Market Commentary: Under Pressure

By Gayl Mileszko

Under Pressure

Most professional and amateur cooks know the pressure cooker to be a sealed pot with a valve that controls the steam pressure inside.  As the pot heats up, the liquid inside forms steam, which raises the internal pressure, and helps foods like stews and beans tenderize and cook faster.  The first such device was invented in 1679 by Denis Papin, a French physicist. He called his pot the “Digester.”  When the first models in his experiments tended to explode, Papin added that steam release valve which later came to inspire the development of the piston-and cylinder steam engine.  It was not until 1864 that the first manufactured pressure cookers came to be made of tinned cast iron, and none were not designed for home use until 1938. Today’s versions, like the popular Instant Pot and Ninja, have air fryers and digital controls and are wildly popular around the world.

Queen Lyrics

The music video for the 1981 hit song “Under Pressure” flashed footage of traffic jams, packed commuter trains, riots, and explosions, reflecting the pressure-cooker mentality of times marked by inflation, hostage-taking, assassination attempts on the U.S. president and the Pope, Iran-Contra, the arrival of the first cases of HIV/AIDS in America, the microcomputer, the space shuttle, paintball, and MTV. The British rock band Queen and David Bowie collaborated on the chart-busting song, recorded in Switzerland, which cited the terror of knowing what the world is about, decried days when it never rains but pours, and reminded us that sitting on the fence does not work.  

Giant Pressure Cooker

The markers have changed over time but, four decades later, the world is still a giant pressure cooker. We have valves in the form of domestic and foreign policies that release some of the steam, usually most of it. But there are still explosions from time to time, and it is nearly impossible to predict when and where they will occur.  A buildup of steam is evident in our politics, within and between our branches of government, on our border, in courtrooms, across college campuses, among our allies. War is rampant, inflation is back, nuclear weapons are threatened, the recovery from pandemic setbacks is slow, dangerous alliances are forming, and the battle for control of space, of water, of rare earth minerals is staged.

Financial Pressures

Financial stresses on more than 90% of U.S. households have mounted in this era of high interest rates and stubborn inflation. Debt is escalating and in no case is that clearer than with our own federal government. Since remnants of the trillions in aid are still sloshing through our economy, additional fiscal stimulus is highly unlikely outside of a recession, which is entirely still possible.  So the squeeze is on the central bankers to do something to alleviate the plight we face, particularly for those whose mortgaged homes are underwater, auto loans delinquent, credit cards maxed out, savings depleted, and teetering on the brink of default or bankruptcy. As just about everyone in the world is aware, the Federal Open Market Committee meets this week to discuss the interest rate outlook. Even though the central banks of Sweden, Switzerland, Canada and the European Central Bank have all recently agreed to cut rates, no one expects the Fed to do so right now. But all eyes will be on the dot plot of projections made anonymously by the voting members. Markets have generally assumed that, in the next four meetings, there will be one or two rate reductions, but if a majority or significant minority signal none — or, goodness forbid, an increase on the horizon — both stock and bond markets could yelp in pain.  Imagine how much more pressure would build if this were still 1981, and the FOMC did not publish their rate decisions for nearly two months after the meeting! 

Bond Market Stress

Lesser stresses, but pressures, nonetheless, have been placed on the bond markets of late due to the extraordinarily high levels of issuance. In May, there were 38 of Treasury auctions; last week saw 6 and this week will see 10. The $39 billion 10-year Treasury sale on Tuesday was well received, but other recent sales have been described as poor in that they met with relatively weak demand. High yield corporate sales total $151 billion so far in 2024, exceeding the total for the entire year in 2022. Investment grade corporate sales exceed $800 billion, up 21% from 2023. Demand for corporates, however, remains strong:  last week’s $35 billion higher rated calendar saw subscription rates of 3.3 times the par offered. 

Municipal Volume Climbs

The municipal market has seen unusually high levels of sales, exceeding $10 billion a week for several weeks in a row, including than $15.5 billion last week.  Broker inventories hit a high for the year last month, and this has caused underwriters to be more cautious in pricing, particularly as several major marketmakers have exited the business: Citi and UBS. Bonds offered daily in the secondary market have also been extremely high at $34 billion. But buyers continue to be attracted to the yields and tax-exemption. In part, this is due to the $26 billion of principal and interest payments made on June 1, and another $122 billion coming in for reinvestment by the end of August. Lipper reported $549 million of inflows into muni funds last week, and $1.5 billion of flows into tax-exempt money market funds have raised assets under management to $130.7 billion, the highest level since July 1, 2020. Our trading desk is working well with our retail and institutional clients to meet the elevated level of current demand that has not been seen in many years.

High Yield Muni Sales

Bloomberg estimates that long term, fixed rate, high yield tax-exempt issuance through May 31 totals only about $5.3 billion, and that includes a $770 million non-rated series of Brightline Passenger Rail Expansion bonds. The market has only seen 23 charter school transactions and 6 senior living financings that were non- rated or rated below investment grade so far this year. With the lack of supply, some larger fund buyers with high yield portfolios are being forced to invest new cash in lower yielding investment grade credits. Investment grade muni index returns are still in the red year-to-date, whereas high yield and non-rated muni indices are outperforming Treasuries, corporate bond, mortgage-backed and convertible bond benchmarks.   The slate of higher yielding munis last week included a $24.1 million Ba3 rated sale for Cornerstone Classical Academy in Jacksonville, Florida that came with 2059 terms bonds priced at par to yield 5.50% and a $13.7 million Ba2 rated limited offering for Desert Heights Charter School in Glendale, Arizona that had a final maturity in 2057 priced at 6.125% to yield 6.25%. This week, we expect to see a $20.4 million non-rated placement for Pioneer Technology and Arts Academy in Phoenix, Arizona; a $34.4 million BB+ rated deal for First Philadelphia Preparatory Charter School; a $15.7 million non-rated limited offering for Coweta Charter Academy in Senoia, Georgia; a $9.6 million sale of sustainable bonds for Athenian e-Academy in American Fork, Utah; and a $13.3 million BB rated private school financing for Turning Point School in Culver City, California.

HJ Sims in the Market

Last week, HJ Sims brought a $16.1 million BB rated transaction for Champion Schools with campuses in San Tan Valley, Phoenix and Chandler, Arizona. This is a Pre-K to grade 8 school with 1,342 students chartered by the state’s Board for Charter Schools that has been educating students since 1999. We structured the deal, issued through the Sierra Vista Industrial Development Authority, with a final maturity in 2064 that priced with a coupon of 6.375% to yield 6.45% and sold the bonds to accredited investors and qualified institutional buyers in $100,000 denominations. This week, we have a $20.3 million double-A rated financing for the Greater Ouachita Water Company in Louisiana that is insured by Build America Mutual. Please reach out to your HJ Sims representative for more information.

Market Movers

This week, most attention on the part of U.S. traders, aside from Fed forecasts for future monetary easing, is focused on data releases on the consumer and producer price indices.  The U.S. political primary season is over and the focus is turning to the conventions in July and August. The bond issuance calendars have slowed and investors are a bit more cautious, braced for surprises, but not expecting any, despite all the events underway overseas: the snap elections just called in France, the G-7 in Italy, the Summit on Peace in Ukraine in Switzerland, the Jordan meeting on aid to Gaza, the BRICs gathering in Turkey, the Bank of Japan rate meeting. It is not at all surprising that more than 320 single family offices with an average of $2.6 billion of assets surveyed by UBS cite geopolitics as their top concern.

Where Things Stand

HJ Sims bankers, traders, brokers and advisers welcome your call to discuss current market conditions and how we can help you to meet your borrowing and investing needs as we approach the end of the second quarter. At this writing, the Dow, S&P 500, and Nasdaq indices are all higher in June.  Almost all commodities except natural gas are down. The 2-year Treasury yield is 4.68%, the 10-year is at 4.26%, and the 30-year yields 4.43%. The 2-year AAA tax-exempt municipal general obligation benchmark yield stands at 3.16%, the 10-year at 2.92% and the 30-year at 3.79%.