Market Commentary: A Watched Pot Never Boils

Published January 30, 2019

The watched pot in Washington finally boiled and the longest government shutdown on record mercifully came to a provisional end on Friday. Temperatures have been reduced to the simmer level at least until February 15, when the temporary spending measure expires. The Congressional Budget Office estimates that the 35-day partial closure of numerous federal departments and agencies had a spillover cost to the economy of about $11 billion and reduced first quarter gross national product by $3 billion or 0.02%. It is still unclear whether this three week funding extension will provide sufficient time to whip up an agreement on homeland security issues, but the border wall has moved to media’s back burner for now. The attention of the financial markets has turned to the head chefs of the Federal Open Market Committee, the various cooks in the Brexit kitchen, and the range of Chinese trade talks and Huawei charges heating up in Washington.

There is not much heat to be found in the Midwest and South this week. The polar vortex has brought frigid temperatures to Chicago and Minneapolis, and enough snow and ice to disrupt travel in Atlanta, the host of Sunday’s Super Bowl game. On Wall Street, volatility has dropped alongside temperatures as traders awaited news of a deal out of Washington and now look for confirmation that the Fed has no plans to raise rates anytime soon. The Chicago Board Options Exchange SPX Volatility Index (VIX) has dropped from 25.42 to 17.42 since the start of the year, and the companion CBOE 10 year U.S. Treasury Note Volatility Index (TYVIX) has fallen from 4.58 to 3.80.

While frustrated by the freeze on releases of economic data and waiting for some kind of stew to be put on the table in Washington, stock market indices hovered last week. The Dow gained 30 points to close at 24,737, the S&P 500 dropped 5 points to 2,664, and the Nasdaq added 7 points to finish at 7,164. Oil prices held steady at $53.69, while gold prices rose $23 an ounce to $1,305. Treasuries strengthened a bit, as the 2-year yield fell one basis point to 2.60%, and the 10- and 30-year benchmarks each fell 3 basis points to 2.75% and 3.06%, respectively. While the 2-year AAA general obligation bond yield mirrored the Treasury and dipped one basis point to 1.69% the 10- year muni yield rose 2 basis points to 2.23% and the 30-year tax-exempt added 4 basis points to close higher than the comparable Treasury at 3.10%. Investors continued to add to municipal bond mutual funds last week. Net inflows totaled $821 million, including $383 million into high yield muni funds.

HJ Sims led the senior housing calendar during the holiday-shortened week with a $92.7 million Missouri Health and Educational Facilities Authority financing for Lutheran Senior Services communities in Illinois and Missouri. We structured the BBB rated bonds with a 2042 maturity priced with a coupon of 5.00% to yield 4.35%. The $2.9 billion new issue slate also included a $77.8 million non-rated student housing issue for the University of Florida at Gainesville that included 30-year term bonds priced at 7.00% to yield 7.162%, a $9.3 million BB-minus rated Arlington Higher Education Finance Corporation refunding deal for Winfree Academy Charter Schools in Texas that priced at par to yield 5.75% in 2043, and a $5.5 million non-rated St. Louis County Industrial Development Authority financing for The Crossings at Richmond Heights which had a 2047 term bond priced at 5.00% to yield 5.033%.

This week, muni issuance is expected to remain light at $3.7 billion, In the high yield sector, the California Pollution Control Financing Authority has a $185.1 million Baaa3 rated revenue refunding deal for the San Diego County Water Authority’s desalination project, and the Dallas Area Municipal Authority in Pennsylvania plans a $29.2 million Baa3 rated transaction for Misericordia University. At HJ Sims, we are preparing for our 16th annual Late Winter Conference in Clearwater Beach where we have invited Cornell Professor Christopher Anderson, Director of the Center for Hospitality Research, to discuss how the science of revenue management and service pricing applies to senior living. We look forward to having you join us.

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