Market Commentary: Flip Flops

Published August 27, 2019

Millions will be trying to wring a few more days of sunshine and sea or mountain breezes out of summer this week but about one in four Americans will celebrate Labor Day without having taken any time off at all. U.S. workers used an average of 17.4 vacation days last year while forfeiting a combined 768 million days of earned vacation worth an estimated $213.2 billion according to recent research from the U.S. Travel Association. The Bureau of Labor Statistics reports that 73% of civilian workers have access to paid vacations, but 36 percent of those responding to the annual Allianz survey reported that it has been more than two years since they ditched their pumps and wing-tips for flip-flops. Just over half (55%) of us who do have vacation benefits fail to use all our allotted time off. Some are small business owners, others are caregivers with no respite care, and plenty are young parents who save paid vacation time to stay home with children who fall sick during the school year. There are workers juggling multiple part-time jobs, millions who cannot afford to get away, quite a few who feel pressured by their managers, believe they have no one to cover for them, feel no one else can do their job, or fear losing out on chances to be promoted. There are always the work martyrs and worrywarts concerned that projects will pile up in their absence and cause even greater stress upon their return. America has been dubbed the “No-Vacation Nation” and stands in sharp contrast to Spain, which has the highest number of mandated paid vacation and paid holidays at 39, as well as Austria at 38, and Finland and Sweden at 36.

Regardless of how we spent these past few months, Labor Day approaches and for most of us that means back to school, back to the regular work, gym and worship routines after we let some things slide over the summer. Those of us who spent any time on the beach noticed that there are quite a few folks who have let things slide an awful lot. Nearly two billion people worldwide are now overweight, according to the World Health Organization, including about 39 percent of adults. And approximately 650 million people are obese, including 41 million children under the age of 5. The numbers are surprising but the culprits are not: energy-dense foods high in fats and physical inactivity. Debilitating health problems associated with obesity include respiratory difficulties, chronic musculoskeletal problems, skin problems, and infertility; life-threatening problems include cardiovascular disease, type 2 diabetes, certain types of cancers, and gallbladder disease. From the perspective of governments and health professionals around the world, the start of a new academic year is as good a time as any to flip to a healthier regimen with low-fat, high-fiber foods and 30 minutes of daily exercise.

Global investors have been heavily overweighting U.S. Treasuries as central bank monetary policies have pushed the yields of trillions of sovereign debt in Europe and Japan into negative territory. At this writing, the 10-year sovereign debt of France is negative 0.408%, the German Bund yields negative 0.692%, the Swedish counterpart is at negative 0.351%, the Dutch sovereign yield is negative 0.558%, Swiss government bonds are at negative 1.048% and the Japanese 10-year is at negative 0.278%. Foreign buyers looking for anything with a positive yield can still consider the sovereign debt of Australia, New Zealand, South Korea, China, Canada, Brazil, Mexico, the United Kingdom and Italy. In the +1.50% range, there is Greece at 1.78%, South Korea at 1.20% or the U.S. at 1.484%. Demand for what is viewed as the safest investment in the world has caused prices here to rise dramatically and U.S. 10-year yields have plummeted from 3.23% last November. Just during the month of August, the 10-year yield has dropped by 48 basis points, the 2-year by 34 basis points, and the 30-year benchmark by 50 basis points. The 2-year and 10-year government note yields have been on top of each other since August 14, and at this writing the demand for the shorter maturity has pushed its yield above the intermediate one as buyers are bidding bonds with longer maturities at higher prices.

Much attention is given to negative rates, the inversion of the yield curve, and whether a recession is coming. Note that 10-year Treasury Inflation Protected Securities yields, currently at -0.056%, have dipped as low as negative 0.92% in 2012 based on inflation expectations. With inflation at about 1.8%, you could say that most every U.S. government bond already has a negative yield. But it is the relationship of the 2-year bond to the 10-year that is the most closely monitored relationship in the bond world and, while the spread has been flattening for more than two years, in the past few weeks we have been seeing an anomaly. It is not a negative rate, but a yield flip happening for the first time since 2007 and it has — so far– only occurred in intraday trading. The key yield is always the closing level. If we see it this week, we find no cause for alarm. Not every inversion of the 2/10 curve is followed by a recession. But when there is such an anomaly, the inverted state persist for weeks or months, as was the case in December 2005, and occurs as much as 24 months ahead of the recession. Economists use several gauges in monitoring recession risk, and two different models used by the Federal Reserve Banks of New York and Cleveland show the probability of a recession in the next 12 months has risen to 1 in 3. But in this case, our markets are so distorted by monetary policy and global debt as well as trade concerns, we are in uncharted territory. Troubles abound overseas, and the U.S. economy may be slowing, but for now our indicators show strength, our consumers are confident, and low rates are great for anyone looking to buy a home or car.

The municipal market continues to rally alongside governments in the worldwide search for safe, positive yielding bonds. The 2-year AAA municipal general obligation bond yield has fallen 9 basis points, breaching the 1% mark at 0.98%. The 10-year muni yield has compressed by 28 basis points to 1.24% and the 30-year benchmark is down 35 basis points to 1.89%. State and local governments, hospitals, housing agencies, municipal utilities, colleges and other nonprofits have been taking advantage of the low rates and could not be happier with borrowing conditions. Last week, in the high yield space, the Public Finance Authority of Wisconsin sold $41.8 million of non-rated first mortgage revenue bonds for Cedars Obligated Group structured with 2054 term bonds priced at par to yield 5.75%. The Michigan Strategic Fund issued $24.2 million of BBB-minus rated revenue and refunding bonds for Holland Home Obligated Group that had a 2043 maturity priced with a 5.00% coupon to yield 3.15%. The Kalamazoo Economic Development Corporation brought an $18.8 million BB rated revenue and refunding transaction for Heritage Community featuring 2042 term bonds priced at 5.00% to yield 3.50%. The American Village Public Educational Building Authority of Montevallo, Alabama sold $14.7 million of non-rated refunding bonds for The Alabama Veterans Loving Legacy Project that had 2042 maturity priced at a discount, 3.00% to yield 3.07%. In the charter school sector, the Delaware Economic Development Authority issued $12.6 million of BBB-minus rated charter school revenue bonds for First State Montessori Academy priced with a coupon of 5.00% to yield 3.18%; the Capital Trust Agency of Florida had an $11 million deal for Ba1 rated Odyssey Charter School priced at 5.00% to yield 3.70% in 2054; and the New Hope Cultural Education Facilities Finance Corporation in Texas sold $10.7 million of BB+ rated education revenue bonds for Cityscape Schools that came with a 2051 maturity priced with a coupon of 5.00% to yield 3.42%.

This is the last trading week of August and we are about to enter the final stretch of the third quarter. Fires rage in the Amazon rainforest, Tropical Storm Dorian nears Puerto Rico, the U.S. Open is underway in Flushing Meadows, the President is back in Washington after the G-7, Members of Congress are back in their home districts campaigning, the Treasury is auctioning $113 billion of notes, and markets flip and flop almost hourly based on expectations for trade talks. The muni calendar totals $6.2 billion calendar and includes a BB+ rated Darke County, Ohio deal for Wayne Healthcare, a Baa3 rated South Carolina Jobs-Economic Development Authority issue for Lowcountry Leadership Charter School, a Saint Paul Housing and Redevelopment Authority BB+ rated financing for Twin Cities German Immersion School, and a BBB rated Pima County Industrial Development Authority deal for the Center for Academic Success. Markets will be closed on Monday as America takes a long weekend to celebrate the many contributions made by its workforce of 163.3 million to the strength and prosperity of our nation. We at HJ Sims wish you and your families a safe and happy Labor Day.

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