Market Commentary: Through Hardship to the Stars

Published October 22, 2019

Ad Astra Per Aspera, Through Hardship to the Stars

In honor of Houston’s importance to the U.S. space program, its major league baseball franchise was renamed the “Astros” in 1965 when they began playing indoors at the world’s first multi-purpose domed sports stadium. The Astrodome was a venue that Texans quickly dubbed “the Eighth Wonder of the World” and it boasted two other firsts: artificial turf known as Astroturf and Astrolite, the first animated scoreboard. On Opening Day, President Johnson was there for the exhibition game with the New York Yankees. Nearly fifty years later, the Astros switched over to the American League West Division and President Obama listed the old stadium on the National Register of Historic Places. Right now, it sits idle with an uncertain future, while the Astros prepare to host the 115th World Series at their current home, Minute Maid Park. They play on Tuesday and Wednesday before traveling to Nationals Park, home of the Washington Nats, for championship games on Friday and Saturday.

Just hours before the Astros won the American League pennant with a walk-off home run in the ninth inning against the Yankees, three Americans made history by completing the first ever walk in space by an all-woman team. Two hundred and forty miles above Texas, Christina Koch and Jessica Meirre stepped outside the International Space Station to replace hardware used to charge the spacecraft’s batteries. They were guided by the Mission Control capsule communicator, Astronaut Stephanie Wilson, who was on the ground at Johnson Space Center in Houston. Five hours into the task, they took a congratulatory call from President Trump. The last such long-distance call to spacewalkers from the White House was made by President Nixon in 1969.

Fifty years ago on October 23, 1969, the 10-year U.S. Treasury yield was 6.90%. The benchmark government yield reached a high of 15.84% on September 30, 1981, fell to a record low of 1.35% on July 8, 2016, and current stands at 1.76%. Yields this month on shorter maturities have dropped by 5 basis points; the 2-year has fallen from 1.62% to 1.57% at this writing. But the 10-year maturity has increased by 9 basis points and the 30-year is up 13 basis points from 2.11% to 2.24% in October. The weakening on the intermediate and end reflects current investor assessments of prospects for a Brexit deal, rising hopes for a partial trade deal with China, and signs of slowing U.S. and global growth. In addition, there are market expectations for central bank easing that includes a quarter point rate cut by the Federal Reserve next week, upbeat third quarter corporate earnings, new tariffs being imposed on several products from the European Union, and concerns over developments in northern Syria.

Municipal bonds have shadowed Treasuries but technical conditions have enabled them to outperform their taxable counterparts. The 2-year AAA general obligation bond yield is down 10 basis points on the month to 1.12%, while the 10-year has gained 5 basis points to yield 1.47% and the 10-year is up 6 basis points to 2.07%. A surge of new supply in the primary market, including $13 billion last week alone, has been well received by cash-heavy investors seeking tax-advantaged investments and yields that are relatively high in the global context. Prices remain elevated but demand is expected to exceed supply by nearly $9 billion in the next 30 days muni buyers look to reinvest proceeds from about $12 billion of maturing bonds and $12 billion of called bonds. Last week, investors added another $1.2 billion to municipal bond mutual funds, bringing the month-to-date total to $2.5 billion. The ICE Bank of America Merrill Lynch indices show that high yield municipals as up 0.8% on the month, while U.S. Treasury returns are -0.40%, corporate bonds -0.9%, and Dow Jones Industrials -0.44%.

Among recent municipal bond offerings was a $188.2 million taxable Baa3-rated State Public School Building Authority of Pennsylvania refunding for The School District of Philadelphia priced at par to yield 3.196% in 2031. The Florida Higher Education Educational Facilities Financing Authority sold $98.3 million of BBB-minus rated revenue bonds for Florida Institute of Technology that had a 30-year maturity priced at 4.00% to yield 3.52%. In the senior living sector, the Hickory Chase Community Authority in Ohio brought a $30.7 million non-rated deal due in 2040 priced with a coupon of 5.00% to yield 4.73%. The Development Authority of Cobb County, Georgia sold $21.3 million of non-rated refunding bonds for Presbyterian Village Austell structured with a 30-year maturity priced at 5.00% to yield 4.45%. And the City of Chatfield, Minnesota sold $13.3 million of non-rated refunding bonds for Chosen Valley Care Center with maximum yield term bonds due in 2052 pried at 5.00% to yield 4.22%. The California School Finance Authority had a non-rated charter school financing for Real Journey Academies structured with a 2058 maturity priced at 5.00% to yield 4.36%, and the Danbury Higher Education Authority in Texas had a $28.2 million BBB-minus rated transaction for Golden Rule Schools that had a 30-year term bond priced at 4.00% to yield 3.38%.

Traders are monitoring participation in the Federal Reserve’s term repo operations, partly mystified by the heavy liquidity that is still being injected into the funding markets since September 17. They are watching for a resolution to United Auto Workers strike, in its 37th day at this writing, and the strike by teachers in Chicago which has canceled classes for four days. Investors await the opening of New Jersey’s American Dream theme park and mall this Friday, more than two years after $1.1 billion of non-rated bonds backed by payments-in-lieu of taxes and sales tax revenue were issued. This week’s municipal calendar is expected to total $14 billion and will include a $367 million B-rated revenue bond issue of the Hoover Industrial Development Board in Alabama, subject to the alternative minimum tax, for United States Steel. The Pima County Industrial Development Authority is bringing a $40.9 million non-rated issue for American Leadership Academy. The City of Santa Fe is coming with a $70.1 million BB+ rated financing for El Castillo Retirement Residences, the Washington State Housing Finance Commission has a $39.8 million non-rated deal for Rockwood Retirement Communities in Spokane, the Public Finance Authority of Wisconsin is in the market with a $33.1 million non-rated issue for Penick Village in Southern Pines, North Carolina, and Fulton County plans a $51.3 million non-rated residential care facilities financing for Canterbury Court in Atlanta. The 30-day visible supply of municipal bonds totals $16.8 billion.

Do you receive our

Private Client Newsletter?

HJ Sims Video Series

HJ Sims Culture