Municipal Bond Investor Weekly - Raymond James

Municipal Bond Investor Weekly

High Net Worth Wealth Solutions and Market Strategies // Fixed Income Solutions

JUNE 27, 2022

TED RUDDOCK

THE WEEK AHEAD

Managing Director Fixed Income Private Wealth

1.

Two key indicators this week: the Fed's preferred inflation measure PCE out on Thursday --- see related commentary below --- look beyond the

headlines; Consumer Confidence out on Tuesday.

DREW O'NEIL

Director Fixed Income Strategy

2. Muni new issue supply picks up with ~$8 billion on tap in this holiday shortened week --- early 2:00 PM close on Friday for the Bond Market, full close on Monday July 4th.

3. Treasury auctions this week will set the market tone --- nearly $100 billion in both bills and 5 and 7 year notes. Will the recent rally fade pushing yields higher?

MONDAY'S COMMENTARY Time For A Mid-Year Check Up!!

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THE NUMBERS THIS WEEK

Bonds rallied last week taking yields lower across most of the fixed income landscape. The intermediate portion of the Treasury curve finished the week 12 to 16 basis points lower in yield, while the short and long part of the curve fell by just 3 to 4 basis points. Municipal yields also retreated last week, as benchmark AAA yields fell by 8-12 basis points across the curve.

Municipal Municipal Municipal Municipal Muni Muni TEY*

Year

Treasury (AAA)

(A)

TEY* (AAA)

TEY* (A)

(AAA)/Tsy Ratio

(AAA)/Tsy Ratio

1 2023 2.83 1.66 2.08 2.81 3.51 59% 99%

2 2024 3.04 1.95 2.39 3.30 4.04 64% 109%

5 2027 3.18 2.28 2.79 3.85 4.72 72% 121%

10 2032 3.13 2.79 3.34 4.71 5.64 89% 150%

20 2042 3.51 3.09 3.66 5.22 6.18 88% 149%

30 2052 3.26 3.25 3.81 5.49 6.44 100% 168%

*Taxable equivalent yield @ 40.8% tax rate

Traditional ladder strategies (table on right) highlight opportunities along the curve, based on maturities. Duration focused strategies can extract additional yield available with longer maturities, while potentially mitigating risk with shorter calls. Yield curve (upper right) highlights taxable equivalent yields.

7.00 6.00 5.00 4.00 3.00 2.00

4.72

5.64

3.85 3.18

4.71 3.13

6.44 5.49 3.26

1.00

0.00 1

3 5 7 9 11 13 15 17 19 21 23 25 27 29

AAA Municipal TEY

A Muni GO TEY

Treasury

Maturity Range Avg. Maturity Duration Yield to Worst

1 to 5

3.0

2.78

2.25%

5 to 10

7.5

6.31

2.82%

10 to 20

15.0

7.98

3.31%

*Taxable equivalent yield @ 40.8% tax rate. Assumes a 10-year call.

TEY* 3.79% 4.77% 5.58%

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MUNICIPAL BOND INVESTOR WEEKLY

TIME FOR A MID-YEAR CHECK UP!!

To say the first half of 2022 has been challenging is an understatement. Both equity and fixed income investors faced some of the most turbulent market conditions seen in years. The S&P 500 was in bear market territory through mid-June, down more than 20%; the NASDAQ more than 30%. The bond market offered no relief. In anticipation of the Fed's attempt to quash inflation fears, the 10 year Treasury rose 200 basis points from ~1.50% at the start of 2022 to a high of ~3.50% mid-June --- that equates to a nearly 16% decline in the price of that bond. But wait? Aren't Treasuries risk free? Credit risk free maybe... not price risk. Yields up, prices down...even for Treasuries. Similar volatility in muni land. It wasn't pretty. And in muni-land, depending on the security coupon, structure, credit and various other factors, investors may have experienced even greater volatility: some bonds that were selling at par in January were down as much as equities. Of course, what didn't change: the coupon cash flow. More about that later.

In our 2022 Outlook published in January, our key message for muni market investors: "while we will almost certainly see higher rates in 2022, higher does not mean historically high." That certainly has come to pass --- and we would add with a bit of humility, faster --- and higher --- than we anticipated. On the short end, 2 year munis skyrocketed more than 8x from just 23 basis points to 1.97%; 10 year yields tripled from 1.05%, before settling back to close last week at 2.79%. Those are extraordinary moves in a roughly six month period from a historical perspective (the March/April 2020 COVID panic spike notwithstanding.)

Related 2022 Outlook messages concerning credit quality --- that continues to not only hold up, but improve as well. Moody's has reported upgrades to more than $100 billion in municipal debt year to date versus just $13 billion in downgrades: State of New Jersey dominated with ~$40 billion, moving from A3 to A2. On the supply front, we were concerned about two issues: the mix of taxable v. tax-exempt issuance, and the volume of refunding bonds versus new money. Through May, The Bond Buyer reports total volume is down more than 8% at $170 billion: taxable issuance is down 40%, but tax-exempt is down just 2%. Is there a bright spot? Yes: new money (versus refundings) is up over 9%, with $134 billion of new-money coming to market. We were looking for $20-25 billion of new money monthly --- and we're above that level. The challenge has been that demand for munis remains incredibly strong. It's not uncommon for new issues to be 5 ? 10X oversubscribed during underwriting. In the secondary market, The Bond Buyer reported monthly trading volume in May was over $360 billion --- an increase of 75% from January and an incredible 108% increase over May 2021.

We've had MANY conversations with financial advisors and clients who are concerned about the value of their bond portfolios. We understand that concern. Fixed income is the ballast of investment portfolios. And it still is. The one truism of fixed income: Yields up, prices down. It's just math. Yields up a lot, prices down a lot. Here's what doesn't change: The semi-annual, tax-exempt coupon cash flow of municipal bonds. Here's what else doesn't change: you know what you get back at maturity (or call). (Required disclosure about the remote possibility of default based on Moody's 50+ year historical default on investment grade municipal bonds.) With fixed income, unlike other investments, you can see into the future --- see when you will get your coupon cash flow and see when you will get your principal back. Try that with other investments.

If you have cash to put to work, there is, as they say, no better time than the present. With yields at levels we haven't seen in years --- nearly a decade --- municipal investors can once again buy 4% coupons at par; 5s are at a modest premium. Yes, these yields are achievable further out on the curve (but even bonds 5 ? 7 years out offer yields in the 2.50% range --- again, levels not seen in years.) The taxable equivalent yields achievable for select investors in the top tax brackets in states with higher income taxes (think CA, NY, NJ, OR) can exceed 8%.

Looking ahead to the second half of 2022: we remain in a VUCA world --- Volatility, Uncertain, Complex, Ambiguous --- as we wrote about back in March. We anticipate some volatility ahead, but nothing like the first half of the year. Short term yields may climb higher as the Fed raises Fed Funds a few more times this year. But, market experts are already ratchetting back their forecasts --- whether that's related to Fed Funds, GDP growth, or any number of factors. Last week, the market was digesting Fed Chair Powell's comments regarding the Fed acting

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MUNICIPAL BOND INVESTOR WEEKLY

too fast and too far --- moving towards a more data dependency. One of the more obscure bits of data we follow is the Dallas Fed's Trimmed Mean PCE Inflation Rate --- we wrote about that last year, as well. It's one of many metrics Chair Powell monitors closely. Here's why: it removes a great deal of noise in a VUCA world. The chart below highlights the month over month (blue line) and year over year (red line) change in the Dallas Fed's Trimmed Mean PCE Inflation Rate. The primary chart highlights data back to 2015 (inset highlight data back to 1978.) The 12 month, year-over-year numbers (red) highlights the trend --- the month-over-month numbers (blue), while seeming looking like noise, can provide important early signals... and we just received them. The month-overmonth PCE has reversed course and crossed below the 12 month trend. Will that continue? Some inflationary factors are slowly coming out of the markets. And you can see that first in the monthly data --- but it hasn't quite shown up in the year-over-year data. But we believe it will. And that, we would argue, is what the Fed is waiting to confirm. And it may not have to wait much longer. Granted, there are plenty of disruptive factors in the world, from the war in Ukraine, to gas / fuel sky high prices and shortages coupled with higher demand, to food inflation, to the re-opening of emerging market economies from the pandemic --- each one a confounding factor in its own right. As the Fed considers all the data, we would expect 10 year yields and longer will likely move within a relatively narrow range --- 25 ? 50 basis points --- in the short term likely higher, but by year end we would not be surprised to see 10 year muni yields in the 2.00 ? 2.25% neighborhood. These days, six months is a lot of terrain to cover with so much uncertainty. We'd be kidding ourselves otherwise.

Our commitment is to continue to monitor market developments and give you our unvarnished view of the municipal bond market and the factors influencing it. We don't have a special crystal ball. But we do have years of experience, in all sorts of markets, to provide perspective on what's "signal v. noise." There's plenty of hyperbole out there provided by market participants with VERY different interests than you, our clients. Short term traders / speculators are not long term investors, looking for wealth preservation and reliable, tax efficient income.

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MUNICIPAL BOND INVESTOR WEEKLY

Speculators distort markets, creating "noise" that makes it difficult to see / hear important market signals. Stay tuned. We're watching and listening closely.

NAVIGATING TODAY'S MARKET

According to The Bond Buyer, $8 billion in new issuance is expected this week. Some of the larger deals include: the New York City Transitional Finance Authority (Aa1/AAA/AAA) is selling $950 million of future tax-secured subordinate revenue bonds; the Beaverton School District No. 48J, OR (Aa1/AA+) is issuing $318 million of general obligation bonds; the Merrillville Multi-School Building Corp, IN (-/AA+) is selling $144 million if ad valorem property tax first mortgage bonds; The Willis Independent School District, TX (-AAA) is bringing a $140 million PSF-backed deal to market; the Alameda County Transportation Commission, CA (-/AAA/AAA) is selling $125 million of Measure BB limited tax senior sales tax revenue bonds; and Williamson County, TX (-/AAA/AAA) is issuing $112 million of unlimited tax road bonds.

HISTORICAL YIELDS

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Municipal AAA 10-Year

Municipal AAA 2-Year

Fed Funds (Upper Bound)

Date Amount

Issuer

ST

Description

6/27 6/27 6/27 6/27 6/27 6/27 6/27 6/28 6/28 6/28 6/28 6/29 6/29 6/29 6/29

$130MM Willis Independent School District TX Unlimited Tax School Building Bonds

$105MM Williamson County

TX Unlimited Tax Road Bonds, Series 2022

$49MM Connecticut Housing Finance

CT Housing Mortgage Finance Program

$8MM City of Pearland

TX Certificates of Obligation 2022B

$10MM City of Pearland

TX Certificates of Obligation 2022A

$24MM City of Pearland

TX Permanent Improvement Bonds

$46MM City of Pearland

TX Certificates of Obligation 2022C

$10MM Town of Hamden, Connecticut

CT General Obligation Refunding Bonds,

$950MM New York City Transitional Finance NY Future Tax Secured Tax-Exempt

$16MM Fowler USD (County of Fresno) CA General Obligation Bonds, Election of

$725MM Alabama Corrections Institution AL Revenue Bonds, Series 2022A

$10MM William Penn School District

PA General Obligation Bonds Series 2022

$107MM Nebraska Investment Finance

NE Single Family Housing Revenue Bonds

$3MM Harlandale Independent School TX Unlimited Tax Refunding Bonds, Series

$40MM Harlandale Independent School TX Unlimited Tax School Building Bonds,

Moody's/S&P/Fitch

/AAA / ( /AA- / ) PSF /AAA /AAA Aaa /AAA / Aa2 / /AA Aa2 / /AA Aa2 / /AA Aa2 / /AA NR /AA /NR ( /BBB+ / ) Aa1 /AAA /AAA /AA / ( /A+ / ) BAM Aa2 /AA- /AA NR /AA /NR ( /BBB+ / ) /AA+ / /A+ / /AAA / ( /A+ / ) PSF

Maturity

2/15/2030-52 02/15/2023-42 05/15/20233/1/2030 3/1/2023-42 3/1/2023-42 9/1/2024-42 8/15/2032 8/1/24-48 08/01/2023-25,53,359/1/22-52 03/01/2023-42

08/15/2024-32 08/15/2025-52

This offering calendar is for information purposes only, and is not intended as an offer for solicitation with respect to the purchase or sale of any securities. For more information on the new issues go to .

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MUNICIPAL BOND INVESTOR WEEKLY

There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and investors may incur a profit or a loss. Past performance may not be indicative of future results. Prior to transacting in any security, please discuss the suitability, potential returns, and associated risks of the transaction(s) with your Raymond James Financial Advisor. This communication is not an offer to sell or a solicitation to buy any securities mentioned herein. High grade and High yield securities mentioned herein may not be suitable for all investors. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. All expressions of opinion reflect the judgment of the Fixed Income Municipal Department of Raymond James & Associates (RJA) at the time of publication and may be subject to change without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. Other departments of RJA or its affiliates may have information that is not available to the Fixed Income Municipal Department about companies or Issuers mentioned in this report. Further information on the securities mentioned herein is available upon request. Interest on Municipal Bonds is generally exempt from federal taxation and may also be free of state and local taxes for investors residing in the state and/or locality where the bonds were issued. However, bonds may be subject to federal alternative minimum tax (AMT), and profits and losses on tax-exempt bonds may be subject to capital gains tax treatment. Bonds are subject to risk factors including: 1) Default Risk - the risk that the issuer of the bond might default on its obligation 2) Rating Downgrade - the risk that a rating agency lowers a debt issuer's bond rating 3) Reinvestment Risk - the risk that a bond might mature when interest rates fall, forcing the investor to accept lower rates of interest (this includes the risk of early redemption when a company calls its bonds before maturity) 4) Interest Rate Risk - this is the risk that bond prices tend to fall as interest rates rise. 5) Liquidity Risk the risk that a creditor may not be able to liquidate the bond before maturity. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio.

Sourced from Bloomberg: Treasuries: US Fed H15 CMT Curve - The H15 curve is comprised of the constant maturity treasury rates as published daily by the Federal Reserve in the H15 report. Municipal (AAA): BVAL Municipal AAA Yield Curve (Callable) - The curve is populated with high quality US municipal bonds with an average rating of AAA from Moody's and S&P. The yield curve is built using non-parametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues, and other proprietary contributed prices. The curve represents 5% couponing. The 3 month to 10 year points are bullet yields, and the 11 year to 30 year points are yields to worst for a 10-year call. Municipal (AA): US General Obligation AA Muni BVAL Yield Curve - The BVAL curve is populated with pricing from uninsured AA General Obligation bonds. Municipal (A): US General Obligation A+ A A- Muni BVAL Yield Curve - The BVAL curve is populated with pricing from uninsured A+, A, and Arated General Obligation bonds. Fed Funds (Upper Bound): The federal funds rate is the short-term interest rate targeted by the Federal Reserve's Federal Open Market Committee as part of its monetary policy. US Treasury securities are guaranteed by the US government and, if held to maturity, generally offer a fixed rate of return and guaranteed principal value. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

US Treasury securities are guaranteed by the US government and, if held to maturity, generally offer a fixed rate of return and guaranteed principal value. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

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Raymond James? is a registered trademark of Raymond James Financial, Inc.

M21-3985225 through 12/15/2023

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