economic outlook remain somewhat elevated. For more than seven years, Powell has been a calming influence on the markets, but his job has by no means been easy. There have been 175 basis points of cuts since September 2024; CME Group futures trading at this writing reflects expectations for two more 25 basis point rate cuts this year – on June 17 and December 9. Before his term is up in May, Mr. Powell has only two more press conferences to run, two more updates to the world on the U.S. economy — one that John Mauldin terms “bipolar”, and Peter Atwater dubbed “K-shaped”. No doubt he looks forward to that final presser on April 29. For now, Mr. Powell and six other voting members – all appointed by the U.S. President and confirmed by the Senate in very political processes – will try to convince markets that their decisions are apolitical and independent of pressure from the executive, legislative, and judicial branches. Main Street’s interest always lies in bringing down 30-year fixed rate mortgage rates – currently at 6.09%, used auto loan rates in the range of 5.62% to 7.43%, and credit card interest rates, averaging 21% to 23%.
Clattery Market Conditions
The backdrop for this month’s vote to pause was complex. The dollar is at a 52-week low. Amazon is announcing another round of layoffs. Gold bullion prices have skyrocketed close to $5,300 an ounce, and silver prices are up over $110. The power grid has been sorely tested during unseasonably cold and snowy weather impacting more than 40 states. The House is out of session, and the Senate is debating how to handle the remaining federal spending bills without shutting down the government this weekend. Eyes around the globe are on Iran and the massive American “armada” heading there. The spotlight is off Venezuela and Cuba, but not for long. While U.S. trade tariff negotiations continue, India and the European Union announced a landmark free trade deal. More than 20% of the S&P 500 companies report earnings this week as the Index touched 7,000 for the first time. There are 10 Treasury auctions scheduled. After the last round of mixed data, new releases on housing, durable goods, factory orders, inventories, consumer confidence and December producer prices are out this week. The U.S. center of attention hovers over Minneapolis but will soon shift back to Washington for appropriations, “Trump accounts,” major Supreme Court rulings on tariffs and Lisa Cook, and the State of the Union address on February 24.
Time For a Quiet Conversation
With the first month of 2026 nearly behind us — and before we welcome the wonderful distractions of the Winter Olympics and Super Bowl LX — we invite you for a quiet chat with your HJ Sims representative to review your capital needs and update your investment and tax strategy for the year. The world is noisy and messy but that does not mean your finances, your life, or your business need to be. Let’s deal with it together and enjoy all that this year, and our nation celebrating its 250th anniversary, have to offer.