Market Commentary: Over the Moon

Published June 11, 2019

Moving tributes to the heroes of D-Day dominated the news last week and anniversaries will continue to capture our attention this summer. Buzz Aldrin, 89, and Michael Collins, 88, veterans of the crew of Apollo 11, are being honored on July 20, fifty years after the unforgettable landing on the moon. The British rock band Yes is on tour, still performing after a half century. 2019 marks the 40th anniversary of Ronald McDonald House and the 70th anniversary of the publication of George Orwell’s portentous novel 1984. There is a 35th edition of the first minivans: the Dodge Caravan and Plymouth Voyager. Fans of the comedy Ghostbusters are still singing the movie’s catchy theme song after 35 years. It has been 100 years since the ratification of the 19th Amendment which guaranteed women the right to vote. Also celebrating centennials are Hilton, GE Aviation, the American Legion, Grand Canyon National Park, British Airways, horseracing’s Triple Crown, and the Chicago Bears.

Many moons ago, nine years before the allied invasion of Normandy and six years after the start of the Great Depression, the Social Security Act was signed into law, making this August the program’s 84th anniversary. The agency mailed its first benefit check on January 1, 1940 and, in 2018, the program hit a new milestone by collecting a record $1.2 trillion, $885 billion of which was generated through the 12.4% payroll tax and $35 billion of which came from taxes paid on benefits. All but $3.1 billion of the total was paid out in benefits and administrative costs. The surplus was banked with other asset reserves now totaling an all-time high of $2.9 trillion. Every penny of that surplus is being hoarded in preparation for the peak onslaught of retiring baby boomers. The SSA will begin tapping into its reserves starting next year and, by the agency’s centennial in 2035, they will all be gone. Due to the lower birth rates, greater longevity, and widening income gaps, the size of the payouts will have to be reduced by an estimated 23% to match revenue.

Right now, 63 million Social Security benefit checks are mailed every month and approximately 70% of that total goes to retirees. 62% of senior recipients count on these checks for at least half of their income. Unless the current law is changed, there will be a $13.9 trillion shortfall between 2035 and 2093 according to the most recent report by the Trustees of the Social Security Trust Fund. Some of the methods for reducing or eliminating that gap include lifting the payroll tax earnings cap, currently set at $132,900, and/or increasing the retirement age. Only once in a blue moon do the Congress and President managed to agree on major amendments to the Social Security Act. The last time was 36 years ago. Just getting 60 Senators to agree on anything these days is hard enough, so it seems unlikely that this 116th Congress will be able to make any strides toward shoring up the system’s finances.

U.S. financial markets have seen a strong start to June. Prices were up across the board last week. The Dow gained 1,168 points and closed at 25,983. The S&P 500 added 121 points to finish at 2,873 and the Nasdaq ended at 7,742, up 288 points. Oil gained 49 cents to close at $53.99 per barrel and gold prices climbed $35 an ounce to end at $1,340. The bond markets also rallied. The 2-year Treasury yield fell 8 basis points to 1.84% and the 10-year dropped 4 basis points to 2.08% while the 30-year benchmark yield basically ended flat at 2.57%. The 2-year Baa corporate bond yield fell from 3.32% to 3.15%, the 10-year dropped from 4.59% to 4.46% and the 20-year finished down one basis point at 4.79%.  In the tax exempt market, available rates have borrowers over the moon. The 2-year AAA general obligation municipal bond yield fell 7 basis points to close at 1.32% while the 10-year dropped 4 basis points to 1.61% and the long bond ended at 2.30%, down 2 basis points.

Investors pulled $11.4 billion from equity funds last week and moved more than $15 billion into taxable fixed income and money market funds. Municipal bond mutual funds took in another $1.2 billion, bringing the year-to-date total to another record high at $38.5 billion. As the U.S. – China trade conflicts drag on, the stock market waxes and wanes, Fed watchers howl at the moon, and the world rushes to haven assets, demand for U.S. state and local government securities increases high. This on top of a heavy flow of income available for reinvestment from coupons, redemptions and maturities, and the lingering impact from recent changes in deductions available to investors in high tax states, has made munis quite pricey. Finding tax-exempt bonds with a yield of much more than 3% is no moon walk. Given the low rates and lack of supply, traditional tax-exempt buyers are likely to remain awash in cash and money market funds for much of the summer.

The primary municipal slate totaled $6.4 billion last week. Among the high yield deals coming at the end of the academic year were five non-rated charter schools. The Louisiana Public Facilities Authority brought a $25.3 million issue for Young Audiences Charter School that came with 2057 term bonds priced at 5.00% to yield 4.83%. Lake County, Florida had a $23.2 million financing for Imagine South Lake Charter School structured with 2054 term bonds priced at 5.00% to yield 4.50%. The Arizona Industrial Development Authority sold $18.1 million of revenue bonds for Skyline Education including a 30-year maturity priced at par to yield 7.00%. The Pima County Industrial Development Authority issued $8.3 million for the Paideia Academies that had a 30-year final maturity priced with a coupon of 5.25% to yield 5.30%. And the Public Finance Authority of Wisconsin sold $5.1 million of revenue and refunding bonds yielding 6.75% in 2044 for A.C.E Academy.

This week’s $9.8 billion calendar includes more schools bonds. The Capital Trust Agency of Florida is bringing an $86.4 million non-rated deal for Renaissance Charter School and a $23.7 million Baa3 rated financing for Advantage Academy of Hillsborough. Palm Beach County has a $40.4 million Ba1 rated student housing transaction for Palm Beach Atlantic University. The Public Finance Authority plans a $26.2 million BBB-minus rated student housing financing for North Carolina Agricultural and Technical State University, a $24.2 million non-rated deal for Notre Dame College, and a $10 million non-rated deal for Traders Point Christian Schools in Whitestone, Indiana. And the Oklahoma Development Finance Agency is in the market with an $11.4 million non-rated refunding for Southern Nazarene University. The 30-day visible supply of municipal bonds totals $12.5 billion at this writing.

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