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Muni Fortnightly
Bottom Line:
• Treasury curve flattens more (2’s’-10’s at 53 bps) after below expectations CPI data and FOMC Fed
rate hike and stated intentions of three more in 2018. ECB and BOE sat tight.
• Munis completed their volatile roundtrip from tax policy expectations and spike in issuance – AAA
GO Ratio comes back to nearly where they began one month ago.
• Bloomberg Barclay’s Municipal Bond market index total return was -0.54% in November (% 4.36YTD).
• PABs spared but not advanced refunding in the GOP tax bill.
• Hartford, CT raised to ‘CCC’.
• S&P Puerto Rico Total Return Index was -1.5% two weeks; -18.7% YTD.
• For the week ending 12/15/17 Treasury yields traded mixed and flatter; 2-year Treasury Note yields were
+4.6 bps to 1.84%, 5-year Notes yields were +1.4 bps at 2.15%, 10-year Notes yields were -2.1 bps to 2.35%
and 30-year bonds yields were -7.5 bps at 2.69%.
• Bloomberg Municipal Index curve yields were mostly higher and the curve flatter, AAA-rated GO yields; 2-
year bonds were +0 bps to 1.46%, 5-year bond yields were -2 bps to 1.64%, 10-year bond yields were +4 bps
to 2.02% and 30-year bonds were +3 bps to 2.66%.
• The Ratio of 10-year AAA GO debt to 10-year Treasury yields fell from week-ago levels to 85.9 from 86.6 last
week. The year-to-date average is 89.2 and the 12-month average is 89.4.
.
Figure 1 - Yield Curve and Muni Curve Changes – Data Source: Bloomberg
One can observe these changes by looking at how rates have changed along the curve for both the Treasury curve
and for the AAA-rated G.O. Index since last week. The top panel shows four yield curves; two for the Treasury curve
(in red) - one for the most current date and one from last week and two for the AAA-rated G.O. (in blue) - current and
last week. The bottom panel of the graph shows changes in the rates along both curves for the week for both
Treasuries and the AAA G.O. Index.
105.0
100.0
Ratio (%)
95.0
90.0
85.0
85.9
80.0
Supply (Figure 3) – Bloomberg 30-Day Visible Supply currently stands at $13.9 billion down from $26.6 billion this time
last week. The YTD average visible supply is $12.2 billion and the 12-mo average is $12.0 billion. This week’s expected
volume exceeds the entire volume of last December.
35,000
30,000
25,000
$ Million
20,000
15,000
10,000
5,000
Articles of Interest
Municipal Fund Flows: According to Lipper data muni funds had net inflows of $216.9 million after $807.2 million of net
outflows during the previous week. The four-week moving average was $42.3 million of inflows. High-yield funds had net
inflows.
Private Activity Bonds (PABs) Spared in the Tax Bill; Advanced Refundings Gone: After the House bill initially
terminated PABs, the final bill has spared PABS and they will be fully preserved including for those for sports stadiums
and arenas. Advance refundings have bene eliminated.
November Municipal Tax-Exempt Performance:
• Bloomberg Barclay’s Municipal Bond Index had a -0.54% total return in November and underperforming the
Treasurys’ Index return. The negative municipal index return comprised of a price return of -0.88% and a
positive coupon return of +0.35%. Through November, the year-to-date total return is +4.36% and the last 12-
months’ total return is +5.58%.
o The ending Yield-to-Worst (YTW) for November was 2.47% (+22 bps) with a 5.1 modified duration-to-
worst.
• The General Obligation Index had a -0.65% total return in November. Through November GOs had a +4.18%
total year-to-date and +5.34% during the last 12-months.
o The YTW at the end of November was 2.38% (+25 bps).
o The State General Obligation sub-index had a -0.69% total return in November, with a +3.81% total
return year-to-date and a 12-month total return of +4.86%.
Notable geographic indexes’ November returns include; Laggards – Puerto Rico (-0.96%), MS
(-0.92%) and MN (-0.79%); Leaders – Virgin Islands (+0.45%), Guam (+0.16%), VT (+0.07%).
Other notable jurisdictions; AZ (-0.66%) CA (-0.54%), CT (-0.57%) FL (-0.61%), IL (-0.34%), IA
(-0.63%), KS (-0.68%), MI (-0.51%), MN (-0.79%), NJ (-0.30%), NY (-0.57%), OH (-0.50%),
OR (-0.75%) PA (-0.31%), Puerto Rico (-0.96%), TX (-0.58%), WA (-0.66%), WI (-0.68%).
The ending YTW for the State G.O. sector was 2.31%.
o The Local General Obligation sub-index had a -0.60% total return in November, with a 4.62% total
return year-to-date and the 12-month total return of +5.92%.
The ending YTW for the Local G.O. sector was 2.46%.
• The Revenue Bond Index had a -0.46% total return in November, with a year-to-date total return of +4.80%
and a 12-month total return of +6.18%.
o The best performing revenue sectors in November were hospitals (-0.18%), housing (-0.38%) and
education (+0.42%).
o The laggard revenue sectors were resource recovery (-0.71%), special tax (-0.65%), and electric (-
0.60%).
o The ending YTW for the Revenue sector was 2.59%.
The returns across maturities for the Barclay’s Muni indexes were; 3-yr -0.96%, 5-yr -1.13%, 10-yr -0.89% and 20-yr -
0.14% reflecting the flattening in the Treasury curve.
Hartford Credit Rating raised to ‘CCC’: S&P raised its rating on Hartford, CT to ‘CCC’ from ‘CC’ saying “The bonds are
vulnerable to nonpayment because a default, a distressed exchange, or redemption remains possible without a positive
development and potentially favorable business, financial, or economic conditions.”
Fitch on State Pension Plans: Fitch commented that state pension liabilities rose to 6% of personal income in ’16 up
from a rise of ‘5.65 the year prior. In AK, CT, IL, KY and MA and NJ pensions liabilities constitute more than 20% of
personal income.
Tobacco Bonds Performance (Bloomberg Brief): Tobacco settlement revenue bonds, with a significant amount
considered high-yield, have enjoyed 20.4% return in 2017 so far – in fact have outperformed the S&P 500 returns in
three out of last five years. Payments on tobacco bonds are based on domestic cigarette sales.
Muni Sector Volatility: On the back of tax policy wrangling and surge in issuance, the municipal bond sector volatility
rose, as readers of should have noted the wide swing in the Muni Ratio. In fact, according to Bloomberg Brief, price
swings in the 30-yr muni benchmark was the largest since the end of last year (graph below).
Puerto Rico:
o The tax bill ends some long-enjoyed tax advantages that companies with operations in PR had as they will be
treated as foreign and subject to certain taxes on intangible assets held offshore.
o Hurricane Maria Relief Absence: According to Bloomberg Brief, Puerto Rico has yet to receive any of the
$4.9B of short-term loans promised by Congress in October. And separately, almost a ¼ of million people have
moved out of PR, at least temporarily, to Orlando, FL.
o The S&P Municipal Bond Puerto Rico Index finished at 143.7 on Friday vs. 145.9 at the end of two weeks
ago, -1.5%%. Year-to-date the index is -18.7%.
Table 1 - AAA Muni Ratios and Spreads by Maturity - Data Source: Bloomberg
12/18/2017 Yield-to-worst (%) 0% Tax Rate 35% Tax Equivalent
Maturity (yrs.) AAA Gen. Oblig. Treasury Spread (bps) Ratio (%) Spread (bps) Ratio (%)
1 1.26 1.69 -43.6 74.2 24.0 114.2
2 1.47 1.85 -38.1 79.4 41.0 122.1
3 1.52 1.96 -44.8 77.2 36.8 118.7
4 1.57 2.10 -53.0 74.8 31.5 115.0
5 1.64 2.18 -53.2 75.6 35.4 116.3
7 1.79 2.30 -51.1 77.8 45.3 119.7
10 2.02 2.37 -35.4 85.1 73.3 130.9
15 2.36 2.40 -4.5 98.1 122.6 151.0
20 2.54 2.51 3.0 101.2 139.5 155.7
25 2.61 2.60 1.0 100.4 141.7 154.4
30 2.66 2.70 -4.2 98.4 139.1 151.4
Figure 4 – AAA General Obligation Ratios and Spreads – Data Source: Bloomberg
Spread (bps)
90.00
Ratio %
85.00 -20.0
80.00 -30.0
75.00
-40.0
70.00
65.00 -50.0
60.00 -60.0
1 3 5 10 20 30
Maturity (yrs.)
Figure 5 – Muni Index Yield Curve by Credit Rating – Data Source: Bloomberg
3.50
Muni Yields by Rating
3.00
2.50
Yield (%)
2.00
1.50
1.00
0.50
0.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Treasury AAA AA A