Repricing Risk

Healthcare issuance kicked back in this week with borrowers confronting varied pricing performance, especially in the tax-exempt sector. We are in a period where risk appetites and risk pricing are recalibrating in response to the weight of macro-economic, geopolitical factors, and changing Federal Reserve policy. Any healthcare organization that is preparing to come to market should anticipate the need for good investor engagement (pre-marketing) and the possibility for volatility during the pricing period. Hedging and other volatility reduction strategies are important to consider and are the subject of an article I recently published with my colleague, Steve Sohn.

SIFMA reset this week at 0.49%, which is approximately 110% of 1-Month LIBOR and represents a +25 basis point adjustment versus the March 9 reset.

Repricing Risk

As noted above, we are early but fully into the process of recalibrating and repricing capital market risk. This is occurring against our “never done that before” backdrop wherein a central bank that has flooded the economy and markets with massive liquidity must now navigate between one set of pressures that call for monetary tightening (historically high inflation) versus another set that call for continued accommodation (the war in Ukraine creating ripple threats to economic growth). There are three interesting observations from these early days of the risk recalibration journey:

1. US Treasuries set the tone for how capital markets respond to big things like inflation, geopolitical risk, and anticipated Fed policy. Thirty-year US Treasury rates have increased sharply during 2022, but there have been ups and downs along the way. Even if there is a consensus that long-term rates will likely trend higher, the events of each day intercede to make the recalibration process continuous and volatile. It is also noteworthy that although Treasuries have moved higher at what has felt like an alarming pace, 30-year rates remain below recent historical averages. Shorter points on the yield curve have moved more significantly—in some cases breaching their averages since 2009—but core long-term benchmark interest rates remain low.
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2. Credit spreads are widening as part of the risk repricing process. The chart below shows 30-year Investment Grade (“IG”) spreads as published by Bloomberg and the message is generally in line with what is happening in the Treasury market. Looking at the broad IG universe, spreads have moved up sharply over 2022 but they have moved lower most recently and remain generally in line with historical averages. The shift from the lows of 2021 to where we are now has been quite abrupt, but the credit spread aberration was the 2021 lows versus where we are now.
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3. The other compelling dislocation has been across the municipal market. The table below shows 30-year MMD/Treasury ratios and here the message has been a sharp escalation in ratios during 2022 (which means municipal rates have moved up faster than Treasuries); but these ratios are approaching 2009-YTD averages. Like credit spreads, the aberration was recent history versus current levels. This increase to ratios can be sourced from general rate pressures but also from significant municipal bond fund outflows (liquidity moving out of the municipal market), which suggests something of a multiplier effect wherein ultimate borrowing costs get hit by any or all of Treasury benchmark rates plus the relative value between that global benchmark and municipal-specific benchmarks plus municipal credit spreads. Each of these elements can impact municipal risk pricing at any point in time, which perhaps means more sub-market volatility until we settle each of those three components.
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Volatility comes either from shocks that produce abrupt shifts from one set of expectations to another (a pandemic or a geopolitical event) or from a series of recalibrations on the journey to stabilization, like a process wherein capital market participants go back and forth trying to figure out where benchmark and relative value risk pricing should settle. Hopefully, we aren’t in for more shocks because the normal recalibration process is likely to be difficult and multi-dimensional. The expectation for challenging times ahead extends to every element of a healthcare organization (operations, finance, and investing). The best—arguably the only—response is to anticipate these varied challenges and position resources accordingly. Effective and enterprise-centric resource allocation will remain the differentiator.

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.