By Gayl Mileszko
Market Commentary
Secret Spaces
The sculptor of Mount Rushmore, John Gutzon de la Mothe Borglum, oversaw a team of carvers, drillers, powdermen and call boys who worked in harsh conditions over a 14-year period in the Black Hills of South Dakota to create one masterpiece of a national memorial. Presidents Calvin Coolidge and Franklin Roosevelt continued to fund the colossal project via matching funds, unemployment relief, and direct aid throughout the Great Depression. But, back when this used to happen, Congress pulled its purse strings and halted funding. It happened just after a bill was introduced to add the face of Susan B. Anthony to the monument. Borglum had proposed a compromise but Congress nixed funding for everything but the finishing of the four presidential faces. The final construction cost of the memorial was $989,992, a pittance compared to the most recent national memorial dedicated to Dwight D. Eisenhower in 2020, which took 20 years and cost $145 million. Remaining, left unfinished, on the mountain in Keystone, South Dakota known as Six Grandfathers by the Lakota Sioux, is a 70-foot long “secret” tunnel behind Abraham Lincoln’s head that would have led to a Hall of Records inside the mountain with busts of famous Americans like Anthony.
Hidden Lincoln Room Floorboard
President George Washington laid the cornerstone of the U.S. Capitol building in 1793 and a lot happened between then and when construction was completed in 1826, not the least of which involved British troops setting fire to the building, nearly destroying it. The House of Representatives met in a space south of the Rotunda from 1807 to 1857. It was repurposed in 1864 as Statuary Hall with a gallery of two statues of prominent citizens from each state. A onetime mailroom off the Hall is now known as The Lincoln Room, named for one-term Congressman Abraham Lincoln who would sit by the fire and read letters. A hidden floorboard in that room leads to a staircase and passageways dating back to the original construction. The tunnels have since been sealed off but the secret exit route has become a popular tourist draw.
Lincoln Escape Route Tunnel Plans
Soon after the Battle of Fort Sumter in 1861, General Winfield Scott drew plans to evacuate President Lincoln to vaults nested into stone under the U.S. Treasury Building in the event that the White House came under attack. Construction on a 731-foot zig zag tunnel did not actually begin until December 1941 but efforts to protect secrecy were unsuccessful. A number of other tunnels and bunkers exist in the Treasury Building as well as the East and West wings of the White House. And there are rumors of tunnels connecting the White House to the Capitol, Camp David and the Pentagon, but these are unsubstantiated.
Top Secret Talks Today
Quite a few secret meetings have been taking place here and around the world in these past few months. There are negotiations on tariffs and on reconciliation bill provisions, talks to arrange a Russia-Ukraine ceasefire, detailed discussions on Israeli plans to attack Iran’s nuclear infrastructure, arrangements to realign U.S. forces in the Middle East region, and options for the direct involvement of the U.S. military including use of the GBU-57 warhead, our bunker-busting bomb, on Fordo, the uranium enrichment plant south of Tehran. No doubt there has also been extensive dialogue between China, Russia, and Iran about the “Great Satan” and their number one joint enemy, us. There is open talk of killing Iran’s supreme leader and calls for unconditional surrender. Iran unnervingly threatens a great surprise, “one that the world will remember for centuries.” We are preparing for cyberattacks and attacks on key domestic infrastructure. The truth is that we just don’t know where all this goes. We may be underestimating the risks posed by Russian President Vladimir Putin, Chinese President Xi Jinping, and Iranian Ayatollah Ali Khamenei. But Wall Street is behaving as if all will be OK, that tax reforms and other fiscal policies will largely support business and economic growth, that there will be two rate cuts this year, that Iran is sincere in its desire to de-escalate hostilities, and that the Russian and Iranian conflicts will be contained and eventually resolved without significant civilian casualties or further impact on global markets. Wishful thinking or not, we all hope for these good outcomes.
Deadly Deadlines
The U.S. set a 60-day window for completing nuclear talks with Iran back on April 12, and that 60-day window expired on June 12. On the 61st day, Israel began to launch strikes, deemed to be preventative, to neutralize what it deemed to be an existential and imminent threat from usable nuclear weapons. Bond market volatility as measured by the MOVE Index jumped from 88 to 97 and currently stands at 93, well below the tariff-related high of the year at 139 but off the low of 83 one month after the presidential inauguration. The VIX fear index moved from 18 to 21 and currently stands at 20, just below the average for the year and down from its high of 52 in early April. At this writing, the S&P 500 is off by 1.1%, the Dow is down 1.9% from June 12, and oil prices are 10% higher. Gold prices are pretty flat and Bitcoin prices dropped 3%. Treasuries have weakened. The 2-year yield at 3.94% is up 4 basis points since the strikes on Iran began. The 10-year at 4.39% is 4 basis points higher, and the 30-year at 4.88% has risen 4 basis points.
Mild Municipal Bond Reaction
Municipal bond yields have also risen in the past 5 trading sessions since the air strikes began, but tax-exempt performance has bettered U.S governments. The 2-year benchmark AAA general obligation bond yield at 2.63% has fallen 5 basis points. The 10-year yield at 3.30% is 2 basis points lower, and the 30-year at 4.54% is just 1 basis point higher. Only 34 basis points separate the 30-year tax-exempt muni yield and the 30-year Treasury.
HJ Sims in the Market
This week, HJ Sims brought a $40.6 million non-rated Arizona Industrial Development Authority financing for San Tan Charter School, a K-12 charter school in Gilbert, adding a third campus. We structured the deal with 4 term bonds and priced the final 40-year maturity with a 6.875% coupon to yield 7.00%. Among other financings in the market since June 12, the Maricopa County Industrial Development Authority sold $45.95 million of BBB-minus rate bonds for Legacy Traditional Schools, pricing the 2060 final maturity with a coupon of 5.50% to yield 5.64%. The Florida Local Government Finance Commission issued $25 million of non-rated bonds for Orlando Senior Health Network structured with a 2060 term bond priced at 6.00% to yield 6.09%. The Public Finance Authority brought a $140.9 million non-rated financing for Absolute Awakenings that included a 2061 final maturity priced at 7.25% to yield 7.29%. The Washington Housing Finance Commission had a $16.5 million non-rated transaction for Bayview Manor II featuring a 2060 maturity priced at 6.00% to yield 6.04%. And in the student housing sector, the Maryland Economic Development Corporation sold $52.9 million of BBB-minus rated bonds for Morgan State university’s Harper Tubman House project that had a 40-year final maturity priced at 5.75% to yield 5.32%.
No Secret: Munis are Hot
Municipal bond issuers have been extraordinarily active during this year-long period of uncertainty. On top of geopolitical scares and in addition to the DOGE-recommended federal program cuts, regulatory changes, and rapid-fire executive orders affecting a range of operations, there have been direct threats to tax-exemption, the private activity bonds financing senior living communities and charter schools, elite colleges, sports stadia, and hospitals, among others. Muni issuance is running 15-20% above last year, and these past several weeks have seen more than $20 billion of volume. Fund flows have been positive for 7 straight weeks, muni exchange traded funds are raking in cash, secondary market offering levels are at unusual highs as buyers look to make room for higher yielding bonds. Tax-exempt municipal money market funds just took in $139 billion last week. Bondholders are flush with cash and expecting more: CreditSights estimates that principal and interest payments between June 1 and August 31 are expected to exceed $159 billion. Secondary trade counts are up 10% this month. Last Wednesday saw $9.5 billion of new customer buys, the biggest single day in 30 months. This week’s $6.5 billion calendar is relatively quiet as a result of the Fed meeting and Thursday’s Juneteenth holiday, but is slated to include as many as 5 charter schools and 4 senior living deals.
Market Movers: An Open Secret
Major market movers this week, clear to all observers following major and social media obviously headline developments in Israel/Iran, especially any impacts on the Straits of Hormuz, and oil prices. We should expect volatile conditions to continue as events play out on the world stage. U.S. markets will also be particularly sensitive to any delays in the debt ceiling increase/suspension, the FY25 rescission package(s), FY26 government funding, weak Treasury auctions, and terrorist threats to elected officials. Traders are digesting the latest draft version of H.R.1, the One Big Beautiful Bill, as it is being presented to Senators, with new Medicaid, SALT, business tax, tax credits for children, low-income housing, and clean energy, university endowment and foundation tax, and other provisions. This week, investors also now scrutinize the latest quarterly summary of economic projections and dot plot from the Federal Open Market Committee, given how mixed our central bankers are about the direction of rates through 2027. We are also parsing comments made by Chairman Powell during Wednesday’s afternoon press conference, some in response to President Trump’s press for 100 to 200 basis points of cuts in order to save some $600 billion in federal interest payments. Prior to 1967, the Fed only reported summaries of decisions as part of its annual report. After that, summaries were kept secret in-house for various periods between 3 days and 90 days; now summaries are released after three weeks. The delay is intended to allow for orderly market adjustment to its decision and avoid unnecessary market volatility. Note that the Fed is the largest single holder of U.S. debt; its portfolio has major unrealized operating losses. However, a recent Treasury report shows that, as of April 30, about 31.4% of the outstanding national debt is due for refinancing within the next year – that amounts to $11 trillion of our outstanding debt and the new higher rates will be paid on Fed holdings. Futures trading continues to indicate the expectations for 25 basis point rate cuts in September and December.
HJ Sims History Dates Back to Mt. Rushmore
Among other possible movers this week were the results of seven Treasury auctions and economic data on retail sales, housing, and leading indicators. There is little aftermath from the G-7 meeting in Alberta once President Trump left early. The Bank of Japan met this week and held rates at 0.50%, and the Bank of England held rates at 4.25%. Nearly halfway through the year, few asset classes outside of precious metals and steel have provided significant returns. Convertible bonds are up 3.85%, high yield corporate indices are posting 3.15% returns; Treasury and mortgage indices are more than 2.50% higher, exceeding all equity index returns so far. Investment grade munis are still in the red by more than 1%, but taxable munis are showing close to 2% gains.
Check in with your HJ Sims representative to review your goals, risk profiles, needs and concerns, and investment options before this second quarter of the year comes to an end. We make no secret of our long history of success in operating in all the market conditions that have prevailed over the past 90 years. These are extremely unsettled times and you deserve a tried and tested partner, one who launched in 1935 while Mt. Rushmore was still under construction, one who continues to stand in awe of all our symbols of American spirit, and one who strives to help construct your monuments to success.