by Gayl Mileszko
British Prime Minister Margaret Thatcher once argued forcefully that “there is no alternative” (TINA) to capitalism as an economic system. Nearly 30 years later, equity traders adapted her slogan to fashion the narrative that in prevailing market conditions there is no alternative to stocks, that all other investment opportunities are worse. The acronym TINA popped into Wall Street parlance after the 2008 financial crisis. But it has not been heard much this year. Returns for the Dow are down 9% year-to date, the S&P 500 has lost 13%, the Russell 2000 has declined 15% and the Nasdaq has fallen 21%. Conventional equity funds have seen outflows for 28 consecutive weeks. So, we think a new mantra is now in order, BRANDY: Bonds Really Are Now Delivering Yield.
Stock and Commodity Markets Flat or Down This Month in Volatile Trading
Stock market volatility as measured by the VIX is up 13% this month. After seeing gains earlier this month, the market has sold off in recent sessions, leaving most indices flat for August. The Dow stands at 32,909, the S&P 500 at 4,128, and the Nasdaq at 12,381. Only the Russell 2000 at 1,919 is up 1.8% in August. Oil at $93.74 a barrel is down 5%, silver at $19.16 an ounce is down 6% and Bitcoin at $21,466 is off by 10%.
Bond Yields Surge
Bond yields have been surging all year long but the move has not been a slow and steady one. The MOVE Index which measures bond market volatility has jumped from 84 at the start of 2022 to 133, where it now stands at double the 10-year average. The 3-month Treasury currently stands at 2.79%; the markets have not seen it this high since January of 2008. The 2-year and 10-year Treasury yields have risen more than 40 basis points this month alone to 3.29% and 3.04%, respectively, and the 30-year yield is up 25 basis points to 3.25%. With talk swirling about a series of aggressive rate hikes, prices on short maturities have sunk, elevating yields to unusually high levels. The 2-year Treasury yield has risen from 0.76% to now surpass that of the 10-year since July 5; it has even closed higher than the 30-year yield since August 2.
Central Bank Policy
Markets are still assessing the spine of the Fed, the strength of its commitment to quashing demand in consumers. Many look at the resilience and of the average shopper and the ease with which retailers have raised prices and question whether raising rates will have much of an impact at all on inflation. Some think we need to look deeper into the root causes and put an end to further stimulus. Perhaps not enough of us worry about the bigger and bigger bite that interest costs are taking out of the federal budget. And now, since China has been selling Treasuries for seven straight months now, new concerns are being raised about the global appetite for Treasuries. There are ten auctions scheduled for this week alone and the last was met with soft demand.
Futures Trading Adjusts to a 4% Max Rate
Fed futures trading at this writing reflects a 50.5% probability of a 75 basis point increase in the target rate at the September 21 Federal Open Market Committee meeting; the likelihood of a 50 basis point increase is 49.5%. Futures traders currently expect 25 basis point hikes at the November, December, February and May meetings until the target rate is in the 3.75% to 4.00% range. Markets then anticipate a rate cut in June.
Municipal Bond Yield Curve Inverts on Short End
The tax-exempt market has been much slower to adjust to all the hawkish Fed talk, marching instead to a drumbeat of persistent demand, low volume, solid credit, flows into municipal exchange traded funds and, more recently, into high yield mutual bond funds. But traders and customers had some major attitude adjustments last week. The 2-year AAA municipal general obligation benchmark yield has jumped 43 basis points to 2.18% in the last 7 trading sessions. The 10-year yield at 2.50% has risen by 26 basis points and the 30-year at 3.13% is up 20 basis points. For four days last week, the 1-year muni yield exceeded the 5-year yield, an inversion of the muni curve rarely ever seen. It has since reverted to the more normal, upward sloping curve but conditions have by no means normalized. The top-rated one-year muni bond currently yields 2.17%. For those who have not recently looked at prices and yields in the muni market, we invite you to contact your HJ Sims representative for some very attractive income opportunities.
HJ Sims in the Market Last Week
HJ Sims guided one expanding K-10 North Carolina charter school through last week’s market maze. Shining Rock Classical Academy in Waynesville came with a $21.3 million non-rated revenue bond through the Wisconsin conduit Public Finance Authority. We structured the financing with four term bonds including a final maturity in 2057 that priced with a coupon of 6.125% to yield 6.20%. Among other school deals, the Equitable School Revolving Fund came to market with an A rated pooled financing for 58 charter schools in 19 states. Bonds sold through one issuer in Arizona had a final maturity in 2052 priced at 4.25% to yield 4.33% and bonds sold through a California issuer offered term bonds in 2057 priced at 5.00% to yield 4.40%. Central Charter School in Lauderdale Lakes had a $50.5 million non-rated sale through the Florida Development Finance Corporation that included 35-year term bonds priced at par to yield 6.00%. The Corporation also issued $45.1 million of BB+ rated bonds for Cornerstone Charter Academy in Belle Isle that featured a 2056 maturity priced at par to yield 5.25%. The largest high yield transaction in the market was also issued by the Corporation: it was a $770 million non-rated revenue bond, subject to the alternative minimum tax, for the Brightline Florida Passenger Rail Expansion Project, structured with a single 35-year term bond priced with a 7.125% coupon to yield 9.18% and a mandatory tender date of 10/03/2023.
Uncharted Territory
Hundreds of charts and graphs are produced and analyzed daily by the brightest minds on Wall Street but none can realistically factor in the uncharted territory in which we trade these days. Next month, the Fed is expected to proceed with reductions in its $9 trillion balance sheet with runoff caps that increase to $35 billion for mortgage-backed securities and $60 billion for Treasuries. The economy is slowing, hobbled by lingering pandemic supply issues and an inflation rate that has risen since May of 2020 to levels not seen in more than 40 years. Half of all employers are now planning layoffs. Home sales have plummeted and inventory has surged to levels not seen since 2009. The Conference Board just took a look at its leading indicators index and concluded that we will see a third quarter of negative GDP growth and prospects for a “short but mild recession” by the end of the year or early 2023; several from the “schools of doom” project a much more severe and protracted downturn.
Talk In The Tetons
Much attention is being paid to the annual central bank symposium being held in Jackson Hole, Wyoming at the end of the week. The visual backdrop of the Tetons well suits the mountain of issues faced by bankers and the enormity of their tasks in attempting to quelch an inflation that their own policies created without producing massive unemployment, market upheaval and recession. Investors will tune in to the opening remarks to be made by Fed Chair Jay Powell at 10:00 on Friday morning, but no one expects any earthshaking revelations. Traders are longing to hear not so much about how high rates will go but how long they will stay there, and they crave lots more detail about plans for the balance sheet reduction. But the bankers still have weeks of economic data to review ahead of the next two-day meeting that begins on September 20. And we will not even learn of specific topics and speakers until Thursday night. There is a blackout on press coverage during the informal weekend events but investors around the world would love to be bugs on the wall at the Jackson Lake Lodge.
Bonds Really Are Now Delivering Yield
This is the last full trading week of August. Next week begins the long slide into the Labor Day weekend, the unofficial start of Fall and a new school year. It is a good time to sharpen your pencils, call your HJ Sims representative, and go over your portfolio and financial plans for the remainder of the year, keeping BRANDY in mind.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.