By Gayl Mileszko
Twelve Labors
In Roman mythology, Hercules was a demi-god of superhuman strength and violent passions who, in enduring mighty hardships, became the epitome of bravery. He was perhaps best known for completing the 12 labors assigned to him by King Eurystheus, starting with wrestling a man-eating lion. Over time, he evolved from a Greek legend into a major icon of popular culture. To this day, Hercules still evokes images of great power, spirit, and resilience. Not surprisingly, a number of American manufacturers have aligned their products and brands with the superhero. Amazon uses a Hercules robot to move goods in its warehouses. BAE Systems makes a Heavy Equipment Recovery Combat Utility Lift and Evacuation System military vehicle. Rezvani sells the 2025 Hercules 6×6, a $295,000 off road truck with bulletproof glass and body armor. The Lockheed C-130 Hercules, first introduced in 1951, is the longest continuously produced military aircraft in history. Other American companies have used the Hercules name in peddling dynamite, tires, missiles, silver, bicycles, sealants, tools, sound cards, and many other products.
Herculean Efforts
We live at a time when we still need heroes and heroines — but we no longer rely upon myths for inspiration. Herculean efforts are being made every day by very real people among us: Special Olympic athletes, Coast Guard rescue teams, firefighters, Red Cross, Salvation Army, and Samaritan’s Purse volunteers. Few of them make headlines. Some monumental efforts get occasional ink: those in backrooms who toil to secure our neighborhoods and borders, eliminate wasteful government spending, build affordable housing, teach students with special needs, revitalize U.S. shipbuilding, and reshore drug, auto, and electronics manufacturing. But, no matter our politics, we have to agree that, Herculean work is underway in Washington with respect to border security, deregulation, fairer trade, and securing new investments in the U.S. So far, we have seen little progress in reducing our budget deficit and national debt, but yeoman’s efforts are underway to broker peace agreements in the Ukraine and Middle East. Achieving success in these realms will undoubtedly require more than one superhero.
Much More to Accomplish by Labor Day and Year End
The Trump Administration policy rollouts have not been smooth and the pace has come faster than most investors ever imagined. As we all know, markets have been extremely volatile in response to the news, the size, the extent, the speed, sequence and range of announcements. The Congress has been deliberative, much slower to act. But the pressure is on the legislative and executive branches to get a budget, tax, and larger policy bill – including an increase in the debt limit — in place by summer, and a new spending bill before the start of the new fiscal year on October 1. The Judiciary, and the Supreme Court in particular, is being asked to take on a huge new role in resolving constitutional disputes arising for the first time in centuries. The current SCOTUS session ends next month and the next will begin in October. And, the Federal Reserve which, up until recently, has been running the economy for as long as most traders can remember, has now taken a back seat. But futures traders expect that economic conditions may well cause them to make two quarter point cuts by the end of December.
Congress Wrestles with Major Reform
Lions, perhaps many more vicious than the one that Hercules wrestled, appear in various architectural forms around the U.S Capitol. Member of Congress always find themselves navigating around them every day. Every 6 or 8 years or so, the roar intensifies for a new overarching tax, farm, and other program authorizations. We hear one now. Some U.S. House members will be lionized for their accomplishments. Others, along with their wish lists, will get fed to the proverbial lions. Members of the House of Representatives are struggling to produce a reconciliation bill, and it matters a lot to us in public finance because the tax-exempt financing tool available to senior living and charter school borrowers, among others, has been threatened for elimination. We at HJ Sims along with our banking, advisory and investing clients, are fierce advocates of municipal tax exemption and private activity bonds. We have been relieved to know that the latest draft from the House tax-writing committee has not targeted our industry. But we know that the threat is not over. There are so many more steps and issues involved in the process of drafting a bill and getting it through the scorers and parliamentarians in both chambers before it gets to the President’s desk. We take nothing for granted this year and ask all readers to remain involved as vocal advocates until a new bill is signed into law.
Division of Labor
As we await news from House Ways and Means on tax negotiations, and from the House Energy and Commerce Committee markup on Medicaid, municipal market watchers work to keep a close eye on fund flows, issuance, redemptions, and yields. We have seen two straight weeks of net inflows exceeding $1 billion into municipal funds. Looking back over the course of the year so far, conventional mutual funds have seen assets drop by $2.1 billion to $792 billion. Municipal exchange traded funds have, however, taken in a net of $7.4 billion and the assets held by 125 ETFs now total $146 billion. Fourteen new muni ETFs have launched this year, and 2 more are in the process of being registered. Attractive taxable equivalent yields have engaged retail buyers although index returns, with the exception of taxable munis and one-to-seven-year tenors, are negative. If the last 10 years of history holds, average returns in May, June and July will be positive. In part this trend is attributed to the seasonal peak in principal and interest payments made to bondholders. This year, $107 billion of principal and $42 billion of interest will be paid out between June and August and available for reinvestment.
Twelve Years of Yields
Some borrowers, fearful of volatility and hoping to hold out for lower rates, have been reluctant to come to market this year. In cases of refundings, a swing of 100 basis points may clearly render a financing uneconomical. And we did see such a wide swing in April. Right now, the tax-exempt market has calmed although there is no clear conviction on direction among traders. Wall Street forecasters are divided on whether or not we will see Fed rate cuts this year. Very few wager that the Fed will lower rates at the next meeting on June 18. Futures trading currently reflects the expectation for quarter point cuts in September and December. But some predict that we will not see reductions until 2026, and a few actually anticipate the prospect of an increase to counter tariff-induced inflation. At present the 2-year AAA municipal general obligation bond benchmark yield stands at 2.88% and the 10-year is 3.31%. The 30-year tax-exempt yield at 4.40% is only 54 basis points below the comparable U.S. Treasury at 4.94% and below the year’s high of 4.84%. At this point in time looking back 12 years, consider that markets grappled with plenty of other uncertainties and far greater shocks. These included massive fund outflows, regional bank failures, inflation, COVID, massive federal stimulus, federal government shutdowns, debt ceiling crises, the downgrades of the U.S. sovereign rating, emergency Fed actions, the taper tantrum, and the Detroit and Puerto Rico bankruptcies. Nevertheless, state, local and nonprofit borrowers brought more than $5.2 trillion of issues to market during this period. And, over the last 12 years, the 30-year muni yields in mid-May have ranged from 1.60% to 4.40%.
HJ Sims Proud to Be an Industry Leader in Two Key Muni Sectors
For a variety of good reasons, both municipal bond borrowers and buyers have driven the tax-exempt market volume to new highs this year. Senior living, hospital, education, student housing and other nonprofits have come to market to take advantage of solid buyer demand and prevailing rates. Last week, we saw the Florida Development Finance Corporation sell a $4.3 million non-rated financing for Naples Classical Academy that was structured with a 2058 term bond priced with a coupon on 7.00% to yield 7.579%. The Wisconsin Health and Educational Facilities Authority had an $81.2 million non-rated financing for Chiara Housing and Services that featured a 2060 maturity priced at par to yield 6.625%. At this writing, 19 senior living and care financings have come to market with combined par value of $2.19 billion. HJ Sims is proud to be the leading underwriter with 5 transactions totaling $842.8 million. We have also underwritten the largest number of charter school and private school financings with six of the 28 deals priced thus far. This week, we are bringing a $26.9 million non-rated financing for Hozho Academy, a preK-11 charter school in Gallup, New Mexico affiliated with Hillsdale College’s Barney Charter School Initiative, coming through the Wisconsin Public Finance Authority. Please reach out to your HJ Sims coverage for more information.
Fruits of Your Labor
This week, we expect a $14 billion calendar and next week will also see healthy issuance before thing start to wind down ahead of Memorial Day and the start to summer holidays. June, July and August are big months for municipal bond investors as an estimated $150 billion of principal and interest payments will hit accounts before Labor Day. Together with the $142 billion sitting in tax-exempt money market funds, that is a lot of money available to deploy. We have a broad array of options for you to consider. So, before you start making plans for the summer, be sure to contact your HJ Sims representative for guidance. We look forward to working with you to protect the fruits of your labor, boost your income, and meet your investment and financing goals.