Municipal Bond Investor Weekly - Raymond James

[Pages:5]Municipal Bond Investor Weekly

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

JUNE 13, 2022

NOREEN MCCLURE

THE WEEK AHEAD

Director Fixed Income Private Wealth

1.

The Fed ? will they or won't they raise 75 basis points (versus the 50 basis points previously indicated)???

DREW O'NEIL

Director Fixed Income Strategy

2. The Fed ? look for hawkish tone in Powell's post-meeting press conference --- otherwise the Treasury market will likely sell off further.

3. The Fed - doesn't control the entire market...munis march to a slightly

different beat --- see how with The Numbers This Week and our Commentary

MONDAY'S COMMENTARY Opportunities Moving Out On The Curve

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THE NUMBERS THIS WEEK

Treasury yields rose sharply last week, as short-term yields finished the week 30-40 basis points higher and longer-term yields increased by 9-19 basis points. Yields for the benchmark AAA municipal curve were mixed, as short-term yields fell by a few basis points while intermediate and long-term yields rose by 14-25 basis points. These moves led to a steeper municipal curve for the week but also lowered muni-Treasury ratios for short and intermediate maturities.

Municipal Municipal Municipal Municipal Muni Muni TEY*

Year

Treasury (AAA)

(A)

TEY* (AAA)

TEY* (A)

(AAA)/Tsy Ratio

(AAA)/Tsy Ratio

1 2023 2.01 1.58 2.00 2.67 3.38 79% 133%

2 2024 2.47 1.86 2.30 3.15 3.88 75% 127%

5 2027 2.71 2.18 2.66 3.67 4.49 80% 136%

10 2032 2.74 2.50 2.97 4.22 5.02 91% 154%

20 2042 3.16 2.71 3.20 4.57 5.40 86% 145%

30 2052 2.97 2.83 3.34 4.79 5.64 95% 161%

*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.

6.50 5.50 4.50 3.50 2.50 1.50

4.49

5.02

3.67 2.71

4.22 2.74

5.64 4.79 2.97

0.50

-0.50 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

2.13%

5 to 10

7.5

6.33

2.58%

10 to 20

15.0

8.03

2.94%

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

TEY* 3.60% 4.36% 4.96%

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MUNICIPAL BOND INVESTOR WEEKLY

OPPORTUNITIES MOVING OUT ON THE CURVE

The municipal market experienced quite a sell off on Friday finishing the week with higher yields and lower dollar prices which will likely contribute to mutual fund outflows. However, for a high net worth investor who prefers purchasing individual bonds, this has extended the opportunity to capture higher yields. Market professionals differ on what they expect moving forward in this economy; there are many moving parts and impending uncertainty. Many believe we will be faced with recessionary conditions while others believe the Federal Reserve will direct us to a soft landing. All eyes will be watching the Fed this week as they meet on Tuesday - Wednesday, the market already assumes there will be an increase in the Fed Funds rate, the question is how much will they raise Fed Funds? I am not an economist, but what I do know is that municipal bond investors should not be ignoring what the yield curve is telling us. Today I am going to focus on demonstrating the reward an investor can achieve by moving out on the yield curve, locking in these higher yields!

Throughout the past quarter we have witnessed many investors requesting very short term maturities and this was understandable, the yield curve was much flatter and for a period of time you

AAA Municipal Curve Slope Analysis 6/9/2019 to 6/10/2022 Slope

could achieve in excess of 2% on 1-2 year maturities. The thought process for many was, "why go out in duration and subject myself to volatility risk if I can capture almost 200% of where

Maturities 5yr - 1yr 10yr - 5yr

Current 64 53

Avg Steepest Flattest

24

64

-4

42

68

15

rates were a year ago?" Moving forward to the 15yr - 10yr

22

24

40

10

present, that window has closed. We have seen a large correction on the curve, yields have

20yr - 15yr

13

18

24

7

dropped on the short end and increased on the 25yr - 20yr

9

14

17

8

longer end, creating a "steeper" yield curve. 30yr - 25yr

5

5

6

4

Looking back over the last 4 years, aside for a

short window in March 2021, the current slope is

at a high of 166 bp --- that's the difference between 10yr - 1yr

117

66

117

14

the 30 year yield (3.07%) versus the 1 year yield 20yr - 1yr

152

107

152

54

(1.41%) based on the Municipal Market Date Scale (MMD).

30yr - 1yr

166

126

170*

72

Sources: MMD, Raymond James

What does this mean for investors? The municipal curve is presenting an opportunity to

* denotes 3/3/2021

extend portfolios that we haven't see in a long time. Just by going out five years you capture 67% of the yield

available on the curve (2.05% / 3.07%); at 10 years, you are achieving 84% (2.58% / 3.07%) and if you venture out

15 years you are picking up 91%. One of the strategies we often deploy is building a ladder for our investors. That

would mean buying bonds within a specific maturity range, having bonds mature each and every year. This

presents a more conservative approach and will provide the opportunity to continue to buy the ladder as each bond

matures. The yields curves shown below illustrates the comparison between municipals (taxable equivalent yield),

corporates & Treasuries. You will notice the steepness in the muni curve in comparison to corporates and

Treasuries. Depending on your federal tax bracket and your state of residency corporates or Treasuries may offer

the best value on the short end, however clearly municipals prove to be the best value for higher tax bracket

investors as you move out in maturity.

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MUNICIPAL BOND INVESTOR WEEKLY

As I mentioned above, moving out on the curve offers true value especially for those in the higher federal tax brackets and reside in states with a higher income tax. This morning I prepared a national municipal ladder from 5 to 10 years to illustrate the benefit of extending. I assumed a $500,000 par investment, the investor is in the 37% federal tax bracket and they reside in a state with no income tax. The average maturity is 7.8 years with a duration of 6. The results produce a current yield of a 3.95%, a yield to the call of a 2.98% and a yield to maturity of a 3.10%. More impressive is the taxable equivalent yield coming in at a 4.73% to the call and a 4.92% yield to maturity. Please reach out to your financial advisor to have a customized portfolio prepared for you, based on your individual needs and goals. NAVIGATING TODAY'S MARKET A light new issue calendar is expected this week according to The Bond Buyer, as just $2.88 billion forecast to come to market this week. Some of the larger deals expected are: Salt Lake City, UT (Aa1/AAA) is selling $301 million in revenue bonds; Nassau County, NY (A2/A-/A) is bringing a $241 million general obligation deal to market; and Riverside County, CA is issuing $360 million in tax and revenue anticipation notes. See table below for additional new issuance.

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MUNICIPAL BOND INVESTOR WEEKLY

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

6/13 $20MM Putnam County School District 6/14 $16MM Harbor Springs Public Schools 6/14 $64MM City of Celina, Texas 6/15 $26MM Pell City 6/15 $16MM City of Sealy 6/16 $14MM Kennebec Water District 6/16 $2MM City of Groton, Connecticut 6/16 $28MM City of Groton, Connecticut

ST

Description

Moody's/S&P/Fitch

GA General Obligation Bonds, Series 2022 Aa1 / / (Aa2 / / )

MI 2022 School Building and Site Bonds,

/AA /

TX Tax & Waterworks & Sewer System

Aa3 /AA /

AL General Obligation School Warrants, Ser /AA /

TX Combination Tax & Revenue Certificates of /A /

ME 2022 Water System Revenue Bonds

A1 /A /

CT General Obligation Refunding Bonds,

NR /AA /NR

CT General Obligation Bonds, Issue of 2022, NR /AA /NR

Maturity

10/1/23-32 05/01/2026-42 9/1/2023-47 2/1/24-52 9/1/2023-47 6/1/23-52 10/1/22-29 4/1/23-42

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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M21-3985225 through 12/15/2023

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