The Ides of September?

September 24, 2018

In Shakespeare’s "Julius Caesar," a fortune teller warns the Roman emperor of bad things to come on a specific period of the calendar. The warning was not heeded, and poor Julius was murdered by Brutus and his fellow Senators.

Stakes aren’t as high but some warning signs started blinking last week for issuers. First, long-term yields started to widen significantly. On Thursday, the 30-year MMD hit a yield of 3.20%. That’s 17 basis points higher than it was three weeks prior, reflecting a steepening of the yield curve that will translate into higher costs for issuers needing to access capital on the long-end. According to a story by Bloomberg’s Danielle Moran, investors on the long-end this month experienced the highest loss relative to other maturities due to the market’s downturn.

The spike in 30-year rates was coupled with more data that indicates the investor-base on the long-end has weakened considerably. According to Michelle Kaske, banks have sold close to $27 billion of their muni holdings over the first two quarters of 2018, the first time these investors have been net sellers in over eight years. This should be really concerning for any issuer needing to access large amounts of capital on the long end, as banks and property & casualty insurance companies are the two most important buyers. Both of these investors have stopped buying – only banks right now are sellers, according to Fed data – due to changes in the corporate tax code.

The first story from last week might be a short-term blip – a little bit of rate volatility. Or it might be a result of the second story. Market risk is always going to be present for any issuer, and good ones know how to be proactive to hedge or minimize that risk – like adjusting the method of sale. But the longer-term warning sign indicates we’re in a new bond market and the investor base is very thin. Not adjusting for this new reality is like Caesar brushing off the fortune teller.

Colin MacNaught

Colin MacNaught

CEO & Co-Founder @ BondLink