by Gayl Mileszko
There was a time when a simple nail was among the most valued of commodities, made by hand to last longer than the wooden creation it was used to build. Archeologists have found examples made of bronze in Egypt dating back to around 3,400 B.C. In more recent eras, metalworkers would pass shafts of metal, usually heated iron, to skilled nailers who would then hammer and work the metal into the shape and size required. In the Middle Ages, nails were still rare enough that it was not unusual for building to be burned down just to recover the ones used in construction. The only spot where you could not remove nails for re-use was the door, which required studded nails, called doornails, which were hammered into the wood and then hammered smooth against it on the other side. In the 14th century, the idiom “dead as a doornail” first surfaced, referring to anything that was useless and ought to be discarded.
Losing Fear of Inflation and Higher Rates
Seven centuries later, nails, screws and doors are mass produced and other things have become more valuable. Things like information, security, liquidity, health, and affordability. On Wall Street and Main Street, talk of classified documents and the debt ceiling heats up, but it seems that a big wet blanket has suddenly been tossed over most of the inflation and interest rate fears that hammered investors in 2022. The new year has started out with rallies across virtually every asset class, although nothing significant on the domestic or global front has improved. Global debt is staggering, the pandemic still rages on, the Russia-Ukraine War is entering its second year, there are border and immigration issues, energy shortages, anti-government protests and the Doomsday clock has just been moved forward to 90 seconds to midnight. Here in the U.S., money supply growth has turned negative for the first time in 33 years. But less than two weeks after the latest consumer price index was reported at 6.5%, inflation was deemed “deader than a doornail” by Ken Fisher, the founder of the investment firm with $197 billion of assets under management. And less than a week before the first Federal Open Market Committee meeting of the year, Wall Street economists have traders believing that there will be only two more 25 basis point increases this year, bringing the target rate to 4.75% before the Fed closes the door on further hikes. The betting is that we will see a first rate cut in November.
Bond Yields Above Inflation Rate
High yield bond buyers are taking advantage of current conditions to lock in yields that finally exceed the inflation rate, one that does not at all feel dead to shoppers and renters. CPI reached a year-over-year high of 9.06% last June. The gauge now in the 6 to 7% range is making some bonds look attractive. The current yield to worst on the S&P U.S. High Yield Corporate Bond Index is 8.21%. In the primary market, Caesar’s Entertainment just sold $2 billion of 7-year senior bonds at par to yield 7.00%. The yield to worst on Bloomberg’s Municipal High Yield Index is 5.41%. Tax-exempt bonds rated BBB- as issued with a 5% coupon by the Flint Hospital Building Authority in Michigan for Hurley Medical Center and callable in July just traded in the secondary market at 7.873%. Please check with your HJ Sims representative for corporate and municipal bond offerings that may help meet your investment goals and income needs in these inflationary times.
Bonds Lead the Rallies
Some Asian markets are closed all this week for the Lunar New Year holiday. Sunday marked the first day of the Year of the Rabbit, said to be a symbol of happiness, prosperity, abundance, peace, elegance and longevity. Our colleagues at MacKay Shields have also dubbed 2023 as “The Year of the Bond”, and it has indeed begun with rallies across corporate, government and municipal markets. The 10-year BAA rated corporate bond index yield at 5.93% has plummeted 51 basis points so far this year. The 2-year Treasury yield has fallen 21 basis points. The 10-year is 42 basis points lower, and the 30-year yield has dropped 36 basis points. This is not exactly a textbook rally, however. The Treasury yield curve remains inverted for a sixth month. The 3-month and 12-month yield both currently stand at 4.67% while the 2-year is at 4.13%, the 10-year at 3.44% and the 30-year at 3.60%. Even the short end of the municipal bond yield curve has been upside down since last month. At this writing, the 12-month AAA general obligation bond yield at 2.33% is above the 11-year at 2.30%
Municipal Bond Renaissance
Vanguard expects to see a “municipal bond renaissance” in 2023. We are big supporters of tax-exempt and taxable municipal bonds in every market cycle but we welcome this call from one of the world’s largest bond buyers with more than 30 million investors. There is no question that tax-exempts have been outperforming most taxable counterparts during these first four weeks of the year. The 2-year AAA rated general obligation bond yield at 2.17% has dropped 43 basis points. The 10-year at 2.21% is down 42 basis points. And the 30-year at 3.18% is 40 basis points lower. Technical conditions all favor an ongoing rally. Supply is expected to remain light through March, open end mutual fund flows have turned positive for two consecutive weeks, and institutional trading has picked up again. Valuations are high, but so is cash available for reinvestment.
We expect to face bouts of volatility as the Treasury slowly runs out of the extraordinary measures they are using to avoid a default on debt service while the Congress debates the debt limit. We also anticipate quite a bit of pushback from Fed Chair Powell and the FOMC voters as markets stubbornly continue to price in easing action this year. Too much hawkish talk makes stocks and bonds turn bearish. Next week’s policy statement could put the brakes on rallies that have seen stock market indices up between 1.8% for the Dow, presently at 33,733, and 8.3% for the Nasdaq, now at 11,334 and propelled Bitcoin prices up nearly 39% to 22,911.
Market Movers This Week
This week, Fed speakers are in a blackout period. We might be at the debt limit, but spending continues and the Treasury has ten auctions scheduled. Quarterly earnings will be reported by Tesla, Microsoft, Visa, Mastercard, Johnson & Johnson and Boeing, among other corporations. Economic data including GDP, durable goods, new home sales, pending home sales, personal income and consumption and consumer sentiment will be released. At HJ Sims, we are nailing down the final plans for our 20th Annual Late Winter Conference in Sarasota from February 14-16. This year’s focus is on financing methods and operating strategies for charter schools and senior living. We look forward to a full agenda with dynamic speakers and exceptional networking opportunities. For information on how you can participate, please reach out to your HJ Sims representative.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.