Signalizing a Turn
One would have to be a disciple of Rip Van Winkle not to notice the turn we have taken in the markets of late. It started with the Fed tightening and has continued a path that has led us to even higher rates and yields. The trajectory is now firmly established with the ten-year Treasury at 5.14%. The federal buyback program is not making much of a difference considering the ever-growing pipeline of Treasury debt to be issued over time.
Any attempts to change the direction of the federal deficit or other policies are deemed of lower importance than the conducting of the midterm elections.
These trends have not put much of a chill on the equity markets. The tech sector continues to contribute much of the positive gains despite some fretting over the outlook day to day. Given the many threats that persist in the virtual world it is no surprise that cybersecurity firms are thriving.
As for the economy, the recent readings remain positive. More Fed tightenings are expected due to the incredible staying power of inflation. Oil is leading the way in this regard. Any successful negotiation of an end to the Iran war would cause a reset. Based on the proceedings at the United Nations this week, one should not anticipate much progress despite some indications that negotiations have resumed some intensity to end the blockade in the Strait of Hormuz.
As for trade, one is hopeful that something more positive comes out of the discussions that President Trump and President Xi at having now. Shipping goods for the holiday season is underway, but merchandise managers are cautious about their orders. Some early projections are for holiday spending to be marginally better than the level for last year.
The higher rate environment also may be putting a bit of a damper on the pace of M&A activity. Several high-profile IPOs have been moved to later this year or to next year.
Rates climbed higher on the shorter end of the yield curve, but the entire curve has shifted up. Issuing more on the shorter end will be dearer for Treasury and all debt issuers.
Municipal Matters
The higher rate environment has not greatly affected issuance trends at this point. Investors are pleased that there are more higher coupons and yields available.
As for high yield, the anticipated filing of Brightline will be instructive. Many buyers will continue to evaluate the risk/reward proposition. In every bankruptcy filing there are many lessons to be learned. One given is that greenfield or new projects always exhibit more risk from the start.
Reauthorization of the transportation bill has been pushed back but early reports are that highway, and road projects should do well, but mass transit should not be treated as well. Airports remain a priority; this is especially true for the air traffic control system upgrades. There has been an effort to induce more P3 activity, but this remains to be seen.
The 3Q earnings season reports should be informative. States have come to rely on capital gains at a time when federal largesse is on the wane.
John Hallacy
John Hallacy Consulting LLC
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