by Gayl Mileszko
In the animal kingdom, owls have the highest degree of head rotation. These nocturnal birds of prey have tube-shaped eyes that are unable to turn or roll, so they can only look straight ahead. But many among the 150 different owl species are capable of stretching and turning their necks 270 degrees in either direction for an incredibly wide field of vision. They have a complex, adaptive network of protective blood vessels and an anatomy that enables them to look to the left by rotating all the way to the right and vice versa. They can also position their necks so that their heads are almost upside down while their bodies are still facing forward.
We humans cannot attempt such Exorcist-type maneuvers, but as investors, as advisors, as managers, as parents and caregivers, we would sure love to have a 360-degree view of the world at all times, to be able to see whatever is coming from any direction so as to avoid trouble as well as pounce on opportunity. Alas, we are left to squint and swivel and seek out others with different angles, insight, and perspective to help inform our decisions and maneuver through all the feathers as they fly. Today, there are as many uncertainties as there have ever been or always are: the threats of the ongoing pandemic with its variants and resulting impacts on the economy and our daily lives, supply shortages and unrelenting inflation, employment issues, fiscal feuds, trade imbalances, monetary policy disputes, mandate controversies, overwhelming debt, shifting demographics, complex geopolitics, and terrorism on land and on line.
Prey of Data
The economic data coming out every week make our heads spin. GDP was recently growing at 6.7% and the unemployment rate has fallen to 4.8 percent. But cotton prices are at a 10-year high, oil prices are up more than 65% this year and natural gas prices have jumped more than 112% since January. Consumer confidence has dropped for three consecutive months. Job gains were much weaker than expected for a second straight month. Nearly 3% of the workforce – or a record 4.3 million Americans – quit their jobs in August. This week, we find out the latest trends in consumer, producer, import and export prices, jobless claims, retail sales and consumer sentiment. We will eyeball the minutes from the last Federal Open Market Committee meeting, and follow the results of Treasury auctions of 1- and 2-month bills and 30-year bonds.
Forward and Back
Owls are zygodactyl, which means their feet have two forward-facing toes and two backward-facing toes. They are able to pivot one of their back toes forward to help them grip a perch and walk. Buyers and sellers aim for this type of flexibility on trading floors which have been slippery and uneven in October, almost always a volatile month. At this writing, yields are up across the board. The 2-year Treasury at 0.33% is up 6 basis points on the month, the 10-year at 1.57% is 9 basis points higher and the 30-year at 2.09% has increased 5 basis points. The 10-year BAA corporate bond yield has risen 11 basis points to 3.21%. Municipal bonds have weakened as well but to a lesser extent. The top-rated 2-year benchmark at 0.18% has risen only one basis point. The 10-year at 1.18% is up 4 basis points and hit a high for the year. The 30-year at 1.69% is 2 basis points higher. On the equity side, the Dow has gained 534 points, the S&P 500 is up 1%, the Nasdaq is basically flat and the Russell 2000 is 1.4% higher. Among commodities, oil prices have risen by $5.61 a barrel, gold prices are $2.54 higher, silver is up 2.6% and Bitcoin has gained a staggering 30% to price at $55,897.
Eyes on the Primary Calendars
In the new issue market, high yield corporate offerings totaled $7.9 billion last week. More than $27 billion of investment grade corporate bonds priced. In the tax-exempt market, the slate was led by a $5.08 billion non-rated refunding for Loring Hospital in Sac City, Iowa which had a final maturity in 2027 priced at par to yield 1.90%. The Wisconsin Health and Educational Facilities Authority issued $38.6 million of non-rated bonds for PHW Muskego structured with a 40-year term bond that priced with a 4.00% coupon to yield 3.77%. The Authority also sold $25.9 million of BBB-minus rated bonds for Saint John’s Communities that settle in September of 2022; the final maturity in 2045 had a coupon of 4.00% and priced to yield 3.45%. A companion $18.2 million series included 2045 term bonds with a 4.00% coupon yielding 2.75%. Charter school revolving loan fund conduit issuers in four states brought a combined $217.5 million of A-rated bonds to market. Kestrel Verifiers provided the opinion on the social bond designation for these Equitable Facilities Fund Loan Program issues, with final maturities in 2051 and 2056 priced at 4.00% to yield between 2.34% and 2.42%.
The municipal calendar for this holiday-shortened week could run as high as $12 billion. There are two green bond deals, two sustainable bond sales, and one social bond issue scheduled, along with five forward settlement financings. On the high yield docket is a $36.9 million non-rated issue for LaGrange College in Georgia, a $35 million non-rated sale for Roosevelt University in Chicago, and a $55.9 million taxable non-rated California mobile home park refunding. In senior living, there is a $39.7 million BBB rated refunding for Ohio Living Communities, an $8.3 million non-rated forward delivery refunding for Wake Robin, and a $17.3 million non-rated sale for Wichita Senior Housing.
Swooping in on the Numbers
Investors hoot and holler this week as third quarter corporate earnings reporting season begins, led by the major banks. An increase in corporate profit would mark the fifth quarter in a row and rank as the longest streak since 2005. In the bond markets, analysts are focused on the weekly mutual fund flow data. There are 779 taxable bond funds with $2.91 trillion of assets under management (AUM) and 122 exchange traded funds (ETFs) with $310 billion. Together, they saw $2.83 billion of outflows last week. Those who study both the technical and fundamental sides of the business wonder if this is the start of an adverse trend. On the muni bond side, there are 549 mutual funds with $967 billion of assets, and 68 ETFs with $79 billion. High yield muni funds have had two consecutive weeks of outflows totaling $563 million.
There are two main independent fund flow reporting entities: Refinitive Lipper, which provides a preliminary weekly read each Thursday, and the Investment Company Institute which publishes a market-wide survey the following Wednesday. Lipper provides an initial snapshot that is closely followed; it often but not always ties to the more comprehensive ICI report. Individuals are by far the largest class of municipal bond-buyers in this $4 trillion asset class, and mutual fund flows are an excellent reflection of retail demand. In recent years, a number of households have been shifting from direct ownership of individual bonds to indirect ownership through mutual funds, closed-end funds and exchange traded funds. Some investors are looking for passive, low-fee options while others are looking for active managers offering a diversified portfolio with continuous credit surveillance. Since The Tax Cuts and Jobs Act of 2017, direct ownership by households is down 1% but indirect ownership through funds is up by 39%. In the first six months of 2021, household ownership of individual bonds fell by $45 billion while mutual fund holdings increased by $75 billion to $952.4 billion and ETFs by $12 billion to $76 billion. Tax-free interest income exceeds $60 billion a year.
Flows into municipal bond mutual funds have been net positive for 31 weeks, but there are signs of slowing and outlier outflows in some categories. Net inflows were +$10.2 billion in July, +$9.2 billion in August and +$5.6 billion in September. Analysts watch this data carefully as net withdrawals tend to create a self-reinforcing loop of negative sentiment which adversely affects prices. In March 2020, outflows exceeded $41 billion; benchmark 10-year yields rose from 0.93% at the start of the month to 2.79% on March 23, and the 30-year yield rose from 1.52% to 3.37%. During the 2008 financial crisis, the outflow cycle lasted 16 months and high yield funds lost 9% of their assets. In 2010, after Meredith Whitney’s appearance on 60 Minutes, high yield funds lost 8% over the course of 24 weeks. After the 2016 presidential election, high yield funds lost 7% over 8 weeks.
Owls are generally considered symbols of wisdom and intelligence in part due to their highly developed auditory system and incredible hunting abilities. We at HJ Sims take pride in our ability to listen carefully to your needs and concerns and help you hunt for investment and financing solutions. Whooo should you call for insight and guidance today? Your HJ Sims representative.
We encourage you to reach out to your HJ Sims representative for guidance in reviewing your portfolio.