Market Commentary: Twas the Week Before Christmas

Published December 18, 2018

Another year comes to a close and the only creatures stirring right now are algorithmic trading models and Congressional staff trying to negotiate a border wall agreement so that everyone in Washington can leave town. The holiday spirit has enveloped the rest of the world and we have become nearly oblivious to what would otherwise cause hair to raise, nerves to fray, and nails to be bitten. The week before Christmas, Congress typically arranges for the federal government to run out of money and the White House usually reports several high-level resignations. Major announcements are timed to either slip through the cracks or rattle the Earth. This is the time of year when France recognized the independence of the British colonies in America, South Carolina seceded from the Union, the Wright Brothers made their first flight at Kitty Hawk, the Supreme Court upheld the executive order for the relocation of Japanese Americans during WWII, and the USSR was formed. Over the years, while families gathered for the holidays, the U.S., USSR, Great Britain and France have all quietly performed nuclear tests, shipyard workers went on strike in Gdansk, Amazon workers went on strike in Germany, Cleveland defaulted on $15.5 million of debt, and Ivan Boesky was sentenced to three years in jail and fined $100 million for insider trading. With less than a week to go before Christmas, the most pressing concern for Americans becomes finding a parking spot at the mall. But mid-December is when President Clinton was impeached, U.S. troops invaded Panama, the world’s first server and website went live, UBS was fined $1.5 billion for its role in manipulating the LIBOR rate, and the Congress passed the $1.5 trillion 2017 tax and jobs bill.

This year, the Transportation Security Administration estimates that 46 million people are expected to fly on U.S. airlines over the Christmas holiday, a record high. Eggnog and gingerbread, candy canes and even fruitcake now provide a welcome escape from a wild three months in the financial markets. Weaker-than-expected economic data out of China and the Eurozone, the lack of major progress in trade talks with China, clash over government funding, tumbling homebuilder confidence, declining foreign holdings of U.S. Treasuries, and the tightening of monetary policy by the world’s central banks — especially the Fed’s rate hikes — have combined to produce some very sharp market selloffs. The stock market has seen its worst start to December since 1980. At this writing the Dow is down 1,437 points on the month and 618 points on the year. The S&P 500 has lost 160 points since November and is down 73 points year-to-date. The Nasdaq has fallen 419 points in the past two weeks and is right about where it started in January. This year, oil prices are down more than $9 a gallon to $51, gold prices have dipped more than $9 to $1,239 and silver prices have fallen by more than $2 to $14.58.

By contrast, the bond market is under the mistletoe this month. Two-year Treasury yields have dropped 5 basis points to 2.73% since November while 5-year yields have fallen 8 basis points to sit right on top of the 2-year benchmark. Ten-year yields are down 10 basis points to 2.88% and the 30-year bond has tumbled 15 basis points to 3.14%. Nevertheless, while yields are still relatively low by historic standards, they have risen across the curve in 2018. The 2-year is up 85 basis points, the 10-year has gained 48 basis points and the 30-year is 41 basis points higher. Except on the long end, municipal bonds have outperformed their taxable counterparts. The 2-year AAA general obligation bond yield has dropped 9 basis points so far this month, the 10-year has fallen 11 basis points and the 30-year is down 5 basis points. Since the start of the year, the 2-year muni yield has increased from 1.56% to 1.83%, the 10-year has risen from 1.98% to 2.40% and the 30-year has surged from 2.54% to 3.17%. Mutual fund investors have moved between stocks and bonds all year long and have lately moved to cash equivalents. Last week alone, they withdrew $53.9 billion from stock and bond funds and added $86.7 billion to money market funds. On the year equity funds have taken in a net of $26.8 billion, taxable fixed income funds are up $68.7 billion and high yield muni funds have added $1.3 billion.

We saw the last major municipal bond issuance of the year sell last week. HJ Sims brought a $41.2 million BBB+ rated issue through the New Jersey Economic Development Authority for Lutheran Social Ministries at Crane’s Mill in West Caldwell. The improvement and refunding bonds had a final maturity in 2049 that we priced at 5.00% to yield 4.375%. The largest charter school financing on record dominated the high yield sector: the Clifton Higher Education Finance Corporation brought a $357 million non-rated deal for International Leadership of Texas had a 30-year final maturity that priced with a coupon of 6.125% to yield 6.25%. The Arizona Industrial Development Authority sold $42.3 million of BB+ rated bonds for Pinecrest Academy of Nevada structured with 2048 term bonds priced at 5.75% to yield 5.15%. And the City of Vadnais Heights, Minnesota sold $12.7 million of non-rated revenue bonds for the Academy for Sciences and Agriculture featuring a 2053 final maturity priced at par to yield 6.50%.

The Economic Development Authority of American Samoa brought a $50.3 million Ba3 rated revenue bond issue that had 20-year term bonds priced with a coupon of 7.125% to yield 7.25%. The Madison County Memorial Hospital in Iowa came to market with a $10 million non-rated refunding and the final maturity in 2029 priced at par to yield 3.90%. In the senior living sector, the Floyd County Development Authority of Georgia issued $81.9 million of non-rated bonds for the Spires at Berry College; this financing had 2053 term bonds priced at par to yield 6.50%. The South Carolina Jobs-Economic Development Authority came to market with a $67.9 million BB rated financing for Episcopal Homes at Still Hopes that had a similar maturity priced at 5.25% to yield 5.15%. The Montgomery County Industrial Development Authority of Pennsylvania issued $42.5 million of non-rated revenue bonds for Whitemarsh structured with a 2051 maturity that priced at 5.375% to yield 5.50%. And the City of Mishawaka, Indiana had an $18.5 million non-rated deal for Hellenic Senior Living due in 2038 that priced with a coupon of 5.75% to yield 5.875%. In the student housing sector, the Farmville Industrial Development Authority in Virginia sold $128.4 million of BBB-minus rated student housing bonds for Longwood University that featured a 2055 maturity priced with a 5.00% coupon to yield 4.66%. Among higher education deals, the Columbus-Franklin County Finance Authority in Ohio Sold $49.9 million of non-rated revenue bonds for Ohio Dominican University including 2053 term bonds priced at 6.50% to yield 6.95%. And the Public Finance Authority of Wisconsin issued $24.4 million of Ba1 rated bonds for Gardner-Webb University in Boiling Springs, North Carolina structured with 2031 term bonds priced at par to yield 5.00%.

This week, there are less than $1 billion of financings on the primary municipal slate. Among the non-rated deals planned are a $149 million subordinate tax revenue bond issue of the Allentown Neighborhood Improvement Zone Authority for City Center, a $56 million start-up rental senior living financing for Bridgemoor Plano in Texas, a $36.8 million Highlands County Industrial Development Authority sale for the new Harder Hall senior living community in Sebring, Florida, a $30 million Port Beaumont Navigation District of Jefferson County, Texas transaction for the Allegiant Industrial Island Park project, an $8 million non-rated financing for Village Tech Schools in Ducanville, Texas, and a $6.6 million limited offering of the South Carolina Jobs-Economic Development Authority for Renaissance Senior Living.
This will be our last market update for 2018. We thank our loyal readers and those who once again offered us the opportunity to earn your business. On behalf of all in the HJ Sims family of companies, we wish you and your families’ safe travels, joyful reunions, a very Merry Christmas and a healthy and prosperous New Year.

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