Market Commentary: The Over Under

Published January 22, 2019

Betting odds for Super Bowl 53 have become relatively attractive now that the over/under for the Rams-Patriots game is at the highest in the game’s history at 59, meaning that you can place a wager that the combined score of both teams will be either over or under 59 points. The average final score since 1966 has added up to 46.8. Among other highs of late, Australia had its warmest December on record and is in the midst of an extreme heat wave with even higher temperatures set last week. The top six U.S. banks produced unprecedented combined profits in excess of $100 billion in 2018. Tax Foundation data show that New Jersey has the nation’s highest per capita property tax rate at $3,074. Bank of America reports that the District of Columbia has the highest overall muni debt outstanding per capita, exceeding $45,000. XTF reports that seven of the top 10 exchange-traded funds with the highest asset flows in early 2019 are all fixed-income ETFs. Sri Lanka reports the highest interest rate in the world at 6.2%. At the other extreme, Worcester, Massachusetts just tied a record low temperature reading on Monday at negative 6 degrees. Morningstar notes that the $157 billion of net inflows into mutual funds and ETFs last year were the lowest since 2008. The Chinese economy slowed to its lowest growth rate in 28 years. The Chinese birth rate is now at a 60-year low while the U.S. birth rate is the lowest in 30 years. In response to weakness in the Eurozone and China, the possibility of a no-deal Brexit, and trade tensions, the International Monetary Fund lowered its global economic growth forecasts to 3.5% in 2019 and 3.6% in 2020. Moody’s estimates that U.S. GNP could be 0.2% or $8.7 billion lower this quarter if the federal government remains partially shut down through January 31.

The battle over funding for the southern border wall has now produced a shutdown that has gone on for 32 days. S&P estimates that the partial closure is costing approximately $1.2 billion a week and that, by February, the tally would exceed the amount requested by the President. The deadlock would have to continue for quite a while longer for the credit rating of the U.S. to be impaired, but with each passing day companies and others dependent on federal money to operate such as state and regional transit systems and food service contractors, and those seeking federal loans for small businesses, as well as those waiting for federal services such as import and export licenses are all being adversely impacted. Hundreds of thousands of federal employees and contractors will miss their second paychecks on Friday, causing retail sales in several communities to slow. Bloomberg points to Florence, Colorado, where 860 of the 3,800 residents work for the federal correctional complex there, including the supermax prison where Ramzi Yousef, Zacarias Moussaoui, and Dzhokhar Tsarnaev are incarcerated. Overseas spending by congressional junkets has slowed to a trickle since most federally funded military aircraft have been grounded by the President. The annual hobnob with business and political leaders in Davos will have to go on without many of the usual attendees from Washington.

This year the theme of the annual conference in Switzerland is “Globalization 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution”. The theme and location of the President’s State of the Union address next week is, however, still up in the air at this writing. Financial markets have largely ignored the theatrics in the nation’s capital but the lack of demonstrated willingness by the executive and legislative branches to negotiate could have a major impact on trading come March, if not before, when the debt limit becomes an issue. Developments in Puerto Rico, however, cannot be overlooked by the municipal bond market. The Federal Oversight Board has just asked the federal court to invalidate $6 billion of general obligation bonds issued after March of 2012 “in clear violation of the Puerto Rico Constitution”. Prices on some of these bonds promptly fell to 45 cents on the dollar, the lowest since August.

The debt markets otherwise lacked excitement last week as investor hyperventilation over further tightening by the Federal Reserve subsided and interest in equities picked up. Although stock funds had $5.9 billion of redemptions, stock market indices rose nearly 3%. The Dow gained 710 points to close at 24,706, the S&P 500 gained 74 points to finish at 2,670, and the Nasdaq ended 185 points higher at 7,157. Treasuries were therefore under pressure for most of the week. Yields increased by an average of 7 basis points across the curve. The 2-year closed at 2.61%, the 10-year at 2.78% and the 30-year at 3.09%. Tax-exempts did better as muni bond funds took in $1.1 billion of new money and new issuance was above December’s weekly average. The 2-year AAA general obligation bond yield dropped by 2 basis points to finish the week at 1.70%. The 10-year ended flat at 2.21%. The 30-year benchmark yield rose 3 basis points to 3.06%. Trading averaged $11.7 billion a day, and Puerto Rico securities were the most actively traded. In the $6.5 billion primary market, the California Statewide Communities Development Authority sold $89.8 million of BB+ rated student housing revenue bonds for California College of the Arts, including 2052 term bonds priced at 5.25% to yield 4.75%. The City of Forest Lake, Minnesota issued $14 million of non-rated charter school lease revenue bonds for North Lakes Academy structured with a single 2054 maturity priced at par to yield 7.25%. And the New Jersey Economic Development Authority had a $7.8 million transaction for North American Camp Trust with a single 30-year maturity priced at par to yield 6.75%.

HJ Sims is in the market this week with a $93.9 million BBB rated Missouri Health and Educational Facilities Authority issue for construction and renovation projects at seven Lutheran Senior Services communities in Missouri and Illinois. The calendar is expected to total $5.1 billion and, in the high yield sector, the Florida Development Finance Corporation has a an $86 million non-rated student housing deal for the University of Florida at Gainesville, and the Higher Education Finance Corporation of Arlington, Texas plans a $9.4 million BB-minus rated refunding for Winfree Academy Charter Schools in the Dallas-Fort Worth area. The 30-day visible supply of municipal bonds totals $7.6 billion.

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