HJ Sims Market Commentary: Warped and Twisted

by Gayl Mileszko

The Milky Way is vast: it may be one of trillions of galaxies in the universe, but it is about a thousand light years thick and stretching some 120,000 light years from end to end, holding every alien planet that our telescopes have ever spotted. To travel once around, it would take 250 million years. The Sun is based along one of its smaller arms about 26,000 light years from the turbulent core, which is packed with supermassive black holes. It has a thin, flat disk of gas and an unknown number of stars, some of which are believed to be 10 to 13 billion years old, in the middle. Near the edges, however, it appears rather sloppy, quite twisted and warped. If viewed from the side, scientists report that it looks more like a softly poached egg sliding off a slotted spoon. A team of astronomers from the University of Warsaw recently mapped the Milky Way in three dimensions and, writing in the journal Science, speculate that the warp may have been caused by interactions with intergalactic gas, dark matter, or some of the dwarf satellite galaxies surrounding them. Eventually, in about four billion years, the Milky Way will collide with its neighboring galaxy, Andromeda, but for the time being it lives on, content to blow massive bubbles of hot gas.

Words Matter to the Markets

In the financial markets these days, there is quite a lot that is warped, twisted and bubbly. October, of course, is the month that has suffered the two worst stock market crashes in U.S. history. Hitting on nerves that are already raw from the pandemic, inflation and a year of ugly investment losses, on Monday JP Morgan Chase CEO, Jamie Dimon warned us not to be surprised if the S&P 500 plunges another 20%, in a manner more painful than the first 20, as a result of interest rates rising more than expected, the unknown effects of quantitative tightening, and the war in Ukraine. He described Europe as already being in recession and the U.S. headed that way six to nine months from now. His alarms came on the heels of President Biden’s terrifying choice of words last week when he quipped that Vladimir Putin’s threat to use tactical nuclear weapons in Ukraine raised “the prospect of Armageddon” to a degree not seen since the Cuban missile crisis of 1962. This sent chills down the spines of citizens and investors alike.

Issues Collide

Here in the final quarter of the year, inflation still runs at 40-year highs, our national debt has surpassed $31 trillion and nears a ceiling that seemed so high less than one year ago, the Fed is in its second month of significant Treasury and mortgage runoffs, China is preparing the celebrate the 100th anniversary of the founding of its communist party, the U.S. Department of Health and Human Services is procuring $290 million of the drug Nplate used to treat acute radiation sickness, and everyone from schoolchildren to global leaders are contemplating for the first time in sixty years the 13,000 nuclear warheads that exist in the hands of nine nations, more than 5,977 of which are based in Russia. These numbers, the prospects, are unthinkable for most of us. So, we focus on what we can comprehend. This week, Wall Street looks at the first third quarter corporate earnings reports, the minutes from the last central bank policy meeting, the relationship between OPEC+ production cuts and domestic gasoline prices, producer and consumer prices, retail sales and consumer sentiment, jobless claims in a shrinking workforce, mortgage rates at 6.81% sitting at the highest level since 2006, rulings and cases being considered in the new Supreme Court session, developments in the campaigns being run across the country with only 27 days to go until mid-term elections, the weakness in near-daily Treasury auctions as two of the largest buyers (sovereign and our own Fed) pull back, policy reversals in the United Kingdoms to calm turmoil in the Gilts market, and how the exceptionally high dollar is harming U.S. exports.

Interactions and Correlations

Stock market volatility has increased more than six percent since the start of the month; as measured by the VIX it stands at 33.63, up from 17.22 at the start of the year. The Dow has gained 1.8% so far in October, the Russell 2000 is 1.7% higher, the S&P is basically flat, and the Nasdaq has fallen 1.4%. Oil prices at $89.35 are up 12.4%, silver at $19.55 is up 2.8%, and gold at $1,680 has increased 1.2% while Bitcoin has declined 2.8%. Much of this volatility is the result of moves in the Treasury market. The Treasury curve remains inverted since July 5, and bond market volatility as measured by the MOVE Index is up 9.6% this month and a whopping 102% in 2022. The 2-year yield at 4.30% has risen 3 basis points and remains 36 basis points higher than the 10-year yield and 38 basis points above the 30-year yield. The 10-year has climbed 12 basis points so far this month and currently stands at 3.94%; the long bond at 3.92% is 15 basis points higher.  The 10-year Baa corporate bond index yield has risen in line with the Treasury and stands at 6.84%.

Last Week’s Star: Municipal Bonds

Tax-exempt municipal bonds have outperformed just about everything but oil in these past six October trading sessions. The SIFMA 7-day yield has been at or above 2.45% for two straight weeks now. The 2-year AAA municipal general obligation benchmark yield at 2.93% has fallen 16 basis points. The 10-year muni at 3.16% has dropped 14 basis points, and the 30-year yield at 3.74% is down 16 basis points.  Fundamental credit conditions are strong in nearly every muni sector and most technical factors remain favorable. On October 1, investors received $30 billion of principal and interest, and reinvestment demand remains elevated. Issuance is well below forecasts; only about $8 billion of issuance in the next 30-days while new redemptions and maturities will total about $13.6 billion.  Municipal bond mutual funds suffered another $3.25 billion of outflows last week as households shift strategies away from open end investment companies with sinking NAVs and high fees into more liquid exchange traded funds with minimal fees and individual bonds with credits that are familiar and can more easily be tracked. Mutual funds have lost more than $105 billion of assets this year and this has disrupted trading. Institutional offerings remain elevated at more than $2 billion a day and trading at $18.2 billion a day is well above the year’s average at $13.8 billion.

Tax-Exempt Investment and Financing Options

Investors seeking higher tax-exempt yields found several opportunities in the primary market last week. The Pima County Industrial Development Authority sold $214.7 million of non-rated senior living revenue bonds for La Posada at Pusch Ridge; the financing was structured in four series with a final maturity in 2057 priced at par to yield 7.00%. And the State of Ohio issued $37.1 million of higher education facility revenue bonds for Capital University that included a 30-year maturity priced at 6.00% to yield 5.90%. On the forward calendar, high yield buyers await a $99 million BB+ Illinois Finance Authority sale for Plymouth Place, a $17.8 million non-rated transaction for Whitney Center by the Town of Hamden, a $10.5 million Toledo-Lucas County Port Authority financing for Northwest Ohio Classical Academy and a $20.9 million Florida Development Finance Corporation sale for Seaside Charters in Jacksonville. Please contact your HJ Sims representative for more information about the higher yielding bonds that may be suited to your investment needs and strategy, and the financing options that may be available for your school or community.

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

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