Market Commentary: Jackpot

Published June 25, 2019

The $2.6 billion, 3-million square foot Encore Boston Harbor casino resort opened in Everett, Massachusetts on Sunday after eight years of siting controversies, licensing, construction, state gaming commission investigations, permitting issues, lawsuits, and $35.5 million in fines related to the allegations of misconduct by Wynn Resorts founder Steve Wynn. 135,000 applied for jobs. 4,900 were hired and they, along with a contingent of elected officials, opened the doors to welcome the first 50,000 high rollers. The resort features 143 gaming tables, 3,158 slot machines, 88 poker tables, 14 restaurants bars and lounges, 671 hotel rooms, a spa and retail shopping. It is the largest private single-phase construction project in the history of the state and has completely transformed the 33 acres on the banks of the Mystic River that had been the site of a chemical plant and a million tons of contaminated sediment. Management has grand plans to become an international destination by expanding the property with additional hotels, convention space and a concert venue. It has been nearly eight years since the law authorizing three casinos and one slots parlor was enacted, and state officials have been anxiously counting the chips ever since. The state’s 25% share of revenue is expected to be in the $300-$500 million range; millions more will be received by the host city and surrounding communities.

As with all states, Massachusetts relies most heavily on income taxes to fund its operations, programs and services. Other sources of funding come from taxes on sales, inheritance, hotel room occupancy, fees and other charges, federal aid and returns on investments. Lottery revenue produced $986 million of revenue for The Bay State in FY18 and the new casino money has already been assumed and accounted for. However, disputes over priorities between the executive and legislative branches continue to provide much fodder for historians and tabloids until one party finally folds. Massachusetts, the 15th most populous state, was the last in the country to finalize a budget for FY19, and it appears that the FY20 budget will be late again. The Commonwealth is just one of the 46 states whose fiscal year will end on Sunday; 36 have budgets in place and appropriations measures are pending on the desk of four governors at this writing. By and large states had strong revenue collections in FY19 but most are aiming to moderate expenses in FY20 while building reserves in preparation for an economic downturn or protracted trade conflicts. Things often come down to the wire, but there have only been about 15 state government shutdowns since 1991.

The end of many state fiscal years typically marks the start of the summer vacation season. It is also the end of the second calendar quarter for many businesses. For the stock market, this may turn out to be the best jackpot in five years. As of Friday’s close, stocks were up between 3 and 4 percent. The Dow gained 790 points and the Nasdaq was up 302. The S&P rose by 116 and hit a record high last Thursday. As nearly $12 trillion of global bonds currently yield less than zero, gold prices reached a 6-year high and are up 8.3% or $107 since April 1. Oil prices have fallen 4.5% or $2.71 a gallon, although there has been recent volatility stemming from the extremely heated exchanges between the U.S. and Iran and worries over possible supply disruptions. During the second quarter, the 2-year Treasury yield has so far plunged 50 basis points to 1.76%. The 10-year yield has fallen 35 basis points to 2.05% and the 30-year has dropped 23 basis points to 2.58%. On the tax-exempt side, the 2-year municipal AAA general obligation bond yield fell 22 basis points to 1.27%, the 10-year yield dropped 23 basis points to 1.63% and the 30-year benchmark yield decreased by 28 basis points to 2.32%. Short-term (SIFMA) rated have spiked to 1.90%, right around the same level as a 15-year AAA bond. With just a few days of flows left to chart, muni bond funds have taken in $19.5 billion of new money this quarter with $4.3 billion directed to high yield funds. Inflows have been reported for 24 consecutive weeks. Taxable fixed income funds have added a whopping $59.3 billion since March while equity funds have had $39.6 billion of redemptions.

This week, the G20 meets in Osaka, Japan and more U.S. sanctions are being imposed on Iran, just another in a series of high stakes moves. The Fed Chair speaks at the Council on Foreign Relations. Market data releases include new and pending home sales, durable goods and consumer sentiment. Expect a full house at auctions this week as the Treasury is in the market nearly every day this week with 3-month, 6-month, 4-week, 8-week, 2-year, 5-year , and 7-year bill and note sales. The municipal market continues to rally borrowers should be all-in as good times look likely to continue through the summer. Net negative supply will intensify as coupon income and maturing bonds hit peaks for the year. This week, we expect a $5.5 billion new issue calendar. The Ohio Air Quality Development Authority plans a $300 million B3 rated revenue bond issue for AMG Vanadium, and the California Municipal Finance Authority is bringing a $31.9 million BBB rated senior living revenue bond issue for Mt. San Antonio Gardens.

Last week, the Federal Open Market Committee passed on taking action on short-term interest rates at its June 19 meeting and members were divided over whether a reduction will be necessary this year. However investors looked at the poker faces and are wagering on cuts of at least 50 basis points before the year is out. In the primary market, we saw 10 non-rated special assessment bond issues. Among the senior housing and education financings, Palm Beach County, Florida sold $40.7 million of Ba1 rated revenue bonds for student housing at Palm Beach Atlantic University structured with 2051 term bonds priced at 5.00% to yield 4.20%. The New Jersey Economic Development Authority brought a $37.7 million non-rated deal for Beloved Community Charter School that included a 2054 maturity priced at 5.00% to yield 4.20%. The City of St. Joseph, Minnesota had a $21.6 million non-rated senior housing bond sale for Woodcrest Country Manor that came with a term in 2055 priced at par to yield 4.50%. The Florida Capital Trust Agency sold $19.7 million of non-rated 30-year term bonds priced at par for Treasure Coast Classical Academy. The Florida Development Finance Corporation issued $19.1 million Baa3 rated revenue bonds for Imagine School at Broward having a 30-year final maturity with a 5% coupon yielding 3.69%. The California Public Finance Authority came to market with a $16.1 million non-rated financing for Trinity Classical Academy structured with 2054 term bonds priced at 5.00% to yield 4.95%. And the City of Columbia, Kentucky had a $14.8 million BBB-minus rated refunding for Lindsey Wilson College that included a 2033 maturity priced with a 5.00% coupon to yield 3.81%.

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