Market Commentary: The Viper

by Gayl Mileszko

The Viper

The legendary Aesop is believed to have been a slave, captured as a prisoner of war, who lived in ancient Greece between 620 and 560 BCE. Little is known about his life — some scholars question if he even lived at all — but over the millennia billions have come to appreciate the witty storyteller who inventing the genre we now call fables. There are some two hundred of such tales in circulation, often using humanized animals to communicate moral teachings. Over time, they have undoubtedly helped to resolve many personal and political conflicts in a gentle, roundabout way. One such story, relevant to today, features a kind farmer who comes upon a viper stiff and frozen in the snow. Taking pity on the snake, he picks it up and places it inside his coat pocket to warm it back to life. The viper, once revived, bites his rescuer, who dies from the venom realizing that it was his fault for showing compassion to a villain. Do not be shocked, the moral goes, when wicked people do wicked things. Kindness is thrown away upon evil.

Moral Confusion

Vipers always abound but we seem to be living in a time of extreme moral confusion over how to deal with them.  Some need much more guidance and correction than can possibly come from a fable.  The Hamas-Israel war has revealed gaping divisions on college campuses, on city streets and in legislative chambers all around the world on the conduct of war, the taking of hostages, the treatment of civilians, the very face of evil. The Twittersphere is being flooded with ugly discourse, videos with horrific images, and fabricated claims.  It is hard to find a lot of united in the United States right now, not to mention the rest of the so-called civilized world. We should be united in outrage but all too many tippy toe around endorsing even the most basic principles of morality.  A global jihad has been declared by Hamas, just one of the many Iran-sponsored terrorist group that the Associated Press refuses to describe as terrorists. AP reporters are told to instead use the less politicized terms “militants, fighters, attackers, or combatants” when referencing the terrorist mobs comprising the proxy armies of the Axis of Evil.

Market Confusion

In addition to moral confusion, we have quite a bit of market confusion at present. No one should be shocked, given all the unprecedented central bank interventions upending what remained of our free markets, and all the fiscal stimulus that brought us a debt ceiling crisis, an avalanche of Treasury issuance, and a spotlight on our escalating federal deficit and debt. The 10-year Treasury yield is a critical economic benchmark, one that reflects investor confidence in the markets as a whole and it is the key barometer used in adjusting most other borrowing rates here and abroad. Last week, it rose to 5%, the highest level since 2007, but at this writing has fallen back to 4.84%. Traders are taking into account concerns over finding buyers for the deluge of new Treasury paper coming to auction each week as the Fed works to reduce its balance sheet, the stubborn inflation that the Federal Reserve may not be able to quash without pushing us into a deep recession, corporate CEO expectations for a slowdown, fear of a looming government shutdown, uncertainty about leadership at a time when the words “World War III” are being bandied about.

Cashing Out

Investors vote with their money, and a lot of money moved out of money market funds last week: $100 billion, a record.  It is unclear why withdrawals would be so great with 7-day current yields averaging 5.18%, and it is unclear where all this money has gone at this writing. Some shows up in data tracking individual bonds, gold, energy, bank loans, and exchange-traded equity and fixed income funds. But that does not account for the vast majority which may just now be held as dry powder awaiting opportunities that emerge amid all the global turmoil. So far this year, the S&P 500 is leading the pack with returns over 11%. Leveraged loan indices are returning 10.37%. High yield corporate bonds come in a distant third at +3.78%. All municipal bond returns are in the red. But investors are wisely seeking income over paper returns, ignoring fluctuating portfolio evaluations of holdings and focusing on coupons and dividends. Many holding mutual funds with sinking NAVs are redeeming shares to invest in ETFs with lower fees and locking in longer-term yields available for the first time in decades in “risk-free” Treasuries and in municipal bonds, many of which are rank just behind in credit quality.

Pressure on Fed to Stop the Hikes

There is a lot of pressure on the Fed from Capitol Hill, Wall Street and Main Street to stop raising rates and begin lowering them before the economy tanks.  Mortgage rates have skyrocketed above 8%, adversely impacting an extremely high-priced housing market. The median home price has risen almost 50% in less than 3 years and housing is less affordable than any time since December 1990. The typical U.S. homebuyer’s monthly mortgage payment is now $2,866. Auto and credit card loan levels are crushing some borrowers and defaults are rising. Consumer and investor sentiment is bearish. Futures trading reflects the expectation for a pause next week and through next May, with cuts beginning in June. But the bond market is already doing the Fed’s job, pushing yields up sharply amid expectations, finally sinking in, that the Fed will hold rates high for the time being.

Market Movers This Week

Traders are closely monitoring developments in the Middle East and, closer to home in Washington where the hope is for progress in the election of a new House Speaker. There are many eyes on oil prices as being impacted by the wars underway in Israel and Ukraine. The U.S. Treasury is holding 10 auctions between Tuesday and Thursday this week with fingers crossed that they go better than last week’s 5-year TIPS and 20-year sales. The Fed is in a quiet period ahead of next week’s monetary policy committee meeting, so there are no new remarks to parse. But there are plenty of other moving parts to follow, including labor strikes impacting the economy, and this week’s data releases on GDP, personal consumption expenditures, durable goods, new home sales, pending home sales and consumer sentiment. Third quarter corporate earnings are expected from Amazon, Microsoft, Exxon Mobile, Visa, Boeing, Meta and many other major firms will provide their outlooks and forecasts for year-end and 2024. Mutual and ETF inflows and outflows are also always on the radar screen.

The Municipal Bond Slate

This week’s municipal bond calendar is expected to total more than $8 billion. The tax-exempt market is experiencing record high retail and institutional trading in response to fund flows, tax loss harvesting, and income hunting. The primary market is heavier than in prior months, something that is common in October, but it pressures the secondary market where bids-wanted and offering par are highly elevated.   We are watching progress in the sale of $10.9 million Ararat Home of Los Angeles insured revenue bonds through the California Municipal Finance Authority. There are also four charter schools in the market: the South Bronx Charter School for International Cultures, Noor International Academy, Atlantic Collegiate Academy, and Athenian Academy. We will check pricing versus last week’s deals when the Academy of Accelerated Learning in Houston came to market with a $15 million financing with the PSF guarantee structured with a 30-year maturity that priced at 5.00% to yield 5.25%.  The Lehigh Valley Dual Language Charter School in Bethlehem sold $8.1 million of Ba1 rated bonds priced with a coupon of 7.00% to yield 7.15% in 2053. 

The Moral of the Story and Stories of the Bonds

At the close on Friday, the 2-year municipal general obligation bond benchmark yield was 3.67%, the 10-year was at 3.59%, and the 30-year at 4.53%. We welcome borrowers and investors to contact us for guidance in navigating this and other moving markets, all confusing but full of opportunities. We have 88 years of experience in sharing the details of the stories behind the bonds we underwrite and trade. Understanding the value of any investment, or the moral of any story, calls for insight and guidance from a trusted party. Reach out to your HJ Sims representative today.