By Gayl Mileszko
Market Commentary
The Ivory Tower and The Street
The 14th Annual Municipal Finance Conference is underway this week in steamy Washington, D.C. while the bond market sizzles and slumps. There is quite a contrast here between the gathering of cool thinkers and all the tax-exempt bond traders on the hot seat. The primary market is swamped, bids-wanted are mounting, yields have been climbing, and buyers are fussing. Meanwhile, academic papers are being presented in the nation’s capital on topics ranging from property assessments to wildfires, and dealer reciprocity to ESG labeling. Dealers are working to clear inventory while scholars debate public versus private sector wages, and how commissions paid on institutional block trades vary from those on retail odd lot trades. Issuers are vying for investor attention during peak summer vacation weeks while mayors, regulators, and financial advisers discuss the cost of debt in coal-producing regions and sanctuary cities, congestion pricing, and the Trump presidency’s impact on local governments.
Public Finance in the Spotlight
This year’s Brookings Institution conference is a joint venture with the Brandeis International Business School, the Purdue University School of Business, the University of Chicago’s School of Public Policy, and the School of Public Affairs at the University of Texas at Austin. As in previous years, an erudite group gathers to examine the hottest, as well as some of the most yawn-inducing, topics in public finance. Last year the focus was on inflation, mark-up disclosure, and cyberattacks. In 2023, attention was on climate risk, the inverted yield curve, and the high cost of early refinancing. In 2020, the talk was about the pandemic, ETFs, and life after municipal bankruptcy. Ten years ago, it was all about the Affordable Care Act, the Chinese municipal market, and the economic value of ratings.
Active Muni Market
Away from the annual ivory tower huddle, the $4.23 trillion municipal market teems with activity. This year, we are seeing record volume with the 52-week average now over $11 billion according to CreditSights. We are at the peak period for monthly redemptions as well as for semi-annual principal and interest payments; July and August will see a combined total of more than $108 billion hit customer accounts. Mutual and exchange traded fund flows are fluctuating but demand for low tenors and high yield products holds steady. Benchmark index yields are at the multiyear highs so attractive to retail income investor while returns — for all but one- to twelve-year maturities and taxable munis — are in the red. Lipper data shows that high yield muni funds have taken in $4.8 billion so far this year. The Investment Company Institute reports that tax-exempt muni money market funds hold $139 billion of liquid assets.
Pricings Last Week
Last week was a quiet one for senior care, charter and private school bond issuance. Treasuries and munis both traded down. Key inflation readings came in softer than expected while June posted higher than anticipated retail sales numbers. The Beige Book outlined tariff-related strategies that companies are using – everything from delaying price increases to absorbing the cost, raising prices on unrelated items and adding a surcharge. Long munis, with maturities of 22 years and out, were hit hardest with losses of nearly 2%, dragging returns for the year down to negative 5.64%. The high yield market was shaken by the deferral of July 15 interest payments on $1.2 billion of the 10% and 12% coupon Brightline Trains Florida bonds; several traded down by as much as 24%. High yield index returns dropped by more than 1% on the week. Secondary trading fell by about 10 percent, and muni funds saw their first outflows in 12 weeks. $10 billion of principal and interest payments hit customer accounts after a whopping $40.5 billion was posted on July 1. More than $17 billion of bonds crowded the primary slate. Within the sectors that we most closely monitor, the California Statewide Communities Development Authority sold $250 million of AA-minus rated, state mortgage-insured bonds for Sequoia Living structured with a 2055 final maturity priced with a 5.00% coupon to yield 5.10%. And the Williamson County Industrial Development Authority in Tennessee issued $12.8 million of non-rated 30-year bonds for Franklin Classical School that priced at par to yield 7.25%.
HJ Sims in the Market with Two Charter Schools
This week HJ Sims is in the market with two charter school financings. We are bringing a $13 million AA rated, state enhanced Utah Charter School Finance Authority issue for the expansion of Karl G. Maeser Preparatory School, a 7-12 charter school opened in 2007 serving 656 students in Linden. And we have a $202 million Ba1 rated Florida Local Government Finance Commission transaction for BridgePrep Academy, a network of 20 K-12 schools, nine of which are acquiring facilities on seven campuses in the Sunshine State.
Market Movers
There is quite a bit in the background driving markets this week, but that has been the case throughout the first six months of this Trump presidential term. Investors have adapted to the noise, volatility, and drama in D.C. by learning to shrug off the barbs and bombast, and the panic over potential inflation. Remarkably, the S&P 500 and the Nasdaq continue to break records as tariff negotiations heat up ahead of the August 1 deadline, courts are ruling on actions brought by and against the Trump Administration, a restructuring of the federal government continues apace, and the Chair of the Federal Reserve is being pressured to resign in favor of a new leader backing lower rates. The Congress has so far given the President most everything he asks for: confirmations, the One Big Beautiful Bill, stablecoin legislation, and the biggest rescission package in three decades, rolling back $8 billion in foreign aid and $1 billion of funds for public broadcasting. Fed officials are gratefully entering a quiet period ahead of the Federal Open Market Committee meeting next week. Four hundred public companies are reporting second quarter earnings. There are eight Treasury auctions scheduled and economists await data on existing and new home sales, durable goods, and leading indicators.
Market Standings
At this writing, futures trading reflects market expectations for 25 basis point cuts in the federal funds rate in September and December this year as well as at the next March, June, and September meetings. The 2-year Treasury yield at 3.83% is 12 basis points higher on the month. The 10-year yield at 4.34% is up 12 basis points, and the 30-year at 4.91% has increased 14 basis points. The 2-year AAA general obligation muni yield at 2.45% has fallen 13 basis points but the 10-year at 3.34% is up 8 basis points and the 30-year at 4.71% is 17 basis points higher. Oil prices at $66.21 a barrel are up $1 in July so far, gold prices have increased by 4% to $3,432, near an all-time high, and Bitcoin prices at $118,730 have risen 10%.
Anniversaries
Researchers remind us that 2025 is a big year for anniversaries. Eight states adopted charter school laws 30 years ago: Alaska, Arkansas, Delaware, Louisiana, New Hampshire, Rhode Island, Texas, and Wyoming. Among other life plan communities, Carillon Senior Living in Texas, Moravian Manor Communities in Pennsylvania, and Westminster Canterbury Richmond in Virginia are celebrating their 50th anniversaries. Rowntree Gardens Senior Living in California marks 60 years of service. On July 30, the Medicare and Medicaid programs will turn 60. And on August 14, Social Security will mark its 90th anniversary. As you celebrate your family, school, and business milestones this summer, reach out to your HJ Sims representative so we can help to spread the new of your success and work on Street-wise strategies to help secure your future.