Muni Fortnightly - Baird

WEALTH SOLUTIONS GROUP

Muni Fortnightly

Treasury yields rise slightly on positive economic data and Federal Reserve resiliency on tone. Muni yields follow Treasuries.

PWM Fixed Income Research

David N. Violette, CFA, Vice President SDeanvieorVFioixleetdteI,nCcoFmA,eVAicnealPysret sident Senior Fixed Income Analyst

May 3, 2021

Bottom Line:

? Treasury yields move slightly higher on a raft of positive economic data. ? Federal Reserve sticks to its tone regarding tapering and rates. ? Muni ratios lift. ? Moody's raises Mass Transit sector outlook to stable. ? Moody's shows Q1 financial distress concentrated in senior living facilities, special tax districts and

Puerto Rico.

What Happened in the Bond Markets Last Week?

? After a week devoid of economic data, last week was just the opposite as it was full of important economic data (GDP, Personal Income/Spending, Durable Goods, Consumer Confidence etc.) and as one would have expected it came in resoundingly positive (and mostly exceeding consensus expectations). In addition, the most recent Fed meeting concluded on Wednesday with nary a sign of changing course yet. They are well away from raising rates (think 2023) and don't even want you to think that they have QE tapering in their crosshairs yet. Treasury yields reversed course last week, with a decidedly higher tick in yields. Corporate credit spreads held tight. Munis yields rose along with Treasuries.

? Municipal bonds' yields were higher across the curve last week. The 10yr AAA GO Ratio is 59.6.

Yield Changes (week over week)

(Since 4/1/21) Tenor 3 mos. 1year 2 year 5 year 10 year 30 year

Treasuries

Change (bps) - MTD

Yield (%)

-0.7

0.01%

-1.6

0.05%

+0.0

0.16%

-5.2

0.85%

-4.3

1.63%

-2.8

2.31%

Munis (Bloomberg AAA GO Index)

Change (bps) - MTD

Yield (%)

-2

0.07%

-4

0.09%

-7

0.42%

-10

0.97%

-14

1.65%

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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.

Yield Curve and Muni Curve Changes (since 3/14/21)

? The 10yr AAA GO Ratio is 59.6.

The line graph to the right shows the ratio of 10-year AAA-rated muni yields to the 10-year Treasury yield over the last year.

Data Source: Bloomberg

The Bloomberg 30-Day Visible Supply currently stands at $11.0 billion. The year-to-date average is $10.5 billion and the 12-mo average is $12.5 billion.

Data Source: Bloomberg

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Data Source: Bloomberg

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Muni Fortnightly, continued

Articles of Interest Muni Fund Flows: According to Refinitiv Lipper, muni funds had net inflows of $1.64 billion last week. ETFs and high-yield funds also had net inflows for the week.

.

Mass Transit Outlook Improves (Moody's): Moody's issued a new Mass Transit sector Outlook, revising it to Stable from Negative. The rationale for the outlook change includes: 1) incremental Federal assistance through The American Rescue Plan Act which includes $30.5 billion to support the industry after two smaller assistance packages earlier on during the pandemic. 2) An expectation of improved tax collections upon the improvement in the economy. 3) They note that changing commuter behavior will remain a challenge to the sector. Higher Education Private Education Sector Demonstrated Flexibility (Moody's): In a Sector Profile, Moody's describes the private higher education as demonstrating flexibility during fiscal 2020 during Covid. The highlights of the report include: 1) Larger private universities remained in a stronger financial position as compared to smaller private schools. Fifty percent of privates saw operating revenue declines in 2020 as compared to 20% seeing a decline in 2019. 2) Private universities showed their flexibility by cutting expenses alongside the reductions in revenues to maintain an a nearly unchanged operating cash flow margin. 3) One-third of the rated universities saw net tuitions decline ? with a median drop of 4.6%. 4) Private universities' reserves and liquidity were maintained. 5) Universities turned more to public financing, away from internal reserves, for capital projects. Muni Sector Delinquencies/Reserve Draws etc. (Moody's): Moody's summarized the 96 material financial-difficulty credit events of Q1 2021. The credit events of Q1 were concentrated among small un-rated issuers and were concentrated among senior living facilities, special tax districts (TIF districts) and Puerto Rico. They commented that given the significance of Covid on the economy that municipal delinquencies and reserve draws were less prevalent that they expected. State Ratings Changes Q1 Summary: Moody's issued the following credit rating changes for states in Q1 2021: 1) Upgraded Connecticut from A1 to Aa3, 2) revised the State of Illinois from negative to stable, 3) revised the outlook for Louisiana from stable to positive, and so far in Q2 4) revised the State of New jersey from negative to stable.

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Muni Fortnightly, continued

Puerto Rico: The S&P Municipal Bond Puerto Rico Index: finished at 231.3 vs. 228.2 in mid-March; +1.4%, +2.4% YTD.

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

4/30/2021

Maturity (yrs.)

1 2 3 4 5 7 10 15 20 25 30

Yield-to-worst (%)

AAA Gen. Oblig.

Treasury

0.08

0.04

0.10

0.16

0.17

0.33

0.32

0.60

0.43

0.85

0.65

1.31

0.97

1.63

1.27

1.86

1.43

2.18

1.59

2.24

1.65

2.31

0% Tax Rate

Spread (bps)

Ratio (%)

7.7

181.0

-1.3

59.9

-6.5

52.3

-10.5

53.6

-19.4

50.2

-31.3

49.4

-12.9

59.8

8.5

68.0

2.4

65.7

20.4

70.9

23.5

71.6

35% Tax Equivalent

Spread (bps)

Ratio (%)

7.7

278.4

-1.3

92.1

-6.5

80.5

-10.5

82.4

-19.4

77.2

-31.3

76.1

-12.9

92.1

8.5

104.6

2.4

101.1

20.4

109.1

23.5

110.2

Relative Value by Rating Figure 5 ? Muni Index Yield Curve by Credit Rating ? Data Source: Bloomberg

For more information please contact your Financial Advisor. Robert W. Baird & Co. Incorporated

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Muni Fortnightly, continued

Appendix ? Important Disclosures

Some of the potential risks associated with fixed income investments include call risk, reinvestment risk, default risk and inflation risk. Additionally, it is important that an investor is familiar with the inverse relationship between a bond's price and its yield. Bond prices will fall as interest rates rise and vice versa.

When considering a potential investment, investors should compare the credit qualities of available bond issues before they invest. The two most recognized rating agencies that assign credit ratings to bond issuers are Moody's Investors Service ("Moody's") and Standard & Poor's Corporation ("S&P"). Moody's lowest investment-grade rating for a bond is Baa3 and S&P's lowest investment-grade rating for a bond is BBB-. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest).

The Bond Buyer 20-Bond Index consists of 20 general obligation bonds that mature in 20 years. The average rating of the 20 bonds is roughly equivalent to Moody's Investors Service's Aa2 rating and Standard & Poor's Corp.'s AA. The Bond Buyer 11-Bond Index uses a select group of 11 bonds in the 20-Bond Index. The average rating of the 11 bonds is roughly equivalent to Moody's Aa1 and S&P's AA-plus. The Bond Buyer Revenue Bond Index consists of 25 various revenue bonds that mature in 30 years. The average rating is roughly equivalent to Moody's A1 and S&P's A-plus. The indexes represent theoretical yields rather than actual price or yield quotations. Municipal bond traders are asked to estimate what a current-coupon bond for each issuer in the indexes would yield if the bond was sold at par value. The indexes are simple averages of the average estimated yields of the bonds, are unmanaged and a direct investment cannot be made in them.

This is not a complete analysis of every material fact regarding any sector, municipality or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Municipal securities investments are not appropriate for all investors, especially those taxed at lower rates. The alternative minimum tax (AMT) may be applicable, even for securities identified as tax-exempt. It is strongly recommended that an investor discuss with their financial professional all materially important information such as risks, ratings and tax implications prior to making an investment. Past performance is not a guarantee of future results.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

ADDITIONAL INFORMATION ON SECURITIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST BY CONTACTING YOUR BAIRD INVESTMENT PROFESSIONAL.

Copyright 2021 Robert W. Baird & Co. Incorporated.

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