By Gayl Mileszko
Market Commentary
What Next?
We are now more than halfway through this remarkable American anniversary year and cannot help but wonder: What comes next?
Quite a number of records have already been set. Artemis II astronauts travelled 252,756 miles from Earth. Norway won 41 medals at the Winter Olympics. SpaceX raised $75 billion with its initial public offering and Elon Musk became the world’s first trillionaire. Bulgaria became the 21st member of the Eurozone. New York City elected a democrat socialist as mayor. Maria Corina Machado handed her Nobel Peace Prize medal to Donald Trump. The price of gold hit $5,335 an ounce for the first time. The Eagles Greatest Hits became certified quadruple diamond with sale of 40 million albums. The U.S.-Russia nuclear arms treaty expired removing all limits on arsenal size. The Dow Jones Industrial Average surpassed 53,000 points. Nvidia became the world’s largest company by market capitalization. Iran closed the Strait of Hormuz. Gallup announced it will no longer track public opinions of presidential approval.
Wild Headlines Every Day
There are plenty of other head-shakers. AI models are going rogue. One in 10 Americans surveyed believe that the greatest source of risk to their safety in daily life is “politics”. More than 300 municipalities have placed bans or moratoriums on the construction of hyperscale projects. Another 830,000 American workers dropped out of the labor force in June, bringing the total number of Americans over the age of 16 not working to an astonishing 105.8 million – more than during COVID, more than during the Great Recession. The Miami metro area has become more expensive to live in than greater New York City. Due to Canadian wildfires, four U.S. cities became the most polluted in the world last week: Chicago, New York, Washington, D.C., and Detroit. Inflation is unrelenting; date night now costs an average of $189.
Inflation Means No Upside to U.S. Treasuries?
To more closely reflect reality, the Bureau of Economic Analysis is planning to change how it measures prices that influence the core inflation rate. The Chairman of JP Morgan Chase says that because inflation has been over 3% for almost five years, he personally sees no upside to investing in Treasuries at this point – and his bank is one of the largest primary dealers of Treasury securities. The most recent $22 billion 30-year auction cleared at an interest rate of 5.058%, the highest yield for the benchmark since before the Global Financial Crisis. The 30-year Treasury yield has stayed above 5% for 28 days this year, the most since 2007 when it was trading above that level for 50 days. At this writing, the long bond yields 5.158%; it has been above 5% for 13 straight sessions. For nearly two decades, five percent was considered something of a ceiling, now it is starting to look like more of a floor. The level is attractive to investors. It is also a sign that something has changed.
Competition from AI Bonds
Twenty years ago, we had a $4.28 trillion Treasury market; has since exploded in size to $31.1 trillion. Investors are more than uncomfortable with the fact that our debt is over 100% of GDP now, and that there is no plausible plan to reduce our budget deficit. With interest costs now the third largest federal budget item after Social Security and Medicare, they see a deteriorating fiscal outlook and are demanding higher yields to take long-term risk with government bonds. At the same time, they are being shown some very attractive high yielding bonds from tech companies. Goldman Sachs counts $489 billion worth of AI-related debt issued so far this year. On Wednesday, Amazon’s 6.05% A1/AA rated bonds due in 2076 traded at $93.976 to yield 6.456%. Alphabet Aa2/AA+ 6.125% bonds due in 100 years traded at $90.577 to yield 6.759%. Meta 6.30% bonds due in 30 years rated Aa3/AA- traded at $94.287 to yield 6.746%. CoreWeave’s B1/B rated 9.25% senior unsecured bonds due in 2030 traded at $95.806 to yield 10.595%.
Tax-exempt Yields Higher, Demand Heavy
Municipal bonds sold off for the past two weeks and continue to demonstrate weakness. Yields are drifting higher, to the delight of bondbuyers, with inflation fears growing again, Fed members making hawkish comments, and the possibility of a Middle East war expanding. At this writing, the 2-year general obligation muni benchmark stands at 2.49%, up 14 basis points since the start of the month. The 10-year at 3.24% is 29 basis points higher. And the 30-year at 4.41% has risen by 22 basis points. But demand continues to exceed supply by a significant margin. Last week’s A1/A rated $2.5 billion Aquarion Water Authority deal drew $70 billion of orders, one of the largest on record. Muni ETF flows have been positive for 23 weeks and Lipper reported $1.4 billion of net inflows into funds last week. This month, investors are receiving a total of $59.1 billion of principal and interest, and on August 1 they will see $37.5 billion more. We will see a hit to returns this week, but through last Friday, indices place high yield and non-rated munis at the top of the fixed income class, up 3.20% and 3.02%, respectively.
Muni Sales Last Week
Last week’s $13 billion muni slate included two charter school transactions. The Massachusetts Development Finance Agency issued $35.4 million BB+ rated bonds for Lowell Community Charter Public School, pricing the 2066 term bonds at 5.50% to yield 5.62%. Gray Collegiate Academy sold $91.7 million non-rated bonds through the South Carolina Jobs-Economic Development Authority; the deal featured 40-year term bonds priced with a coupon of 6.375% to yield 6.55%. And the North Carolina Medical Care Commission had a $45.6 million non-rated transaction for Carolina Village structured with a final maturity in 30 years that priced at 5.50% to yield 5.54%.
This Week’s Muni Slate
The municipal bond calendar is expected to total $12 billion this week with a heavy slate of university financings. In the senior living sector, the Public Finance Authority plans an $83.2 million non-rated bond issue for Peapack Senior Living in New Jersey, and Ohio’s Lancaster Port Authority has a $38.8 million non-rated sale for Vivera Fairfield. In the student housing space, Indiana State University is offering $23.1 million of A2 rated bonds. North Star Charter Schol in Eagle, Idaho is in the market with a $16.5 million Aa2 rated, state-enhanced refunding. And, among other charter schools, Imagine International Academy of North Texas is bringing a $24.7 million state-enhanced Aaa rated refunding deal; Lifeschool of Dallas also has a PSF-guaranteed remarketing.
Market Movers
This week, markets are looking at the Strait of Hormuz, effectively closed again. Oil is up over $100 a barrel and gasoline prices now average more than four dollars a gallon following reports of Iranian attacks on tankers and escalating U.S. strikes against Iran. The Houthis have declared a blockade of Saudi oil and are striking ships in the Red Sea. The U.S. and Saudi Arabia suddenly announced a nuclear cooperation deal. The European Central bank kept its rates unchanged, so markets now anxiously await Federal Reserve action next week. Few of the usual hints or leaks are coming from central bank officials. At this writing, futures trading reflects a 38% chance of a 25-basis point rate increase, and a 28% likelihood that rates will increase by 50 basis points in September. The 10% Section 122 tariffs expire on Friday. It is a slow week for economic data, but second quarter corporate earnings reports roll out for companies representing a broad section of the economy: American Express, Tesla, IBM, Schwab, Verizon, Lockheed Martin. Eight Treasury auctions are scheduled. In Washington, the U.S. House sent a continuing resolution funding over to the Senate; they kept most federal programs at current spending levels through December 4. The stopgap aims to avoid a partial government shutdown during prime campaign season, but it is by no means a done deal; the Senate time to make plenty of changes before the fiscal year ends on September 30.
Old Ways, New Ways, Better Ways
2026 has been a record setting year. The fireworks over the nation’s capital. The Supreme Court rulings. The new Chairman of the Federal Reserve sitting near the old Chairman and setting up task forces to look at new ways to replace old ways. There are more records to come, no doubt. We can never be certain about what lies ahead, but we know it helps to have outside perspective and insight from those involved in the day-to-day markets. Reach out to your HJ Sims representative today to help prepare you for what the markets may have in store.