Market Commentary: The Longest Day

Published June 4, 2019

They number less than 500,000 now, but American veterans of World War II will pause on Thursday to honor allies who were part of the legendary landings at Normandy on D-Day. The unprecedented invasion which took place 75 years ago in German-occupied France marked a turning point in the global conflict. Of the 156,000 allied troops participating, only a small number survivors remain. Some of them are returning to pay tribute to the 2,501 Americans and 1,913 British, Canadian and other allies who were killed on June 6, 1944. Those in their ninth and tenth decades with stories still to tell of the Longest Day were mere teenagers at the time, on board one of the 6,939 vessels or 9,543 airplanes. President Trump is one of dozens of world leaders and former soldiers and sailors who will commemorate the day with solemn ceremonies at Omaha, Utah, Gold, Juno and Sword Beaches.

There is some strain these days between the U.S. and its old allies. This comes as a result of trade policies that are skewing global financial markets. The on-again, off-again talks with China and new tariffs on Mexican goods as well as some twenty active sanction programs have shaken some relationships and steered investors from the realm of risk back into safe havens. During May, the Dow dropped 1,777 points, the S&P fell 6.6% and the Nasdaq 7.9%. Oil prices plunged by 16%, or $10.41 a barrel. Buyers turned to U.S. Treasuries and prices soared. The 2-year yield decreased by 34 basis points to 1.92%, the 10-year fell 38 basis points to 2.12% and the 30-year dropped 36 basis points to 2.56%. The Treasury yield curve began to invert toward the end of the month with the 3-month government yield exceeding that of the 10-year, the widest such difference since the financial crisis. At this writing, the 3-month yield at 2.34% remains higher than the 10-year Note at 2.12%. When short-term rates exceed intermediate rates, the Federal Reserve starts to think about reducing the Fed Funds rates again. Particularly when the data show slowing growth. Futures markets are now pricing in two rate cuts by the end of the year, and central banks around the world are taking note.

The 30-year bonds of Canada, the United Kingdom, France, Spain and Switzerland currently yield 1.74%, 1.49%, 1.19%, 1.77%, and -0.027%, respectively. These low yields continue to make U.S. Treasuries look relatively attractive to overseas buyers, a favorable condition when we have so much borrowing to do. This week alone, the Treasury is auctioning $75 billion of 4- and 8-week bills. Also of increasing interest to foreign investors are U.S. municipal bonds. This market has experienced a supply/demand imbalance for 17 consecutive months. At $27.4 billion, May issuance was at a 5-year low at the same time that $24 billion of outstanding bonds matured and investors scoured the market looking for new ones to invest in. Households have added a net of $37 billion into municipal bond mutual funds during the past 21 weeks. Last month, the 2-year AAA municipal general obligation bond yield fell 16 basis points from 1.55% to 1.39%. The 10-year yield dropped 21 basis points to 1.65% and the 30-year benchmark yield sank 23 basis points to 2.32%. The spread between 2- and 30-year yields narrowed to 93 basis points. Returns were solid. The S&P benchmark municipal index returned 1.35% in May and the high yield muni index closed up 1.54%. The 15+ year taxable municipal bond index outperformed with a monthly return of 4.21%.

With the President overseas, this week’s media coverage will captivate fans of the British royal family as well as World War II buffs. It is also a sports fan’s dream. We have the Bruins and Blues in the Stanley Cup Finals, the Women’s FIFA world cup, the Warriors and Raptors in the NBA finals, NFL minicamps beginning, and America’s national pastime. On the economic front, we expect data on U.S. manufacturing, factory and durable goods orders, productivity, unit labor costs, and jobs. In the municipal market, the primary slate totals close to $7 billion and includes a $25.6 million non-rated Louisiana Public Facilities Authority financing for Young Audiences Charter School, a $23.7 million non-rated Lake County, Florida issue for Imagine South Lake Charter School, and an $89 million Capital Trust Agency of Florida deal for Renaissance Charter School.

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