Market Commentary: Bow Ties, BoJo, and Bonds

Published July 23, 2019

He was a native of Chicago, one of four sons born to a lawyer and teacher, who endured the Great Depression, enlisted in the Navy one day before the attack on Pearl Harbor, and went on to become part of an elite group of robed jurists rendering decisions on many matters too hot for the executive and legislative branches of government to handle. He was awarded a bronze star for his work in codebreaking during World War II, married twice, graduated from Northwestern University School of Law with the highest GPA in the school’s history, served as a law clerk, House subcommittee counsel, antitrust lawyer, and special prosecutor in judicial bribery cases, raising four children along the way. He was appointed to the federal bench by President Richard Nixon, nominated to the Supreme Court by President Gerald Ford, and honored with the Presidential Medal of Freedom from President Barack Obama. John Paul Stevens died last week at Holy Cross Hospital in Fort Lauderdale the age of 99 and was buried at Arlington National Cemetery yesterday. Chief Justice John Roberts acknowledged his 35 years of service on the highest court and remembered his “inimitable blend of kindness, humility, wisdom and independence”. Others remembered him for his modesty, pragmatism, optimism and wide collection of bow ties.

To many, Associate Justice Stevens was the embodiment of old fashioned courtliness. One of his former clerks joked that he could always find a genteel way to go for the jugular during oral arguments. With his passing, the world has lost another pillar of civility. Bombastic discourse abounds on the airwaves from Washington to London and North Korea to Iran. At the time of this writing, Boris Johnson is sworn in as the British Prime Minister as Theresa May exits stage right clutching the handbag she received as a parting gift from her Cabinet after the proverbial boot given by the House of Commons. The President and Congress continue their wars of words while each claiming victory in a two-year debt ceiling and sequestration-ending budget deal. In Puerto Rico, profanity-laced chat messages have sparked massive protests; scores of demonstrators are banging pots and pans outside the residence of the territory’s governor, demanding his resignation.

Financial markets, in contrast, are remarkably calm as second quarter corporate earnings are released and traders await the outcome of the Federal Open Market Committee meeting in seven days. The Dow continues to surge higher into record-setting territory. At the close of business on Friday, the Industrials Average of 30 blue chip stocks had gained 554 points month-to-date. The S&P 500 Index had risen 1.2% to 2,976. The Nasdaq Composite was up 140 points to 8,146. Gold prices have notched up $15.84 an ounce to $1,425. In the bond markets, municipals and corporates have also enjoyed positive sessions in July. The 30-year BAA Corporate bond yield has dipped three basis points to 4.91%. The 30-year AAA municipal general obligation bond benchmark yield has fallen four basis points to 2.27% while the 10-year is down seven basis points to 1.56% and the two-year yield has dropped 12 basis points to 1.13%. Left out of the rally so far this month are Treasuries and crude oil. For a variety of reasons including stronger than expected economic data, weak bond auctions, and the apparent agreement on suspension of the debt ceiling, U.S. government yields are down five basis points across the curve; the two-year yields 1.81%, the 10-year 2.05%, and the 30-year 2.57%. Despite escalating Iran tensions, oil prices have fallen $2.84 a barrel to $55.63.

Last week, municipal bond funds took in another $1.6 billion of new money, bringing the year-to-date total to $50.4 billion. High yield muni funds account for $11 billion of the total. Portfolio managers at the top 5 funds seeing 80% of these inflows – Nuveen, Goldman Sachs, BlackRock, MacKay Shields and Vanguard – continue to vie for allocations of new issues. Last week the $9.3 billion calendar included a $570.9 million non-rated Municipal Electric Authority of Georgia financing for Plant Vogtle Units 3 and 4 structured with 40-year bonds priced at 5.00% to yield 4.13%. In other high yield financings, the City of Maple Plain, Minnesota sold $38.1 million of non-rated senior housing and healthcare revenue bonds for Haven Homes that came with a 38-year maturity priced at par to yield 4.65%. The Government of Guam issued $27.6 million of Ba1 rated general obligation bonds due in 2031 that came with a coupon of 5.00% and yield of 3.25%. And, the Albany Capital Resource Corporation brought a $10.2 million BB rated 30-year transaction for Albany Leadership Charter High School for Girls that sold with a 5.00% coupon priced to yield 3.94%.

This week, the European Central Bank meets and investors await key data on existing and new home sales, durable goods, and second quarter real GDP. The 30-day visible supply of municipal bonds totals $10.1 billion. This week’s $7.6 billion new issue calendar includes a $110 million BB+ rated revenue and refunding bond issue of the Memorial Hospital Service District of Calcasieu Parish, Louisiana, an $84.1 million non-rated Pinellas County Industrial Development Authority financing for the Patel Foundation for Global Understanding, a $75.4 million non-rated senior housing revenue refunding bond issue of the City of Wayzata, Minnesota for Folkestone Senior Living Community, and a $16.6 million non-rated Wisconsin Health and Educational Facilities Authority deal for Clement Manor.

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