Market Commentary: The Boys and Girl of Williamsport PA

Published August 14, 2019

In contrast to all the civil and political unrest affecting Hong Kong and Moscow, the tense relations with Iran and North Korea, and the trade conflicts with China and Europe, South Williamsport, Pennsylvania is the home base for international peace and goodwill for the next 10 days while the Little League baseball World Series is underway. On Thursday, the Caribbean faces Australia while teams from Bowling Green, Kentucky and Coon Rapids-Andover Minnesota compete in the regional playoffs. The boys of summer, aged 10 to 12, along with one girl, Maddie Freking, the second baseman for Minnesota, will slug it out in front of 16 umpires and a worldwide ESPN audience. Parents and other fans of the game from around the world have been electrified since mid-May by the performances of young athletes who have trained so earnestly for a shot at the trophy. Last year it was a talented team from Hawaii that beat out South Korea 3-0 for the championship. This year, Vegas odds favor another U.S. victory in the championship game on August 25 which will feature field diplomacy, hits, strikes, errors and at least one winning run.

Winning in baseball requires scoring the most runs, with a minimum of one, during the course of a game. Only in the rarest of circumstances does a game end in a tie. The most recent scoreless tie in the majors was on September 13, 1989 in a six inning game between the Pittsburgh Pirates and the St. Louis Cardinals. But never in the history of the game has one ended with a negative score. In days of yore, the world’s central banks also only dealt in positive numbers. The Federal Reserve and its global counterparts have long held that zero percent interest rates were a floor, the very lowest level to be considered. Japan implemented the first Zero Interest Rate Policy (ZIRP) in 1999 in an attempt to avoid deflation. But, as it turned out, ZIRP was not low enough. The Bank of Japan left its key short-term interest rate unchanged at -0.1 percent at its July meeting and kept the target for the 10-year government bond yield at around zero percent. Japanese sovereign 30-year bonds yield negative 0.25% at this writing.

In 2009, other banks began to cut rates below zero. Sweden, followed by Denmark, adopted negative rates to stem hot money flows into their economies. In 2014, fearing a deflationary spiral, the European Central Bank implemented a negative rate on bank deposits. Five years later, bonds issued by governments and corporations worth a combined $15 trillion dollars are trading with negative yields. Extreme monetary policy measures put in place by foreign central banks to stimulate economies — and perhaps stay one step ahead of the Fed — have skewed worldwide investment practices, squeezed bank profits, punished savers, saved failing companies, spurred increases in asset prices, and dampened consumer confidence and economic growth. The Fed has studied some of the effects of negative interest rate policies but, as with all the unusually heavy interventionist tools employed by central banks in the past decade, it is too soon to comprehend all the long term effects.

Pundits staring into the summer sun, money managers explaining away poor performances, and economists employed by banks with their own agenda are just some of those promoting a narrative that the U.S. is headed into a recession which will lead to a negative interest rate environment. Given the low inflation rate as it is so narrowly defined, an economy that is still expanding, the extreme level of attention given to maintaining the stability of the financial system, and the unthinkable implications of having billions of dollars of negative interest reported as capital losses on tax returns when our debt and deficit are sky high, it seems truly unlikely that the Fed will adopt a zero or negative interest rate policy anytime soon. Nonetheless, traders shocked by bond yields that are dropping rather than increasing (as has been forecasted for the past three years) are examining all possible scenarios. Some contend that we have already been in negative territory for several years already given the bloated asset prices and a Joe Sixpack inflation rate that takes into account the actual costs of food and energy.

By any standard, it has been a great year for bonds and many forecasts point to higher prices and rosy returns through next spring, given the astonishing demand and lack of supply. Granted, stocks and other commodities have performed well in 2019 as well. As of the market close on Friday, in spite of all the recent trade-related volatility, the Dow Industrials index is still up 13% to 26,287, the S&P 500 has gained 16% to 2,918 and the Nasdaq has increased 20% to 1,323. Nevertheless, a net of $75 billion has been redeemed from equity funds so far this year. Oil prices are up $9.09 a barrel to $54.50 and gold prices have risen nearly 17% to $1,496.95. U.S. Treasury yields have fallen dramatically across the board in 2019. As of the market close on August 9, the 2-year has dropped 84 basis points to 1.64%, the 10-year has fallen 94 basis points to 1.74% and the 30-year is down 76 basis points to 2.25%. AAA municipal general obligation bond yields have done as well if not better for investors. The 2-year muni MMD yield has dropped 83 basis points to 0.95%, the 10-year has fallen 95 basis points to 1.33% and the 30-year benchmark is down a head-spinning 103 basis points to 1.99%. Investors in fixed income mutual funds have driven prices higher: since the start of the year, they have added $138.8 billion to taxable fixed income bond funds and $52.9 billion to municipal bond funds, including $11.6 billion in high yield muni funds.

The high yield municipal bond market has had a lot of attention but not much volume of late. The Public Finance Authority of Wisconsin brought a $22.4 million non-rated deal for Coastal Preparatory Academy in Wilmington, North Carolina structured with a 2054 maturity priced at par to yield 6.125%. The City of Morris, Minnesota brought a $19.2 million non-rated refunding for Farmington Health Services including a 30 year final maturity priced at par to yield 4.20%. The Philadelphia Industrial Development Authority issued $18.2 million of non-rated bonds for Alliance for Progress Charter School that had maximum yield bonds due in 2049 priced with a coupon of 5.00% to yield 4.25%. The California School Finance Authority sold $16.8 million of BB+ rated revenue bonds for New Designs Charter School with 2050 term bonds priced at 5.00% to yield 3.35%. And the Indiana Housing and Community Development Authority was in the market with a $15.4 million deal for Lake Meadows Assisted Living with 5.00% coupon bonds due in 20 year priced to yield 4.75%.

The 30 day visible supply totals $11.3 billion and August primary issuance is expected to exceed that of July. As you and your families relish these last few precious weeks of summer and prepare for the start of new school years, we encourage you to stay tuned for several new exciting deals that we have in progress. We also welcome your contact for our day-to-day market views on rates, financing, and investment opportunities.

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