HJ Sims Market Commentary: Super Roles

by Gayl Mileszko

Back in 1969, Neil Armstrong walked on the moon, the Boeing 747 made its first commercial flight, the last edition of the 100-year-old Saturday Evening Post was published, the Cuyahoga River in Cleveland caught fire and the Beatles gave their last public performance. It was the year of Woodstock and Chappaquiddick. On television, the Brady Bunch, Monty Python’s Flying Circus and the Jackson 5 premiered. Pele scored his 1,000th goal and Tom Seaver and the New York Mets beat the Baltimore Orioles in the World Series. At Super Bowl III, the New York Jets led by Joe Namath defeated the Baltimore Colts 16-7, and tickets at Miami’s Orange Bowl cost between $6 and $12. In Richard Nixon’s first inaugural address, he proclaimed that Americans “cannot learn from one another until we stop shouting at one another… The greatest honor history can bestow is the title of peacemaker.”

Inflation and Unemployment Rates Over Five Decades

In January 1969, the inflation rate was 4.4% and the unemployment rate fell to 3.4%. In the decades since, inflation has frequently fallen below 4%. Federal Reserve Chair Ben Bernanke in his key role made 2% the official target in 2012. But we have not seen unemployment in the range of 3.4% in the last 54 years. Last Friday, the Bureau of Labor Statistics reported that the economy added a reported 517,000 jobs and that the number of jobless Americans as a percentage of the population fell to 3.4%. The unemployment rate, of course, measures the number of people who are out of a job and actively looking; not counted in that number are the 5.3 million people who wanted a job but have not been looking for the past 4 weeks. In addition, for the January calculation, the BLS updated its population estimates, and made annual benchmark revisions, seasonal adjustments and industry classification system changes. Without the adjustments, the change in nonfarm employment was estimated to be negative 2.5 million. Jay Powell and the Federal Reserve will dive into all this and all incoming data between now and the March policy committee meeting, and then the meeting after that in May. The financial markets, of course, wait for nothing. They reacted instantly to the Fed Chair’s press conference last Wednesday and the jobs data headline on Friday. This week, traders will be parsing the remarks being made by 10 Fed officials at separate events. In the meantime, 30-Day Fed Funds futures pricing shows the market’s expectation for another 25 basis point increase on March 22 and another 25 basis points on May 3. Traders expect the target rate to remain in the range of 5.00% to 5.25% until December, when a first cut of 25 basis points is anticipated.

Topsy Turvy Yield Curves and Forecasts

Having the Fed Funds rate at its highest since 2007, and rising, and trying to juggle strong economic data with a lurking recession, has caused considerable volatility in the financial markets. In fact, except for March of 2020, we have not seen this level volatility in the bond markets since the Taper Tantrum of 2013. The 2-year Treasury yield at 4.47% has increased 27 basis points in the first four trading days of February. The 10-year yield at 3.63% is up 13 basis points. Things have been topsy turvy since last July when the Treasury yield curve inverted. The municipal yield curve followed suit in December. At this writing, the 6-month Treasury at 4.90% is at the height of the curve, yielding more than all other maturities. The 3-month bill yields 4.69%, the 12-month bill 4.86% and the 30-year bond 3.67%. In tax-exempts, the 1-year AAA general obligation municipal bond benchmark yield at 2.47% is higher than the 10-year at 2.23% and is only 73 basis points below the 30-year yield. Many investors are waiting for conditions to stabilize. It is unclear where the economy is heading. What has happened to the most forecasted recession in history? Economists are forecasting a first quarter gross domestic product of negative 0.3%, whereas the Atlanta Fed projects +0.7%. It is no wonder that U.S. money market fund assets are at a record high of $4.82 trillion.

Municipal, Corporate and Treasury Issuance

Municipal bondholders are also sitting on a lot of cash. They have had $75 billion of principal and interest hit their account since the start of the year, including $24 billion last Wednesday, but have not been seeing much new paper. Year-to-date issuance is only $24 billion, including $2.1 billion last week. Many nonprofit borrowers are waiting for rates to stabilize or, better yet, fall more than they have already this year. This week, we expect a $4.3 billion calendar, including $680 million of state housing agency deals and a $29 million non-rated pre-development financing for Kendal at Ventura coming through the California Public Finance Authority. In the meantime, tax-exempt buyers focus on the secondary market, where bids-wanted par has averaged more than $1 billion for the last five days and Monday’s offerings exceeded $18.7 billion. Tax-exempt money market funds have recently lost about $11 billion of assets; the SIFMA 7-day yield has fallen from 3.66% at the start of the year to 1.87%. Corporate borrowers are much more active: this week’s investment grade slate is expected to total $35 billion. And the Secretary of the Treasury plans at least $96 billion of sales to raise $29 billion of cash, and refund $67 billion of maturing notes and bonds while insisting that “every responsible Member of Congress” must agree to raise the debt ceiling.

Week Ahead: Super Bowl and HJ Sims Late Winter Conference

This week is jammed packed with events to keep investors on their toes. Chair Powell speaks before the Economic Club of Washington D.C. on Tuesday, ahead of President Biden’s second State of the Union address. There are eight Treasury auctions, and data releases on trade, consumer credit, wholesale inventories and consumer sentiment. Corporate earnings reports for the latest quarter continue. And of course, there are a lot of side bets on Sunday’s Super Bowl where, at the Chiefs/Eagles contest in Glendale, Arizona, the tickets are going for $6,000. At HJ Sims, we are counting down the days until our Late Winter Conference begins in Sarasota. We are thrilled to welcome hundreds of our colleagues from the senior living and charter school communities to join us for informative keynote addresses, insightful panel discussions and social outings on Florida’s beautiful Gulf Coast. If you are unable to attend this year, we will share all the highlights and look forward to welcoming you next year.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.

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