June 27, 2017
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Fixed Income Strategy
Municipal Bond Market Weekly
Bottom Line:
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Treasury market yields mostly fell and the curve flattened once again with no influence from
economic data or Fed speakers but, probably more so by falling oil prices and apparent skepticism
about longer-term growth.
Municipal yields were little changed to lower and the 10yr AAA GO Ratio was also little changed.
Municipal bond fund flows turned negative.
Iowa to issue bonds, uncharacteristically, as liquidity falls.
Moody’s shows in sensitivity test that state and local pension plans, ever more sensitive to
investment returns, are asymmetrically negatively impacted by potential investment returns.
Indiana bond issuance to cover I-69 P3 project shows the potential risk of such structured projects.
Illinois approaches budget plan deadline with bond trading volume elevated and spreads wide.
Puerto Rico Government Development Bank creditors approve (in number) to restructuring plan.
S&P Puerto Rico Total Return Index was +0.6% last week; -3.5% YTD.
What Happened in the Bond Markets Last Week?
• Last week, Treasury yields flattened some more. Bereft of any meaningful economic data Treasuries were left
to the devices of other influential factors which were also not present. Of course there was the countervailing
commentary given by Fed officials which did little to influence yields. Maybe the largest impact to yields was the
continuing fall in oil prices (popularly called a bear market now - again). The fall in the real yield during the
week (10yr reals fell approximately 10 bps over the past week) indicates some skepticism in longer-term growth
prospects.
• Municipal yields were little changed but did fall across the curve. The 10-yr AAA GO Ratio was little changed.
Yields (Figure 1):
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For the week ending 6/23/17 Treasury yields traded mixed; 2-year Treasury Note yields +2.1 bps to 1.34%, 5year Notes yields were +1.3 bps to 1.76%, 10-year Notes yields were -1.3 bps to 2.14% and 30-year bonds
yields were -6.2 bps to 2.72%.
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Bloomberg Municipal Index curve yields were lower AAA-rated GO yields; 2-year bonds were unchanged at
0.90%, 5-year bond yields were unchanged at 1.24%, 10-year bond yields were -1 bps to 1.84% and 30-year
bonds were -2 bps to 269%.
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The Ratio of 10-year AAA GO debt to 10-year Treasury yields fell slightly to 86.0 from 86.1 last week. The yearto-date average is 92.9 and the 12-month average is 94.0.
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David N. Violette, CFA
Sr. Fixed Income Analyst
Vice President
[email protected]
414-298-7688
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June 27, 2017
Figure 1 - Yield Curve and Muni Curve Changes – Data Source: Bloomberg
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 (in red)
- one for the most current date and one from last week and two for the AAA-rated G.O. (in blue) - 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.
Figure 2 - Muni Ratio – Data Source: Bloomberg
AAA 10-Year G.O. Muni Ratio to Treasury
110.0
Ratio (%)
105.0
100.0
95.0
90.0
85.0
86.0
80.0
Mid Price
SMAVG (50)
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June 27, 2017
Bond Buyer Indexes (Table 1 and Figure 3): Last week, the Bond Buyer Index yields were unchanged: Bond Buyer.
Table 1 - Bond Buyer Indexes – Source: Bloomberg
Index
Yield %
Yield Last Week
1 Week Change (bps) Yield 1 Month Ago 1 Month Change (bps)
Bond Buyer 20 Gen'l Obligation Index
3.53
3.53
0.0
3.73
-20.0
Bond Buyer 11 Gen'l Obligation Index
3.04
3.04
0.0
3.24
-20.0
Bond Buyer 25 Revenue Index
3.70
3.70
0.0
3.92
-22.0
Figure 3- Bond Buyer Indexes - 1 Year; Data Source: Bloomberg
Bond Buyer Indexes
1 year
4.5
Yield (%)
4
3.5
3
2.5
2
Bond Buyer 25 Revenue
Bond Buyer 20 General Obligation
Supply (Figure 4) – Bloomberg 30-Day Visible Supply currently stands at $9.4 billion down from $15.4 billion this time
last week. The YTD average visible supply is $11.3 billion and the 12-mo average is $12.2 billion.
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June 27, 2017
Figure 4- Bloomberg 30-Day Visible Supply - 1 Year; Data Source: Bloomberg
Bloomberg 30-Day Visible Supply
U.S. Total
30,000
$ Million
25,000
20,000
15,000
10,000
5,000
0
Articles of Interest
Municipal Fund Flows: According to Lipper data municipal bond funds reversed to net outflows last week of $890
million after $395 of inflows during the previous week. The four-week moving average is $109.6 million. High-yield funds
also had net inflows last week.
Dallas County Schools Repay Defaulted Bonds: Dallas County Schools, which defaulted on $9 million of debt
payments earlier in June, has reportedly repaid bondholders for interest payments missed.
State and Local Pension Burdens Will Continue to Rise (Moody’s): Moody’s evaluated the $4 trillion of public
pension fund’s adjusted net pension liabilities (ANPLs) under three investment scenarios through 2019. In the best case
investment scenario (cumulative investment returns of 25%), pension-related credit risks would be stable at best with
ANPLs falling by 13%. Under the downside scenario (cumulative investment returns of 2.2%) ANPLs would still rise by
7%. In all scenarios, government funding costs to tread water (keeping pace with liability growth) will increase. Moody’s
says that pension fund investment performance has “never been more critical to government credit quality. Currently,
New Jersey has the widest ANPL followed by Kentucky and Illinois.
Iowa to Issue Bonds (Moody’s): Moody’s reports that Iowa’s liquidity has been tightening and may require external
cash borrowing in 2018 for the first time in 10years. Lower cash balances are a result of a slowing economy (state GDP
falling and job growth taper) and low tax collections on lower than expected capital gains realizations. Reserves, even
after being drawn upon, remain healthy at 75 of revenues.
Indiana Plans to Issue Bonds to Rescue I-69 P3 (Moody’s): The State of Indiana’s decided to voluntarily terminate
the availability payment from the I-69 public-private partnership (P3). The Indiana bond issuance will be used to redeem
the bonds issued by the private developer of the project, highlighting the risk of such financially structured projects. The
project, which was entered into with a developer in 2014 was impacted by construction delays and a bankruptcy filing.
Governments can enter such P3s to efficiently finance and develop infrastructure projects but the risk may or may not
still lie with the sponsoring government.
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Illinois Trading Volume Elevated as Budget Deadline Looms (Bloomberg Brief): As Illinois approaches a July 1
budget deal deadline, State of Illinois bonds have been trading at five-month high daily trading volume. It is expected
that if the state does not reach a budget deal that the credit will be downgraded to non-investment-grade status. With
tax-exempt bond 10yr yields at approximately 4.6%, some market participants believe that the bonds’ prices already
reflect non-investment grade status.
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June 27, 2017
Puerto Rico:
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Government Development Bank Creditors Accept Deal (Bloomberg Brief): More than half of creditors to
the Puerto Rico Government Development Bank (GDB) have agreed to debt exchanged terms in restructuring.
The GDB has $4 billion of face value of debt outstanding. As reported, under the plan creditors would exchange
their bonds for either 55 percent, 60 percent or 75 percent of face value depending on their choice of current
interest payments or potential for greater recovery with lower claims on the bank’s cash. The deal, to take effect
needs to be approved by both half of the bondholders and holders of two-thirds of value.
The S&P Municipal Bond Puerto Rico Index finished at 170.6 on Friday vs. 169.5 at the end of the previous
week, +0.6%%. Year-to-date the index is -3.5%.
S&P Municipal Bond Puerto Rico Index Level (1-year)
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June 27, 2017
Relative Value by Maturity
Table 2 - AAA Muni Ratios and Spreads by Maturity - Data Source: Bloomberg
6/26/2017
Yield-to-Maturity (%)
0% Tax Rate
35% Tax Equivalent
Maturity (yrs.)
AAA Gen. Oblig.
Treasury
Spread (bps)
Ratio (%)
Spread (bps)
Ratio (%)
1
2
3
4
5
7
10
15
20
25
30
0.76
0.90
1.01
1.12
1.24
1.48
1.84
2.31
2.56
2.65
2.70
1.20
1.35
1.49
1.66
1.77
1.98
2.15
2.24
2.45
2.59
2.72
-43.6
-44.7
-48.3
-54.1
-52.6
-50.7
-31.0
6.9
10.6
6.0
-2.4
63.6
66.9
67.6
67.4
70.2
74.4
85.6
103.1
104.3
102.3
99.1
-2.6
3.9
5.9
6.2
14.3
28.8
68.3
131.0
148.4
148.5
142.9
97.8
102.9
103.9
103.7
108.1
114.5
131.7
158.6
160.5
157.4
152.5
Figure 5 – AAA General Obligation Ratios and Spreads – Data Source: Bloomberg
AAA G.O. Muni Ratio and Spreads
20.0
110.00
105.00
100.00
95.00
90.00
85.00
80.00
75.00
70.00
65.00
60.00
0.0
-20.0
-40.0
1
3
5
10
20
30
Spread (bps)
Ratio %
(0% Tax Convention)
-60.0
Maturity (yrs.)
Ratio (%) (Left)
Spread (bps) Right
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June 27, 2017
Relative Value by Rating
Figure 6 – Muni Index Yield Curve by Credit Rating – Data Source: Bloomberg
4.00
Muni Yields by Rating
3.50
Yield (%)
3.00
2.50
2.00
1.50
1.00
0.50
0.00
0
2
4
6
8
10
12
Treasury
14
16
18
AAA
20
22
AA
24
26
28
30
A
Figure 7 – Muni Index Ratios by Maturity and by Credit Rating – Data Source: Bloomberg
Muni Ratios by Rating
165
Ratio (%)
145
125
105
85
65
2
4
6
8
10
12
AAA
14
16
AA
18
20
22
24
26
28
30
A
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June 27, 2017
Figure 8 – Muni Index Spread to Treasuries by Maturity and by Credit Rating– Data Source: Bloomberg
Muni Spread (bps) by Rating
100.00
80.00
Spread (bps)
60.00
40.00
20.00
0.00
-20.00
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
-40.00
-60.00
-80.00
AAA
AA
A
For more information please contact your Financial Advisor.
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June 27, 2017
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 2017 Robert W. Baird & Co. Incorporated.
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