By Gayl Mileszko
Shattering Records
No matter which way you turn these days, you come up against some amazing new record being set. Box office receipts. A robot dog running in a marathon. Temperatures. Crypto trading. Gold and silver prices. Lake-effect snowfall. Early voting records. Rocket launches. On Tuesday, the S&P 500 hit a 55th record high in 2024. The Nasdaq Composite marked its 35th new high for the year. Municipal bond volume is breaking records with $474.755 billion of issuance as of November 30, on track for beating the last record set in 2020. Average daily muni trade count has set a new high mark. Investment grade corporate bond sales have broken four monthly issuance records. U.S. air travel over Thanksgiving weekend set a new record. Online holiday sales between Thanksgiving and Cyber Monday hit a new all-time high of $41.1 billion. Elon Musk, with his $348 billion net worth and a billion more ideas to monetize, appears likely to become the world’s first trillionaire.
Trending in the Wrong Direction
Not all this record-setting is worthy of awe and cheer, however. There has been historic flooding in western North Carolina. More than $11 billion appears to have been wasted on political advertising in the latest election cycle. Money market funds are now holding nearly $7 trillion of the savings of Nervous Nellies anxious over bloated stock prices. China’s trade surplus now approaches $1 trillion. The Congressional Budget Office estimated that total U.S. federal borrowing from the public will reach $28.2 trillion this year – the highest amount ever recorded. The U.S. national debt stands at $36.1 trillion and interest costs, driven by Fed rate policy and costly federal stimulus, are not moving the right direction.
Move Fast and Break Things
Down in D.C, federal departments and agencies are having their personnel and budgets subjected to unprecedented scrutiny — and raised hatchets — by the Trump transition team. Investors should not underestimate the waves of disruption planned by the incoming Administration, likely to produce MAJOR HEADLINES in the financial trade press. Fast actions and bold proposals, fueled by November 5 mandates, are bound to rattle financial markets in ways not seen for four or five decades, if ever. Some traders will discount sweeping efforts to “name and shame” and “move fast and break things” as mere theater or pointless endeavors given the size and tenure of the entrenched bureaucracy. But untold numbers of analysts and strategists are being tapped by major Wall Street firms to prepare traders and portfolios for a coming upheaval in policy, procedure, and outcomes. No small-scale initiatives, multi-year studies, or demonstration projects are planned; much more sweeping action is in the works. Those tasked to the unofficial Department of Government Efficiency, supported by new House and Senate caucuses, have very major reforms in mind. Whether or not they succeed, the mere uncertainty over the likelihood of effecting these plans is enough to create tremendous volatility – and opportunity.
New Breed of Lame Duck
The so-called “Lame Duck” session has begun in D.C. and will lasts until the new Congress is sworn in on January 6 and the 47th President is inaugurated on January 20. For now, the Senate will try to move forward with judicial nominations and other priorities of the outgoing administration and Democrat majority. Meanwhile, the newly elected are banding together to fast-track action on FY25 spending, extending the 2017 tax reforms, quickly implementing various high priority immigration, energy, deregulation, and other economic initiatives. We should not expect a quiet end to the year or the usual holiday spirit-filled start to the New Year. Yes, some of the fireworks may fizzle as nominees or plans are shot down. The power of the Washington lobby is not to be minimized. But this transition will likely involve more noise and disruption than we have seen in several generations.
Where Go the Bond Markets in 2025?
Readers have access to plenty of speculation on the potential impact of the incoming administration’s policies on stocks and commodities. For bonds, we certainly continue to expect a heavy volume of Treasury issuance given our nation’s ongoing borrowing needs and the amount of short-term debt maturing. Demand should remain strong for US bonds — including Treasuries, agencies, corporates, asset-backeds and municipals — in the context of a slowing global economy. Ours are haven assets, widely sought in times of stress and uncertainty which produce higher prices and lower yields. But other factors are in play this time. As was the case in 1986 and 2017, tax-exemption is in the crosshairs. The revenue hunters and cost-cutters of DOGE and the Ways and Means committees are aiming for trillions, and the $30 billion so of annual revenue foregone due to federal tax-exemption is on a list of likely targets. A full, partial, or phase-out of the exemption could contribute significantly to the effort to extend income tax cuts or reduce the deficit. But the mere prospect of curtailing or losing the exemption so long critical to the financing of the nation’s infrastructure is starting to have an effect on the muni market. Given the size or our debt and deficit, the size and untouchable nature of mandatory spending programs, and the extremely wealthy status of many policy drivers, those who likely have no particular need for the benefits of tax-exempt bonds, the threat to the core feature of municipal bonds remains real. Hilltop Securities suggests that tax-exempt issuance could balloon to as much as $745 billion next year as borrowers rush to market assuming that they will get their bonds “grandfathered in”. After that, the landscape for muni borrowers could change, limiting financing options and incorporating terms enabling them to compete with U.S. Treasury and corporate markets.
Rallies Built In — or Yet to Shatter Old Records?
Many of the assumptions underlying the “Trump Rally” or the “Santa Claus Rally” so far – deregulation, America-first policies designed to swell economic growth and bring prices down — may carry markets forward into 2025. But market direction can flip from rally to sell-off as major events unfold and there are quick wins or losses on administration efforts to “drill, baby, drill”, “make America healthy again,” negotiate trade concessions, halt the steady flow of illegal immigration, modernize the military, eliminate the education bureaucracy, roll back or rescind spending on Biden administration programs. Since there are aggressive plans to quickly enact reconciliation measures – perhaps even ahead of Inauguration Day — the New Year may be off to a wild start.
We are closely following the debate, which dates back to more than a century, on tax-exemption – its value to bondholders like ours, its estimated cost to the federal government weighed again the benefits to state and local governments and non-profits. There are many options on the table for its retention, full or partial elimination, and treatment of outstanding bonds. We encourage all readers to weigh in with your organizations and elected representatives to provide clear examples of how this financing tool has made all the difference in your work and community. We all need to become more active in our associations and advocacy groups during the process of drafting the tax reform legislation and reviewing the efficiency of government programs.
The James: New Record for the Largest Start-Up Non-Profit Senior Living Rental Community
If you have not already reviewed the terms and sale of $473 million of bonds for The James – the largest start-up non-profit rental senior living transaction on record. We worked with a great for-profit team to finance this community with 350 upscale units in independent living, assisted living and memory care in Irvine, California. The deal size, terms and working group involved in this financing has attracted considerable attention and trade press coverage. Please contact us for more information on this innovative transaction and how we can help you to learn about and take advantage of all the many tools and new opportunities available in an uncertain time where many records are being shattered.