by Gayl Mileszko
On Tuesday, the Earth’s tilt brought the North Pole closest to the sun and those of us in the Northern Hemisphere enjoyed the longest day of the year. In the financial markets, nearly every day this month has felt like a long one, and some have been scorchers. We saw some significant volatility ahead of the Federal Open Market Committee meeting last week as traders began to price in a 75 to 100 basis point rate hike that ended up at 75. Uncertainty over the extent of the next Fed increase on July 27 is still a market mover, but for the moment it seems outweighed by concerns over inflation and the prospect of recession.
Downward Again
Midway through June — with 13 volatile trading sessions behind us — the VIX at 31.13 is up 19 percent on the month. At this writing, as of the close on Friday, the four major stock indices are all down about 10 percent: the Dow at 29,888 has lost 9.4%, the Nasdaq at 10,798 is down 10.6% as is the Russell 2000 at 1,665, and the S&P 500 at 3,674 is off 11.1%. Oil prices at $109.56 a barrel are lower by 4.5%. And even gold and silver have fallen 0.4%. But the hardest hit has been the crypto market: the two bellwethers, Bitcoin and Ether, are both down more than 70% from the all-time highs seen in early November.
Higher Yields
Fixed income returns have also tilted further into negative territory for reasons unrelated to credit at a time when everything seems to look like a risk trade. Yields in what is historically seen as the safe havens jumped yet again last week. The 2-year Treasury at 3.17% has risen a staggering 62 basis points in June and 244 basis points since the start of 2022. The 10-year at 3.22% is up 38 basis points this month, and the 30- year at 3.27% is 23 basis points higher. To reflect the mindset of traders, the yield curve briefly inverted such that short-term yields were higher than those of much longer maturities, and at the close on June 13, in a rare moment, the 2-year, 10-year and 30-year yields all stood at the same level of 3.35%. The 10-year Baa rated corporate bond index has seen a 52 basis point increase in yield to 5.78% in June. And on the tax-exempt side, the 2-year AAA general obligation municipal bond yield has risen 23 basis points to 2.06%, 182 basis points above where it began the year. The 10-year muni benchmark yield at 2.91% has increased 44 basis points. And the 30-year at 3.27% is up 23 basis points month-to-date.
Rapidly Changing Conditions
Borrowers and buyers alike are trying to navigate markets that have been turning on a dime with economic data reports coming in well above or below estimates and concerns over whether the Fed is doing enough to rein in inflation. We see the need for tighter policy and we want higher yields in our portfolios, but we are terrified of the impact of higher rates on our personal and business lives. Consumers as well as investors are alarmed by the rapidity with which conditions change. Retail sales, factory output, and housing starts in May all turned negative, and residential mortgage rates at 6.10% have jumped by the most in 35 years.
Municipal Sales Last Week
The tax-exempt market did, however, see several higher yielding deals successfully price. The County of Cuyahoga sold $24.4 million of BB+ rated refunding revenue bonds for the Eliza Jennings Senior Care Network with a final maturity in 2042 priced at par to yield 5.50%. The Florida Development Finance Corporation issued $15.6 million of non-rated subordinate living revenue bonds for The Convivial Jacaranda Trace community in Venice that included 9% bonds due in 2056. In the charter school sector, the Utah Charter School Finance Authority brought a $19.1 million BB+ rated financing for Wallace Stegner Academy that featured 30-year term bonds priced at par to yield 5.75%. The California School Finance Authority had a $13.4 million BB-minus rated transaction for Citizens of the World Los Angeles structured with 40-year bonds priced at par to yield 6.375%. And the St. Paul Housing and Redevelopment Authority sold $4.3 million of non-rated lease revenue bonds for Career Pathways that had a 2057 term bond priced at par to yield 6.50%.
As Summer Begins This Week
Coming out of the Juneteenth holiday on Monday, all ears tilt again this week to Jerome Powell, the Fed Chair, who is up on Capitol Hill for his semi-annual grilling by House and Senate committees, to hear what is involved in the central bank’s new “unconditional” commitment to restoring price stability. We will also closely follow the release of data on jobless claims, new home sales, durable goods orders, consumer sentiment and expectations. The $7 billion municipal calendar includes a significant number of deals have carried over from last week as heavy outflows from open end mutual funds, and bids-wanted par over $2 billion on two trading days pressured the secondary caused issuers to pause and wait for stability and confidence over direction to return.
HJ Sims is in the market with a $58 million non-rated financing for High Point Academy Fort Worth. The bonds are being issued through the Arlington Higher Education Finance Corporation and we invite you to please contact your HJ Sims representative for more information. Also in the high yield sector, Gallatin County, Montana plans a $160 million non-rated taxable, sustainable refunding for Bridger Aerospace Group. Among other charter school financings, there is a $41 million non-rated deal for WHIN Music Community Charter School through the Build NYC Resource Corporation, Santa Fe South Schools has an $18 million non-rated refunding planned through the Oklahoma County Finance Authority, and the Louisiana Public Finance Authority has a $14.6 million non-rated issue for Lincoln Preparatory School.
For more information on our municipal offerings or questions about current market conditions, please contact your HJ Sims representative.