Markets have been absorbing elevated fourth quarter issuance as well as a range of information emerging from the Fed and general economic performance. Rates have trended higher during 2021 and the expectation is for them to move up further as the Fed slowly transitions to a tighter monetary policy stance. For those considering 2022 issuance, it will be important to do the front-end work to develop a point of view on when to introduce capital structure risk products—at what point do you choose to use floating rate or interim products versus issuing long-duration fixed?
|
1 Year |
5 Year |
10 Year |
30 Year |
|
|
`Nov. 5 -Treasury |
0.14% |
1.04% |
1.45% |
1.87% |
|
v. Oct. 22 |
0.01% |
-0.18% |
-0.21% |
-0.21% |
|
Nov. 5 – MMD* |
0.15% |
0.63% |
1.13% |
1.58% |
|
v. Oct. 22 |
0.02% |
0.03% |
-0.11% |
-0.15% |
|
Nov. 5 – MMD/UST |
107.14% |
60.58% |
77.93% |
84.49% |
|
v. Oct. 22 |
7.1% |
11.4% |
3.2% |
1.3% |
|
*Note: MMD assumes 5.00% coupon |
||||
SIFMA reset this week at 0.04%, which is approximately 45.13% of 1-Month LIBOR and represents a -1 basis point adjustment versus the October 20 reset.
Transitory or Structural
A proverb in the Tao Te Ching teaches that “the journey of a thousand miles begins with a single step.” It feels like at least a thousand miles between today’s capital markets and “normal” and hopefully the Federal Reserve took its first step on Wednesday by communicating its intention to start scaling back asset purchases this month, with a full wind-down of the buying program by June 2022. The Fed has been purchasing approximately $120 billion of Treasury and mortgage securities each month, and the plan is to ratchet this activity down over the next 8 months. The expectation remains that there would be no change to the Fed Funds rate until the asset purchase program has been fully wound down.
The backdrop to this announcement is the Fed’s point of view that, despite being disruptive, most price pressures are transitory, and the U.S. economy can respond to the array of supply-demand dislocations. The message is that inflation is a serious matter, but it is being driven by short-term dislocations and the Fed is not behind the curve in managing the risk. While the tapering program described is orderly and methodical, it will accelerate versus earlier thinking and there is the possibility that both tapering and rate increases could occur even faster if inflationary pressures escalate from here.
Meanwhile, the healthcare business model has blown out. The October Kaufman Hall National Hospital Flash Report has been released and is available here. The results confirm startling levels of expense and margin dislocation:
- Month-over-month, hospitals experienced a median decline in Operating Margin of 18.2% driven by a drop in Adjusted Discharges of 5.1%, a decrease in Gross Operating Revenue of 1.4%, and an increase in Total Expense per Adjusted Discharge of 7.6%.
- September year-over-year comparisons saw a 12.9% increase in Total Expense per Adjusted Discharge, a 18.4% increase in Labor Expense per Adjusted Discharge, and an 8.9% increase in Non-Labor Expense per Adjusted Discharge.
An important consideration is that the Fed is concerned about the rate of inflation, or the pace of price change. The business model challenge is that even if the inflation rate moderates, major expense inputs have moved to new levels based on pressures that may have a relatively long tail. This gets at the critical difference between rates (benchmark borrowing levels that respond directly to macro factors like inflation and supply and demand) versus credit (sector and company-specific performance). The Fed may successfully manage the rate side of the equation without doing much to manage the business model adjustments that drive the credit side.
Another interesting twist is to view healthcare operations as having two distinct supply chains to support the care product they deliver: one comprised of the external supplies and materials that are needed to create and support the care delivery infrastructure, and the other being the internal supply chain, which is mostly the myriad of human resources needed to deliver care. The question is whether these two supply chains will behave the same way. Is the Fed right in predicting that both will prove transitory? Or is the internal supply chain going to behave differently and take a longer time to normalize—and will normalization be at a materially higher level that effectively creates a structural shift in margin?
We have shared our view that not-for-profit healthcare providers are three companies rolled into one: a core operating company supported by a finance company and an investment company. The credit side of the healthcare equation will be driven by getting two things right:
- Having the operating company drive enough performance improvement to offset revenue as well as external and internal supply chain pressures; and
- Using the finance and operating companies to maintain a resiliency foundation that gives the operating company the space and resources needed to respond to environmental headwinds.
Trending in Healthcare Treasury and Capital Markets is a biweekly blog providing updates on changes in the capital markets and insights on the implications of industry trends for Treasury operations, authored by Kaufman Hall Managing Director Eric Jordahl.
