Market Commentary: Flares, Flags, Flyovers and the Fed

Published July 9, 2019

As the Declaration of Independence was read for the 243rd time from the balcony of the Old State House in Boston and behind Independence Hall in Philadelphia, as the nation’s oldest July 4th parades began in Bristol, Rhode Island and Pekin, Indiana, as the President began his Salute to America from the steps of the Lincoln Memorial, and as families with coolers and blankets gathered on high school football fields across the country for firework displays, more than three thousand men, women and children attempted to cross one of the points of entry into the United States of America. Most were in search of a better life — and for many that includes a good job in a country posting 7.32 million openings at last count. The sheer numbers of undocumented immigrants, however, has maxed out the capacity of homeland security and health and human services officials on the borders and solutions are not as easy to find as flares and sparklers in Washington.

Forty five hundred miles across the North Atlantic in Warsaw, Polish lawmakers have the opposite problem and are taking proactive measures to keep their workers from leaving the country to take better jobs in other European Union states. They have just approved legislation exempting some two million citizens under the age of 26 from paying 18% personal income. In Greece, the unemployment rate for workers aged below 25 years is 40 percent and young voters looking for lower taxes and less regulation on private industry just contributed to the center-right opposition party’s victory in the general election on Sunday.

Back at home, our economy just added 224,000 jobs and average hourly earnings rose six cents to $27.90; good news all spurring new debate on rate action this month by the Federal Reserve. The third quarter of the year launched amid of our star-spangled Independence Day celebrations last week. Financial markets were quiet but have had their share of drama these past six months. All in all, stocks, bonds and many commodities here in the U.S. have all done very well so far in 2019. As of June 30, the Dow was up 14% or 3,272 points on the year, the S&P 500 gained 17% or 435 points, and the Nasdaq strengthened by nearly 21% or 1,370 points. Oil prices have climbed more than 28% or $13 a barrel and gold is up 10% or $128 an ounce. Bonds have enjoyed a year-long rally. The 2-year Treasury yield dropped 73 basis points to 1.75%, the 10-year fell 68 basis points to 2.00% and the 30-year shed 49 basis points to close at 2.52%. The municipal bond market has seen similar gains. The 2-year AAA general obligation benchmark yield fell from 1.78% to 1.25%, the 10-year dropped 65 basis points to 1.63% and the long bond yield fell 71 basis points to 2.31% at the close of the second quarter.

Investors have pulled $51 billion from U.S. and global equity funds this year, while moving $135.8 billion into taxable money market funds, $116 billion to taxable fixed income funds, and $43.7 billion into municipal bond funds. In the search for yield as well as tax-free income, $9.6 billion has shifted into high yield muni bond funds in a record-setting succession of 26 weeks. New issue municipal bond volume from January through June totaled $166.8 billion, a smidgen higher than the $165.6 billion entering the primary market during the same period last year.

In the high yield muni market these past few weeks, the Ohio Air Quality Development Authority sold $307.2 million of B3 rated 30-year revenue bonds subject to the alternative minimum tax for the AMG Vanadium Project with a 5.00% coupon priced to yield 4.28%. The District of Columbia sold $69.8 million of taxable non-rated student housing bonds for the Provident Group–Harriet Tubman Quad Issue including a 2025 maturity priced at 5.375% to yield 5.753%. The Public Finance Authority of Wisconsin had five non-rated deals: a $42.3 million senior living financing for Bermuda Village due in 30 years priced at par to yield 6.00%, an $8.1 million transaction for Hampton Senior Care of Brooklyn Park structured with 30-year term bonds priced at par to yield 7.00%, a $28.9 million charter school issue for Monument Academy due in 2026 featuring 5.00% coupons priced at par, a $6 million deal for Queen City STEM School due in 2047 priced at par to yield 6.50%, and a $22 million revenue bond issue for North East Carolina Preparatory School with 5.75% bonds maturing in seven years priced at par. The Philadelphia Authority for Industrial Development came to market with a $20.8 million non-rated educational facilities revenue bond transaction for Aspira Schools that had a 30-year maturity priced at 7.125% to yield 7.718%. The Downtown Development Authority of Norcross, Georgia sold $11.3 million of 10-year non-rated revenue bonds for Brookhaven Innovation Academy with 6.00% coupons priced at par.

This week, we have baseball’s All-Star game, the ticker tape parade celebrating the Women’s World Cup victory, the Federal Reserve Chair’s testimony before Congress, the release of the last policy committee meeting minutes, and economic reports including the consumer and producer price indices. The municipal calendar will total just under $7 billion. One the slate is a $178.5 million Baa3 rated California Municipal Finance Authority student housing financing for the University of California Riverside, a $110.9 million BBB-minus rated New Mexico Hospital Equipment Loan Council deal for La Vida Llena, a $45.7 million non-rated California School Finance Authority deal for Inspire Charter Schools, and a $43.3 million BBB-minus rated Utah Charter School Finance Authority refunding for Summit Academy. The 30-day visible supply of municipal bonds totals $9.6 billion.

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