Municipal Bond Investor Weekly - Raymond James

MAY 30, 2023

Municipal Bond Investor Weekly

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

GINA FAY

THE WEEK AHEAD

Director Fixed Income Private Wealth

1.

June money-in-motion could reach $45 billion and with lower supply expected, munis could become more expensive relative to Treasuries.

DREW O'NEIL

Director Fixed Income Strategy

2. President Biden and House Speaker McCarthy reached a debt limit deal that is now set to make its way through Congress --- any hold-ups would create significant volatility in the markets.

3. Assuming the debt-limit gets approved, the market's focus will shift to this week's economic data, highlighted by Friday's employment report.

MONDAY'S COMMENTARY Summer Drought... Illustrative Portfolios

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THE NUMBERS THIS WEEK

Treasury yields marched higher last week, with yields finishing 10-26 basis points higher from 1 to 10 years while the 30year inched higher by 1 basis point. Municipal yields were higher across the board. The benchmark AAA curve yields were higher by 7 to 15 basis points. Municipal yields have steadily increased recently with the 10-year AAA yield currently over 60 basis points higher compared to its lows in mid-April.

Year

Treasury

Municipal (AAA)

Municipal (A)

Municipal TEY* (AAA)

Municipal TEY* (A)

Muni (AAA)/Tsy

Ratio

Muni TEY* (AAA)/Tsy

Ratio

1 2024 5.25 3.15 3.82 5.33 6.46 60% 101%

2 2025 4.54 3.05 3.72 5.16 6.29 67% 114%

5 2028 3.92 2.74 3.42 4.63 5.78 70% 118%

10 2033 3.80 2.67 3.36 4.51 5.68 70% 119%

20 2043 4.13 3.43 4.16 5.79 7.02 83% 140%

30 2053 3.96 3.65 4.39 6.17 7.42 92% 156%

*Taxable equivalent yield @ 40.8% tax rate

8.00

7.42

7.00

5.78

6.00

5.00

5.68 4.51

4.00

4.63

6.17

3.00

3.92

3.80

3.96

2.00

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

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MUNICIPAL BOND INVESTOR WEEKLY

SUMMER DROUGHT... As we kicked off the unofficial start to summer this weekend, $6.1 billion in new municipal bonds are expected to be issued in this holiday-shortened week. Year-to-date new issuance through April totaled ~$108 billion - the slowest pace for the first four months of the year since 2019 and a ~25% decrease over the same period last year (~$144 billion) and ~12% lower vs the 10-year average (~$123 billion). The slowdown in issuance can be attributed to a variety of factors, including Treasury market volatility, higher interest rates, and debt ceiling concerns. The question is will supply pickup or will there be a drought this summer?

Source: The Bond Buyer, Raymond James

The months of June, July and August are traditionally large redemption months in the municipal bond market. Current Bloomberg data suggests approximately $88 billion of municipal bonds will either mature or be called over the three months from June 1 through August 31. In June alone, an estimated total of $45 billion of combined principal (~$31 billion) and interest (~$14 billion) is expected to be returned to investors. While this is less than in recent years, mostly due to fewer current refundings, if the trend of lower supply continues, we could see a supplydemand imbalance in the muni market. It's common for the summer months to have "negative net supply" as the number of bonds being redeemed outpaced the number of new bonds being issued. In four of the last six years, we've seen negative net supply in the June-August time frame, with "deficits" in the ~$20 to ~$40 billion range. Bloomberg forecasts indicate we could see a "deficit" of $17 billion over the next 30 days. What does that mean for municipal investors? Quite simply, demand (from reinvestment of matured and called bonds) is likely to exceed supply (new issues). These muni market supply and demand dynamics are not likely to change over the course of the summer. Given the recent slowdown in new issue supply, we would expect municipal yields would lag any movement in Treasuries. When that happens, munis become "more expensive" relative to Treasuries. We measure that by comparing the yield on municipals to the yield on comparable Treasuries. For the past five years, the 10-year ratio has averaged ~86%. Since the beginning of the year, that ratio has been in the ~60-70% range ? and could likely stay there if we have a "drought". While that ratio is "expensive" on a historical basis, munis still provide attractive tax-efficient relative value for investors in the top tax brackets. 10-year AAA munis currently yield 2.66% - that equates to a taxable equivalent yield (TEY) of 4.49% (based on the 37% federal tax bracket plus the 3.8% net investment income tax), providing a yield pick-up vs 10-year Treasuries

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MUNICIPAL BOND INVESTOR WEEKLY

yielding 3.72%. Even more value can be found in AA and A rated municipals and for some investors in high income tax states buying in-state bonds, with TEYs great than 6%. So, when redemption money is available to reinvest, don't wait - opportunities may be limited. Our team of fixed income professionals is available to work with your financial advisor to help you weather any market conditions that may develop this summer! ILLUSTRATIVE PORTFOLIOS Our illustrative proposals reflect three opportunities along the yield curve with bonds maturing from 1 to 20 years. Portfolio yields continued to advance, although slightly more modest this week, just 10 - 15 basis points higher as munis followed Treasury yields higher. Strategically, for investors looking to lock in long-term, reliable cash flow, our duration focused 10 ? 20 year maturity illustration continues to offer an excellent tax efficient solution. The average yield to worst is ~3.60%, that equates to a taxable equivalent yield (TEY) to worst of ~6.10% for an investor in the top federal tax bracket and subject to the net investment income tax. If the bonds are not called, the yield to maturity increases to ~3.90%, a TEY to maturity of ~6.60%. This is a solution with premium coupon bonds with an average coupon of 4.45% and a market price of ~$105.60. The current yield is ~4.20%. An investment with $1 million par value ($1.06 million market value) will generate a federally tax-exempt annual coupon cash flow of ~$44,500.

NAVIGATING TODAY'S MARKET New issuance is expected to come in at $6.1 billion this week according to The Bond Buyer. Some of the larger deals include: Connecticut (Aa3/AA-/AA-) is selling $360 million of tax-exempt general obligation bonds as well as $350 million of taxable general obligation bonds; the Massachusetts Educational Financing Authority (-/AA) is bringing a $353 million taxable education loan revenue deal to market; the Maryland Stadium Authority (-/AA/AA) is selling $234 million of football stadium revenue bonds; and the Utah Board of Higher Education (Aa1/AA+) is issuing $163 million of University of Utah general revenue bonds. See table below for additional new issuance.

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MUNICIPAL BOND INVESTOR WEEKLY

HISTORICAL YIELDS

6.00 5.00 4.00 3.00 2.00 1.00 0.00

Municipal AAA 10-Year

Municipal AAA 2-Year

Fed Funds (Upper Bound)

Date Amount

Issuer

5/30 $30MM The City of New York

5/30 $151MM The City of New York

5/30 $272MM The City of New York

5/30 $1111MM The City of New York

5/30 $5MM Colorado Housing and Finance

5/30 $45MM Colorado Housing and Finance

5/30 $75MM Colorado Housing and Finance

5/31 $100MM State of Connecticut

5/31 $260MM State of Connecticut

5/31 $350MM State of Connecticut

6/1 $234MM Maryland Stadium Authority

ST

Description

Moody's/S&P/Fitch

NY General Obligation Bonds, Fiscal 2023 Aa2 /AA /AA

NY General Obligation Taxable Bonds, Fiscal Aa2 /AA /AA

NY General Obligation Bonds, Fiscal 2023 Aa2 /AA /AA

NY General Obligation Bonds, Fiscal 2023 Aa2 /AA /AA

CO Single Family Mortgage Bonds Class I

Aaa /AAA /

CO Single Family Mortgage Bonds Class III Aa3 /AA /

CO Single Family Mortgage Bonds Class I

Aaa /AAA /

CT General Obligation Bonds, Series 2023A Aa3 /AA- /AA-

CT General Obligation Refunding Bonds,

Aa3 /AA- /AA-

CT Taxable, General Obligation Bonds, Series Aa3 /AA- /AA-

MD Revenue Bonds (Football Stadium Issue) NR /AA /AA

Maturity

8/1/23-33 8/1/24-25 8/1/2027-2036 8/1/25-39 05/01/2024-29 5/1/2053 05/01/202405/15/2024-43 08/01/2023-33 05/15/2024-33 3/1/25-9/1/37

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.

The illustrative portfolios are intended as a starting point for a conversation on individual bonds. They are not intended as specific recommendations and bonds are shown for illustration purposes only. The bonds listed in the illustrative portfolios are rated A or better, with average ratings from Moody's and Standard and Poor's of Aa2 / AA. The yields shown in the proposals are based on pricing models, not current market offers. Yields shown are indicative of general market levels but are not a guaranteed result. Prices and yields are not inclusive of any fees or commissions.

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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M23-184726 through 4/28/26

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