By Gayl Mileszko
Market Commentary
Thinking and Thinning
The new Apple iPhone Air unveiled with such aplomb on Tuesday is so thin that some joke it looks like another side effect of Ozempic. Semaglutides aside, we are seeing a lot of weight loss and downsizing of late in our land. The federal workforce. Big agency budgets. A year’s worth of Bureau of Labor Statistics payroll data. Paychecks. The U.S. population. The white collar workforce. The blue collar workforce. Apartment sizes. Traditional public school enrollment. The number of family farms. Product packaging. Attention spans. We see that skinny jeans are back in fashion. Eyebrows are waxing thinner. For all too many, hopes are slim for an affordable starter home or comfortable retirement. Just about the only thing that isn’t shrinking is debt: global, federal, household, consumer, and student loan.
Municipal Bonds Are Huge Right Now
The $4 trillion municipal bond market is large with about one million active municipal securities, but in no need of Wegovy. It is on a mad bull rush, fueled by retail demand, charging ahead to sack last year’s record for volume, and often leaving dealers short of inventory to offer. Deal sizes are larger — in part due to higher inflation-fueled costs involved in construction: land acquisition, materials, labor, equipment, and insurance, to name a few. In addition, infrastructure and service needs have grown. Maintenance projects delayed during the pandemic can no longer be put off, and the need for improvements and expansions have compounded. Population shifts from urban areas during the past five years have placed some heavy new burdens on suburban and rural communities for more utility services, roads, and digital connectivity. Parents are seeking out charter schools with programs geared to the needs of their children, so there is a need for new facilities. Seniors left isolated in their homes during peak COVID years are in search of communities focused on social contact and wellness; the size of the aging Baby Boom population generation points to a huge unmet need for senior housing and care. The artificial intelligence boom has created a massive demand for energy and water to power and cool new data centers. Fears over the clawback of federal grants to universities have driven dozens of well-endowed schools to tap the bond markets. And commercial spaceports, with new access to the tax-exempt market, are revving up their plans. All in all, this is not a market to ignore.
Huge Retail Demand Drives the Market
Over the years, all too many have been outspoken on threats to the $4+ trillion municipal bond market. We will never forget the erroneous prediction for imminent and widespread defaults made by Meredith Whitney in 2010, and the unnecessary damage her call caused for nearly two years. Threats to tax-exemption, the loss of advance refunding, the downgrading of our sovereign rating, the bankruptcies of Detroit and Puerto Rico, government shutdowns and Fed rate increases have also rattled the market. But we at HJ Sims continue to see many new issues oversubscribed and see solid demand in the secondary market. We note that retail buyer activity still propels the market, directly, through separately managed accounts, and via the growing number of exchange traded funds. Conventional municipal bond mutual funds, many of which are focused on high yield and longer term holdings, are still incredibly attractive to household investors, and Lipper reports $14.4 billion of inflows so far this year, including $7.2 billion invested in the high yield space.
Muni Calendar Reflects Our Nation’s Needs and Investor Demand
A poster child for the muni market this week is Dallas Fort Worth Airport, which is proceeding with a $9 billion capital improvement and expansion “future-proofing” plan. Heedless of the recession and bubble calls being made by some market pundits, unaffected by the likely quarter point cut in the Fed Funds rate expected next week, the airport is offering $1.98 billion of A1/AA-minus rated bonds. Dozens of others are proceeding with financings for projects supported by their communities: the Savannah Convention Center Authority and Hartsfield-Jackson Atlanta International Airport in Georgia, the Sullivan County Resort Facilities Local Development Corporation in upstate New York. We are also seeing Alpha Lifestyles Partners, offering $61.1 million of non-rated bonds through the Capital Trust Authority of Florida; Life Enriching Communities with an $88.3 million BBB-minus rated Hamilton County, Ohio sale; and Cherokee Classical Academy in Canton, Georgia with a $24.1 million non-rated deal coming through the Wisconsin Public Finance Authority.
Big Wrinkles in Economic Data Collection
The financial press is focused on by how much the Federal Open Market Committee will lower rates at next week’s meeting. Their decisions, as in the recent past, are based in large part on inflation and jobs data, which have been in greeted with some skepticism for many months. Many technological tools are available help to iron out the major wrinkles in data collection and reporting we appear to have; they are sorely needed to restore the faith of investors who rely upon this information to inform their commitments. The independence of the Federal Reserve is another “must have” for the markets, and it is vexing to see the courts, rather than Congress, making key determinations here. Unquestionably, pressure from the Trump Administration, Wall Street and Main Street is in play, but next week we expect to get the 25 basis point cut that the markets have already “baked in.” A rate hike is highly unlikely at this point, but cannot be ruled out next year if the next rounds of data upend the forecasts. While surprises can always rattler traders for a period, we believe that a 25 bp plus or minus in the Fed Funds rate is unlikely to alter the commitment of our non-profit borrowers or the interest of our institutional and individual buyers in public offerings for worthy projects.
Market Movers
This week, financial markets keep an eye on developments overseas: in Ukraine, the Middle East, Poland, Japan and France. We await a decision on further Russian sanctions. As we approach the close of the federal fiscal year, we cannot help but anticipate the shutdown drama that annually accompanies the funding of the government for short periods until longer term appropriations are negotiated. At this writing, the market expectation is for additional quarter point rate cuts in October and December. The indices for producer and consumer prices are released this week, and debates rage over everything from vaccinations, mortgage fraud, redistricting, National Guard deployments and political violence to the renaming of the Department of War. There are nine Treasury auctions, including 10-year note and 30-year bond sales. The Fed is it its quiet period ahead of next week’s meeting, so there are no officials out on the speaking circuit.
Taking Inspiration and Breaking Free
We heard a report not long ago from someone on safari who stayed at a camp where many old elephants were held by very small ropes tied to one of their legs. The trainers explained that young elephants were conditioned to believe that they could not break free. So, as they grew up, they never even tried to escape. We think about how we often get stuck in old ways of thinking, tied down by imaginary restraints. But we, along with our clients, take inspiration from the major borrowers charging into the market with long-term growth plans. Reach out to your HJ Sims representative to discuss how we can help rewire some of your thinking about what is possible.