Market Commentary: Shell Shock

by Gayl Mileszko

Ecdysis, commonly called shedding, occurs when a lobster extrudes itself from its old shell. Unlike animals that are soft-bodied and have skin, a lobster’s shell, once hard, will not grow much more. But all forty species of lobster continue to grow throughout their lives, so when the shells become hard and inelastic they must be shed. This happens periodically. As a result, lobsters spend much of their time preparing for, or undergoing ecdysis and arranging safe burrows for the time it takes for the new shell to harden. The overall process of preparing for, performing, and recovering from ecdysis is known as molting. Lobsters molt five or six times in the first season, but the length of time between molts increases as the lobster ages such that an adult will molt only once or twice a year and females may go two years between molts when they are carrying eggs. Many factors including water temperature, food supply, and availability of shelter control when and where a lobster will molt. The actual shedding process only takes the lobster twenty or thirty minutes, depending on environmental conditions and the size of the animal, but this is when it is most vulnerable to predators.

The start to a new decade has made clear our vulnerabilities as well as our adaptability. The predator, a pandemic, has caused us to shed our plans, routines and ways of thinking. Many of us have experienced a sea change in how and where we live, work, travel, learn and communicate. The only constant is change and, in 2020, it has been sudden and massive. The impacts have certainly varied. Some individuals, institutions, communities and systems are well along in the recovery process while others have been shell shocked and suffered painful losses, or still remain in the burrow. There are less than thirty days left in the year and yet we cannot be sure how it will end and what comes next. There are still so many variables – including political, social, scientific and economic ones — at our local, state, national, regional, and global levels.

The financial markets have enjoyed favorable environmental conditions and year-long shelter from central banks. This in and of itself is shocking as is our expectation that it rallies will continue ad infinitum. In spite of global upheavals and tectonic shifts in demand, manufacturing, distribution, and technology, stock and bond markets have been in rally mode for all but about five weeks this year. Stock market volatility as measured by the VIX CBOE Index has risen from 13.78 to 20.57, but it is down 83% from the peak level of 82 in mid-March. So far in 2020, the Nasdaq is up 36%, the S&P 500 is more than 12% higher, the Russell 2000 is up 9%, and the Dow has gained nearly 4%. More than $140 billion has been raised in approximately 383 initial public offerings, exceeding the full-year record high set during the peak of the dot-com boom in 1999. The BAA corporate benchmark yield has dropped 92 basis points to 2.78%. Investment grade corporate issuance is well over $1.7 trillion and high yield corporate bond issuance exceeds $400 billion so far this year. After rising to record highs and dipping again, gold prices are still up 17%.

On the bond market side, the 2-year Treasury yield has fallen from 1.56% to 0.14%. The 10-year yield has dropped from 1.91% to 0.83%. The 30-year yield is down 82 basis points to 1.56%. The AAA municipal tax-exempt benchmark yield has fallen from 1.04% to 0.15%, the 10-year from 1.44% to 0.72%, and the 30-year from 2.09% to 1.41%. Municipal volume is on track to smash all records this year as borrowers have clawed or rolled their way to market to secure funds to undertake new, renovation and expansion projects, bolster liquidity, and refinance outstanding debt at low rates, often including low corporate and taxable rates.

Although the municipal calendar shrank to the smallest of the year at $18.8 billion in November as issuers elected to avoid possible volatility surrounding the elections, year-to-date issuance exceeded $440.8 billion as of November 30. Muni price performance has recently been the best in three decades. Among non-rated senior living deals priced in the past few weeks, Wesley Communities of Ohio brought a $69.5 million transaction with a final maturity in 2055 priced at 5.25% to yield 5.09%. St. Andrews’s at Francis Place in St. Louis had a $37 million deal structured with 2053 term bonds priced at 5.25% to yield 5.75%, Vivera Senior Living of Jeffersonville brought a $20.4 million deal that had 20-year term bonds priced at 5.25% to yield 5.20%, and Morningside Senior Living (TX) had a $15.3 million financing with 30-year bonds priced at par to yield 5.125%. In the non-rated education sector, Crossroads Christian Schools sold $20.5 million of bonds due in 2056 priced with a coupon of 5% to yield 4.75%, Columbia College in South Carolina had a $16 million issue structured with 2045 term bonds priced at par to yield 5.75%, and Blinn College had a student housing bond sale that included a 2057 maturity priced at par to yield 5.00%.

At HJ Sims, we welcome our investing clients to contact us for our thoughts on how to re-invest the $51 billion of muni bonds maturing or being called in December and January, how to prepare for year end, and how to position for 2021. We are always available to our banking clients and prospective borrowers looking for guidance on market rates and access. As we look to bring the best possible conclusion to a year that no one ever envisioned, we welcome your input, comments and questions.

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