Muni Fortnightly - Baird

WEALTH SOLUTIONS GROUP

Muni Fortnightly

Treasury yields chop around near their highs. Economic data better than expected. Inflation data this week. Moody's highlights Not-for-Profit Sector credit difficulties.

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

September 11, 2023

Bottom Line:

? Treasury yields climbed since the beginning of the month but has become choppy. ? Moody's reports on the poor operating performance of the Not-for-profit Healthcare Sector. ? Moody's reports on stabilization of Charter School Sector. ? Munis cheapen slightly relative to Treasuries.

What Happened in the Bond Markets Last Week?

? Stronger than expected economic data and a move higher in oil prices were the impetus for a bear flattening move higher in yields. Yields have been a bit choppier at these near highs of the year. ISM Services and jobless claims both reiterated strength in the economy. A heavy calendar of corporate bond issuance was also cited as a contributor to higher yields. There is a very small market implied probability for a Fed rate hike next week and a slightly less than a coin flip's chance of a hike by the end of the year. This week's inflation data will be of keen interest in this development.

? The Bloomberg Barclays Municipal Bond Index yield is 3.84%. ? The 10yr AAA GO Ratio has risen very sharply to 68.3.

(Since 8/31/23) Tenor 3 mos. 1 year 2 year 5 year 10 year 30 year

Treasuries

Change (bps)

Yield (%)

+2

5.47%

+3

5.41%

+14

4.98%

+17

4.41%

+19

4.29%

+17

4.37%

Munis (Bloomberg AAA GO Index)

Change (bps)

Yield (%)

+3

3.44%

+2

3.27%

+2

3.18%

+3

2.90%

+4

2.91%

+5

3.96%

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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 5/31/23)

Data Source: Bloomberg

The 10-yr AAA GO Ratio is 68.3.

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

Bloomberg 30-Day Visible Supply currently stands at $8.0 billion. The 12-mo average is $8.4 billion.

Data Source: Bloomberg

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Data Source: Bloomberg Page 2 of 5

Muni Fortnightly, continued

Articles of Interest Not-for-Profit Public Healthcare Operating Performance Weakens: Moody's issued a Sector Profile report on the Notfor-Profit Public Healthcare Sector' operating performance. The highlights of the report include: 1) in 2022, expense growth was high (8.9%) as revenue growth fell to pre-pandemic rates (5.1%), 2) operating margins, at -0.3%% (4.9% operating cash flow margin), fell to unsustainable levels, 3) liquidity fell back to pre-pandemic levels with days cash on hand fell from 243 to 206, 4) leverage increased to a five-year high of 3.6x, 5) inpatient volumes recovered more slowly than outpatient volumes. Charter School Leverage Remains High: Moody's issued a Sector Profile report on the Charter School Sector. The highlights of the report include: 1) as schools expanded, revenues increased from $10.8 billion to $12.3 billion, 2) margins decreased due to the impacts of inflation of expenses, 3) liquidity was stable as cash-on-hand stabilized, 4) leverage remains elevated with debt to operating revenue still high at 1.65x, 5) debt service coverage has been strong but will deteriorate in the future. Muni Fund Flows: According to Refinitiv Lipper, muni funds experienced outflows of $798 million after $408 million of inflows during the previous week.

Relative Value by Maturity

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

9/11/2023

Maturity (yrs.) 1 2 3 4 5 7 10 15 20 25 30

Yield-to-worst (%)

AAA Gen. Oblig.

Treasury

3.27

5.39

3.18

4.98

3.05

4.69

2.95

4.54

2.90

4.41

2.87

4.37

2.91

4.28

3.50

4.33

3.70

4.56

3.88

4.47

3.96

4.37

0% Tax Rate

Spread (bps)

Ratio (%)

-35.6

60.7

-8.8

63.8

-0.9

64.9

0.7

65.1

5.9

65.9

3.9

65.6

19.3

67.9

105.5

80.8

113.1

81.1

150.3

86.9

171.3

90.5

35% Tax Equivalent

Spread (bps)

Ratio (%)

-35.6

93.4

-8.8

98.2

-0.9

99.8

0.7

100.2

5.9

101.3

3.9

100.9

19.3

104.5

105.5

124.4

113.1

124.8

150.3

133.7

171.3

139.2

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

For more information, please contact your Financial Advisor.

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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 2023 Robert W. Baird & Co. Incorporated.

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