Muni Fortnightly

WEALTH SOLUTIONS GROUP

Muni Fortnightly

Treasury yields whipsawed by Iranian-conflict developments. Muni Funds receive massive net inflows. Ratios back to near most expensive levels.

PWM Fixed Income Research

David N. Violette, CFA, Vice President SDeanveiorVFioixleetdteI,nCcFomA,eVAicnealPyrset sident Senior Fixed Income Analyst

January 13, 2020

Bottom Line:

? Treasury yields whipsaw on Iranian-conflict and weak payroll data. ? Muni funds completed the 53rd consecutive week with massive net inflows. ? Moody's issues report on state of local government pension plans. ? S&P calls state muni credit quality stable for 2020. ? Philly Reserve Bank expects nine states to economically contract in 2020. ? High-yield munis issuance, fund flows and returns flourish in 2019. ? One municipal analytics firm believes that a 2020 Puerto Rico bankruptcy emergence may be

difficult to achieve given legal and political conditions. ? S&P Puerto Rico Total Return Index +2.51 % month-to-date.

What Happened in the Bond Markets Last Week? ? Treasury yields reacted according the general level of concern that the Iranian situation imposed. Early in the week yields fell sharply as Iranian missile strikes were worrying to global markets but reversed sharply when it was perceived that the strikes hit little of consequence and that the tension attitudes became conciliatory. Yields took a small leg lower on Friday when the employment report showed weakness in worker aggregate weekly pay. Other data (in particular ISM non-manufacturing) during the week were more supportive of higher yields. ? Municipal bonds' yields fell, defying the rise in Treasuries.

Yields (Figure 1): ? During the past week Treasury yields rose; 2-yearTreasury Note yields +3.7 bps at 1.57%, 5-year Notes yields +4.2 bps at 1.63%, 10-year Notes yields +3.0 bps at 1.82% and 30-year bonds yields 2.9 bps at 2.28%. ? Bloomberg Municipal Index yields fell; AAA-rated GO yields 2-year bonds -6 bps to 0.98%, 5-year bonds -8 bps at 1.04%, 10-year bond yields -9 bps to 1.37% and 30-year bonds were -8 bps at 2.04%. ? The 10yr AAA GO Ratio: 74.9.

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Figure 1 ? Month-to-date 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 one for the most current date and one from last week and two for the AAA-rated G.O. - 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.

Figure 2a - Muni Ratio ? Data Source: Bloomberg

AAA 10-Year G.O. Muni Ratio to Treasury

95.0

90.0

85.0

80.0

75.0

74.9

70.0

Ratio (%)

Mid Price

SMAVG (50)

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Figure 2b - Muni Ratios Across the Curve ? Data Source: Bloomberg

Supply (Figure 3) ? Bloomberg 30-Day Visible Supply currently stands at $13.2 billion down from $14.4 billion this time last week. The YTD average visible supply is $13.5 billion and the 12-mo average is $12.0 billion.

Figure 3- Bloomberg 30-Day Visible Supply - 1 Year; Data Source: Bloomberg

Bloomberg 30-Day Visible Supply

U.S. Total

30,000 25,000 20,000 15,000 10,000

5,000 0

$ Million

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Articles of Interest

Local Government Pensions (Moody's): Moody's published a Sector Profile report on state of local government pension plans. The highlights of the report include: 1) the largest liability for 29 of the 50 largest local governments is unfunded pension liabilities, debt being second and OPEB liabilities third; 2) Adjusted net pension liabilities (ANPLs) are expected to climb due to 2018's decline in interest rates; 3) while OPEB liabilities are the third largest liability, few assets are usually reserved to pre-fund them; 4) most of the 50 largest local governments have not contributed enough to their pension plans to tread water.

Federal Reserve Bank Expects Nine States to Contract (Bloomberg): The Federal Reserve Bank of Philadelphia expects that nine states move into an economic contraction within six months. West Virginia and Pennsylvania are particularly susceptible.

S&P Expects Stable State Credit: S&P Global Ratings expects stable 2020 credit ratings. They cite that on states will broadly be able to balance delivery of service requirements and generating enough revenue to cover them.

High-Yield Muni Issuance Soared in 2019 (Bloomberg): According to Bank of America strategists, high-yield municipal bond issuance rose 31% in 2019 including those of nursing homes/assisted living, charter schools. Refinitiv Lipper Fund Flows data showed that a record $19.3 billion flowed into high-yield muni funds. The Bloomberg Barclays High-yield Index rose 10.7% vs. 7.5% for investment-grade munis.

Muni Fund Flows: According to Refinitiv Lipper muni funds had a 53rd consecutive week of net inflows. Net

inflows amounted to $2.9 billion of net inflows. The four-week moving average is $1.6 billion. Both ETFs and highyield funds experienced net inflows.

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Puerto Rico o 2020 Bankruptcy Emergence May be a Push: Municipal Markets Analytics analysts have state that Puerto Rico's

emergence from bankruptcy in 2020 may be difficult because of legal and political reasons. In particular the oversight's board to invalidate some of the GO debt will remain a barrier. o The S&P Municipal Bond Puerto Rico Index finished at 212.6 vs. 207.4 at the end 2019, +2.51%.

S&P Municipal Bond Puerto Rico Index Level (1-year)

Relative Value by Maturity

Table 1 - AAA Muni Ratios and Spreads by Maturity - Data Source: Bloomberg

1/13/2020

Maturity (yrs.)

1 2 3 4 5 7 10 15 20 25 30

Yield-to-worst (%)

AAA Gen. Oblig.

Treasury

0.95

1.51

0.95

1.58

0.97

1.59

0.99

1.63

1.03

1.65

1.13

1.76

1.36

1.84

1.66

2.01

1.81

2.15

1.96

2.22

2.03

2.30

0% Tax Rate

Spread (bps)

Ratio (%)

-55.8

63.1

-62.6

60.4

-62.6

60.7

-64.2

60.5

-61.9

62.4

-62.3

64.5

-47.4

74.2

-35.0

82.6

-34.1

84.1

-26.3

88.2

-27.0

88.2

35% Tax Equivalent

Spread (bps)

Ratio (%)

-4.5

97.0

-11.3

92.9

-10.4

93.4

-11.2

93.1

-6.6

96.0

-1.3

99.3

26.0

114.1

54.6

127.1

63.1

129.4

79.2

135.6

82.2

135.8

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