Market Commentary: Spinners and Weavers

Published April 2, 2019

In Greek mythology, there were three Fates, weaving goddesses and sisters, who determined all human destinies. Their power was such that even Zeus was not able to overrule their decisions. Clotho spun the thread of life, Lachesis measured its allotted length, and Atropos cut it off. Only once were they persuaded to spare someone—when Apollo intoxicated the three with wine and made them agree to reprieve Admetus on his fated day of death on the condition that someone else would take his place. On Wall Street these days, our daily obsession is with financial fates—inflation, rate hikes, recession, and the like. We sometimes view our daily destinies as being in the hands of China or the Federal Reserve if not IT companies, nuke negotiators, hurricanes, regulators, or legislators. As we continue to celebrate a reprieve from interest rate increases that may last a year or more, we may lack a certain awareness of those who still do the spinning and may have a major influence on our markets. Bloomberg recently dubbed as “bond whisperers” one group of Treasury appointees, seventeen representatives from financial firms including Vanguard, Citigroup, BlackRock, JP Morgan Chase, Bank of America, Barclays, BNY Mellon, Citadel, and Pimco, who last met on January 29 and convene again at the end of this month.

The Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association is currently chaired by the Treasurer of Goldman Sachs, Elizabeth M. Hammack. She leads a distinguished group that gathers for dinner every three months to exchange views and then has lunch the next day with the U.S. Treasury Secretary and senior debt management officials. In sessions closed to the public and press, they offer Wall Street’s financing recommendations for the coming quarter. To prevent significant market speculation during these exchanges, minutes of the full and frank discussions are not released until the auction schedule is announced the following morning. Members comment on potential new Treasury products, offer debt management tools and suggest changes to Treasury’s coupon auctions. From time to time, they also meet with Federal Reserve board officials. The group was established after World War II to assist the government in figuring out how to raise funds, and so they have. Last year, they advised on $1.34 trillion of net Treasury issuance, and this year the experts will make recommendations on $1.4 trillion worth of borrowings, assuming the U.S. debt limit which resumed March 1 is lifted again.

On Thursday, the U.S. Treasury plans to auction $85 billion of one- and two-month bills.  U.S. government yields, while they fell again last week, are nevertheless quite attractive when compared with those of other sovereign bonds. At this writing the 30-year Treasury yields 2.87% vs the similar maturity in Switzerland at 0.13%, Japan at 0.50%, Germany at 0.59%, France at 1.33%, the United Kingdom at 1.54% and Spain at 2.25%. The 10-year Treasury yield at 2.46% compares to that of Germany at negative 0.052% and Japan at negative 0.076%. The 30-year AAA municipal general obligation bond yields 2.65% and the 10-year benchmark yields 1.90%.

Demand for tax-exempt paper is unabated; investors added $1.5 billion to muni bond mutual funds again last week, which marked the last trading sessions of the month and the first quarter. Fears of slowing global growth, and concerns over future corporate earnings, U.S.-China trade talks and the Brexit impasse, as well as virtual assurances of no more rate hikes from central bankers continue to lead investors to rotate into longer-term fixed income assets. Baird indicates that the broad bond market index returned 2.99% in the first quarter. Bank of America Merrill Lynch reports that its muni master index returns for the first quarter were 2.88%.

Municipal Market Advisors reports that muni price gains of 2.2% represented the largest rally in March since 1990. New issuance totaled $24 billion for the month. Primary market volume is expected to climb a bit in April, and that will be welcome news to bondholders who will have about $10 billion in coupon payments to invest this month alone. We point out that the ICE Bank of America Merrill Lynch muni high yield index (U0HY) returned 3.19% in the first quarter while the Broad U.S. Taxable Municipal Securities Index (TXMB) returned 3.99%. Taxable municipal bonds are investment options available to those looking to diversify retirement account holdings, and we encourage you to contact your HJ Sims advisor to discuss whether they may be suitable for your portfolio.

Non-profit borrowers could not be more thrilled by current tax-exempt and taxable rates. The 2-year MMD AAA taxable yield is 2.47%, the 10-year yields 3.11% and the 30-year yields 3.75%. State and local issuers missing out on refinancing opportunities are spending a lot more time with their Members of Congress lobbying for the restoration of advance refunding rights lost in the 2017 Tax Reform bill. Last week, saw the highest weekly muni issuance of the year at $9.7 billion. In the high yield space, the Iowa Finance Authority brought a $120 million B+ rated refunding for the Iowa Fertilizer Company with a single three-year maturity priced at par to yield 3.125%. The Maryland Department of Housing and Community Development issued $29.5 million of non-rated multifamily development revenue bonds for Huntington Apartments due in two years priced at par to yield 2.34%. Burleigh County, North Dakota brought a $13.7 million non-rated revenue bond issue for Benedictine Living Communities structured with term bonds due in 2039 that priced at 4.75% to yield 4.85%. And the Arizona Industrial Development Authority sold $10 million of non-rated adjustable rate bonds for the Dove Mountain Senior Living community due in 2026.

This week, the $7.5 billion muni slate is led by $750 million of revolving fund revenue bond issues of the Illinois Finance Authority and the Michigan Finance Authority. There are also $569 million of A2 rated revenue bonds for three health systems: Lee Memorial Health System, WakeMed, and Cox Health, and $400 million of AA-minus and A-minus rated revenue bonds for Portland International Airport in Oregon. The United Nations Development Corporation is in the market with a $42.2 million AA rated refunding. The short-term calendar includes the NCAA Final Four, the first full week of major league baseball, and economic data on retail sales, durable goods, average hourly earnings, labor force participation, and unemployment. The 30-day visible supply of municipal bonds totals $7.4 billion at the time of this writing.

Do you receive our

Private Client Newsletter?

HJ Sims Video Series

HJ Sims Culture