HJ Sims Market Commentary: Thoroughfares and Flows

by Gayl Mileszko

Roosevelt Avenue cuts through a 10 square mile stretch of neighborhoods including Woodside, Elmhurst, Corona, Flushing and Jackson Heights in Queens, New York, which is dubbed by many as “The World’s Borough”. This week’s National Geographic features this thoroughfare, named after the 32nd president of the United States, as a “pulsing artery of commerce and life”, home to migrants from 107 different countries speaking more than 360 languages, a veritable microcosm of humanity. Of all the places in the world to highlight, some look to the life on this one long street a perfect illustration of how connected we are as a global population no matter how protectionism and nationalism has flourished throughout all these recent years of trade wars and the pandemic.  The varieties of food, music, clothing and worship on display on Roosevelt Avenue are vibrant and reflect the many treasures brought here by millions from distant lands. It is hard to imagine that there is another place like it with such a blend of cultures and folks, young and old, many of whom are working to start new lives as well as support families far away, much missed, and in such great need.

Safe Routes

The number of migrants attempting to cross our southwest border in March was at the highest level recorded in 22 years: 221,303. More than 5,000 refugees from Ukraine alone arrived last month there and at other ports of entry. Net foreign inflows into U.S. Treasuries have also been increasing. They totaled $75.3 billion in February alone as yields increased, marking the fourth consecutive month of rising inflows, according to the Treasury Department. There has been a global flight to dollar safety during the Russia/Ukraine war and foreign investors see our Federal Reserve as about to move more aggressively than many other central banks to raise rates. Dollar appreciation is attracting more capital to our shores in search not only of safety but of higher yield and returns. At this writing, the 10-year sovereign yields of Canada, the United Kingdom, France, Germany, Italy, Spain, Portugal, Sweden, Switzerland, the Netherlands, Japan and China are all below that of the United States Treasury. The US dollar has also hit a 20-year high against the Japanese yen.

Uncertain Paths

A stronger greenback means we pay less for imported goods — and that should be good news on many fronts, especially energy. We can certainly welcome any good news right now. But there are well-grounded policy questions about why we are importing so much oil and gas as well as resurrected talk of moving away from US dollar-denominated crude contracts. And the Federal Reserve has been loudly broadcasting its plans to tame inflation now at a four-decade high of 8.5% by tightening financial conditions that will certainly not sit well with some, if not many, investors, and at least two branches of government keenly attuned to borrowing costs, mandatory cost-of-living increases, this year’s staggering budget deficit, and our unprecedented national debt. This week, St. Louis Fed President Bullard is now trying to brace us for a 75 basis point increase when the Federal Open Market Committee next meets on May 3 and 4. For investors here and overseas, inflation — perhaps stagflation — the central bank’s actions, mid-term election result impacts, and the effects of the war in Ukraine are key factors for the rest of this year and perhaps throughout the remainder of the decade.

Havens Battered

The U.S. bond markets have taken a bad beating since the start of the year. Fixed income investors have been vexed by inflation, the Fed’s broadcasted plan to consistently raise interest rates in order to quell inflation, and accompanying expectations for low returns. Much of our investment grade debt has lost its standing and appeal as a safe haven for those investors driven by the need for income. In context, the first quarter ended on March 31 marked the bond market’s worst performance in more than 40 years, and the pain continues. This has actually ranked as one of the worst periods in recorded American history. We at HJ Sims have many bankers, traders, analysts and sales executives who in fact faced and maneuvered through the Volcker era and the Lehman collapse, two moments when year to date returns have suffered the most. We are not there by any means, but as we headed into the long holiday weekend, Treasury index returns were down 8.14% on the year, while investment grade corporate bonds were down 10.95%, high yield corporate bonds down 6.32%, taxable municipal bonds down 13.59%, investment grade municipal bonds down 7.64%, high yield municipal bonds down 5.92%, and even pre-refunded munis down 3.62%.

Markets Price in 11 Rate Hikes

This remains an unsettled time. The pandemic still impacts every sector of our society and economy. There are still many supply disruptions. Inflation at 8.5% affects all of us as we have to eat, live somewhere and travel somewhere for something. Mortgage rates have hit 5% for the first time since early 2011. Labor costs, energy prices and interest rates are all up. Bullish sentiment has hit a 30-year low. The markets have already priced in something like 11 Fed rate hikes through 2023 without thinking through all the implications. Investors – at least through the tax filing deadline on Monday – have looked to ultra-short duration and highly liquid instruments. Some have looked to incorporate more non-financial factors in the form of environmental, social and governance policies. There have been at least 20 new ESG-focused exchange traded funds launched so far this year. Tax-exempt mini ETFs have taken in $4.7 billion of new cash this year, averaging $444 million a week for the last 6 weeks.

Municipal Bonds

In the municipal sector, we have seen institutional bid-wanted volume rise to a two-year high.  Last week, investors pulled $4.1 billion from muni bond mutual funds, the fourth largest such outflow on record. Tax-exempts continue to underperform Treasuries. The 30-year AAA municipal general obligation bond yield at 2.99% exceeds the 30-year Treasury at 2.98% at this writing. The 2-year muni benchmark yield has risen 41 basis points this month and stands at 2.18%. The 10-year at 2.64% is up 48 basis points in line with the 30-year jump. Municipal bond broker dealers are welcoming the higher yields and primary dealer inventory hit a new year-to date- high of $10.7 billion on April 6, with the vast majority having maturities longer than 10 years.

Last week, muni volume totaled $6.1 billion. Sales included a $68 million nonrated issue for Cypress Cove at Healthpark Florida sold through the Lee County Industrial Development Authority that has a 2057 term maturity priced at 5.25% to yield 5.10%.  The Public Finance Authority sold $45.9 million of Ba2 rated bonds for Ulwharrie Charter Academy in Asheboro, North Carolina that had 40-yield bonds priced at 5.00% to yield 5.10%.  Santa Rosa Academy in Menifee came with another BB+ rated charter school bond through the California Municipal Finance Authority with a similar final maturity priced at 5.00% to yield 4.87%.   This week, we expect $6.2 billion, including a $26 million non-rated sale by the City of St. Cloud, Minnesota for Athlos Academy, and a $10 million non-rated transaction for Venture Academy issued by the City of Minneapolis.

Also in the Markets This Week

This week is the second one for reporting corporate earnings for the most recent quarter. Analysts are expecting S&P 500 companies to report average earnings growth of 5.2% for the first quarter, well below the 32% profit growth posted in the last quarter of 2021. At this writing, the Dow at 34,911 is up 0.7% on the month while the S&P 00 at 4,462 is down 1.5% and the Nasdaq at 13,619 is off 4.2%. Oil prices have risen to $102.43 a barrel, up 2.1% so far this month, while gold at $1,957 is up $13 an ounce and silver at $25.27 is up 1.5%. Bitcoin prices have sunk 9.5%.

Springing Ahead

The second quarter of the year has begun. For most, tax season is behind us. But just as Roosevelt Avenue is impacted by the regular thunder of the elevated 7 Train line known as the “International Express” passing over Roosevelt Avenue, we as investors are impacted by domestic and international events. But Spring has sprung and, no matter what the latest headlines and tickertapes report, we are fully engaged with our clients to take control over portfolios by encouraging diversification, sticking to our risk profiles, watching monthly or semi-annual coupon income flow instead of daily price fluctuations, protecting principal and relying upon fundamental analysis to carefully choose new investments worthy of available cash. Reach out to your HJ Sims representative today and spark a vibrant dialogue in an investment language that resonates with you, your family and your business.

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

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