by Gayl Mileszko
The Buttonwood Tree
When we talk about Wall Street, we go way back to Manhattan in 1792 and a road with a buttonwood tree under which some 24 brokers and traders gathered to sign an agreement on how to deal in securities. At the time, these were pretty much limited to stock in the Bank of New York and a few insurance companies, and war bonds issued to pay off Revolutionary War debt, but the rules hammered out that day in the so-called Buttonwood Agreement of May 17 became the framework for the New York Stock Exchange and much that underlies our modern financial system. A buttonwood tree still standing outside the NYSE building on Wall Street is a symbol of the agreement for a centralized exchange as well as for the resilience of our markets. It is a native evergreen seaside tree, tolerant of full sun, sandy soils, and salty conditions. It is low branching and multi-trunked. Two main types are recognized: green and silver. They both flower and fruit throughout the year, thriving even in broken shade, wet soil, and harsh urban conditions. Buttonwood is used in smoking meats and fish as well as for firewood, lumber, and furniture.
The Mahogany Table
The oval table in the boardroom of the Federal Reserve Board of Governors and its 12-member Open Market Committee is made Honduran mahogany and has a three-piece black granite insert. It measures 27 by 11 feet and lies under a 750 pound chandelier that helps to illuminate data being presented by the 75 advisers, economists and operational staff this week. The two-story boardroom is the center of the world’s attention, including that of the White House and Capitol Hill, less than two miles away, Wall Street, two hundred and thirty miles to the north, and two other central banks meeting on rates this week: the European Central Bank, four thousand miles to the east, and the Bank of Japan, seven thousand miles to the west.
Trading in the global markets is always somewhat muted ahead of FOMC rate announcements, and such is the case this week in financial markets. The type of continuous trading in which orders are executed when received, did not really begin until 1871, about four years after a ticker machine was introduced. But trading hours fluctuated at that time, generally starting at 10am on Mondays through Saturdays. Weekend sessions ended in 1952 at the same time that weekday hours were formally set from 10am to 3:30 pm. The stock market closing was later extended to 4 pm in 1974, and the opening bell was changed to 9:30am in 1985. The U.S. bond market has also experienced major changes over the course of the past two centuries and, although trading hours regularly run from 8:00 am to 5:00 pm, technology enables many round-the-clock transactions with near-immediate reporting and some same-day settlements.
Last Trading Week of July
We are now past mid-summer, and this is the last full trading week of July. Traders, whether on vacation or at the desk, are responding to key economic data releases on GDP, housing, consumer confidence, and durable goods. While there is a universal expectation for a 25-basis point increase in rates, the eleventh in this tightening cycle, there was always the possibility of a surprise in the wording of the statement or remarks by Chair Powell to move markets. In late August, Fed officials will gather for the annual policy symposium in Jackson Hole, but their next formal meeting on rates will not be held for 55 days, right around the time when the federal fiscal year ends. That opens a big vacuum of time that could see considerable market volatility.
Currently, stock and bond markets were relatively calm ahead and after the Fed meeting. The VIX fear gauge in the range of 13 is well below the 2023 average and has moved little this past week. Investors have moved from a defensive posture just one year ago into one of risk-taking or, as the CNN Fear and Greed Index measures it, “Extreme Greed”. Lipper reports that investors have poured $30.9 billion into equity ETFs during the past four weeks, added a net of $406 million to high yield municipal bond funds and $824 million to high yield corporate funds, while pulling $8.2 billion out of money market funds. Market observers note that stock and bond investors are of split views on where the economy is heading. The equity market rally seems rooted in a “Goldilocks” or “Nirvana” scenario wherein a recession is avoided as inflation is being successfully tamed while employment remains solid. Bond markets, on the other hand, have seen volatility spike and sink by 25% in July and appear to be trading as if a recession is still in store. In the $25 trillion U.S. Treasury market, the 3-month Treasury has yielded more than the 10-year maturity since last November. The spread between the two is the Fed’s most closely monitored indicator of recession, and is currently just below its widest point of this cycle and among the widest since May of 1981. At this writing, the 3-month bill yield is 5.47% and the 6-month at 5.52% has the highest of all U.S. Treasury maturities. The 10-year yield stands at 3.88% and the 30-year at 3.92%.
Last Week in the Municipal Market
Conditions were favorable last week for the largest start-up senior living project financing in nearly two years. Seafields at Kiawah Island brought a $212.9 million non-rated transaction through the South Carolina Jobs-Economic Development Authority to finance 106 independent and assisted living units. The deal was structured in five series, including fixed rate tax-exempt, taxable, and subordinate bonds as well as short-term bonds expected to be redeemed at 50% and 75% occupancy. The final maturity in 2058 was priced at par to yield 7.75%. Ohio Living Communities also came to market with a $59.9 million BBB-minus rated refunding and new money issue through Franklin County, Ohio that featured two term bonds in 2041: one with a 5.50% coupon priced to yield 5.45% and the second with a 5.25% coupon yielding 5.50%. In the charter school sector, there were three sales. The Babylon Local Development Corporation of New York placed $40 million of non-rated bonds for the Academy Charter Schools on Long Island; bonds maturing in 2053 were priced at par to yield 6.65%. The Unity Prep Charter of Brooklyn sold $23.5 million of BB rated bonds through the Build NYC Resource Corporation; the 40-year maturity was priced at 5.50% to yield 5.67%. And the Clifton Higher Education Finance Corporation in Texas brought an $83.2 million PSF-guaranteed issue for YES Prep Public Schools in Houston that included a 2053 maturity priced with a coupon of 4.25% to yield 4.36%.
Municipal Market Trends
The municipal bond yield curve has been partially inverted for more than 7 months, the longest period on record. At this writing the 1-year general obligation AAA rated benchmark yield is 3.02%, higher than the 15-year at 3.00% but below the 30-year at 3.46%. The difference between the 1-year and 30-year had narrowed to only 26 basis points in mid-May, but has since been slowly widening — although not near a normal range. One year ago, this spread was 163 basis points, and ten years ago it was 413 basis points. Many investors have been attracted to the higher short-term tax-exempt yields as well as to the relatively high long-term yields and the 30-year muni/Treasury ratio, currently at 87.6%. In the past four weeks, long-term muni funds have raked in $882 million. Some funds are finding it hard to meet the demand, given the lack of new issue supply. Primary market supply in this higher rate environment is down about 19% from last year, and year-to-date fund flows have been net negative by more than $7 billion. Secondary market offerings and bid-wanteds have been elevated all year, particularly since the sale of the $7 billion Silicon Valley Bank muni portfolio. Our traders sift through these postings every day and are able to find some of the best value and yields we have seen in many years.
Exchanging Investment Ideas
Whether you are examining your portfolio at a kitchen table in an air-conditioned room, pondering your investment strategy under a shady willow tree by the lake, or mulling over a new capital need while under a palm tree at the beach, your HJ Sims representative welcomes your call to review options and opportunities. Our sales, trading, banking and analytic teams are standing by to help make your summer a productive and successful one.