Municipal Market Update
Transcription
Municipal Market Update
Dorian Jamison, Municipal Analyst Municipal Market Update A timely look at trends and developments for muni bond investors January 15, 2015 Strong reinvestment demands helps drive muni yields near all-time lows Seasonal reinvestment demand remains strong which will help offset this week’s supply increase. As reported on January 7, U.S. municipal bond funds posted net inflows of $1.3 billion, the 25th inflow in 26 weeks and the largest inflow in more than 12 months. Yield curve The spread between the Municipal Market Data (MMD) 10-year triple-A benchmark yield and the MMD 30-year triple-A benchmark yield has fallen to just 76 basis points, as of January 14, representing the smallest spread since late-October 2008 (See Figure 1). Since New Year’s Day, the Municipal Market Data (MMD) 10-year triple-A benchmark has fallen 22 bps to 1.78 percent, a 12-month low and down 84 basis points year-over-year. The 10-year yield remains 31 basis points higher than its all-time low of 1.47 percent, which was set on November 28, 2012. 5 Year AAA Yield AA A BBB Current 1.07 13 bps 33 bps 83 bps Spreads to AAA Thom son MMD Curve 1-Day 1-Week 1-Month (4.5%) (13.7%) (11.6%) (7.1%) (7.1%) (0.0%) (2.9%) (2.9%) (0.0%) (1.2%) (1.2%) (2.4%) 10 Year AAA Yield AA A BBB Current 1.78 20 bps 54 bps 97 bps 1-Day (3.3%) 0.0% 0.0% 0.0% 1-Week (5.8%) 0.0% (0.0%) 0.0% 1-Month 3-Month 1-Year (10.1%) (10.6%) (32.6%) (4.8%) 5.3% (9.1%) (3.6%) 0.0% (29.9%) (4.0%) (7.6%) (36.2%) 30 Year AAA Yield AA A BBB Current 2.54 23 bps 53 bps 89 bps 1-Day (3.1%) 0.0% (1.9%) (1.1%) 1-Week (4.9%) 0.0% (3.6%) (2.2%) 1-Month (11.8%) 0.0% (5.4%) (4.3%) 3-Month (0.9%) 62.5% 6.5% (1.2%) 3-Month (12.7%) 15.0% (1.9%) (5.3%) 1-Year (8.5%) 18.2% (36.5%) (33.6%) 1-Year (36.7%) (4.2%) (30.3%) (32.1%) Source: Thomson Municipal Market Monitor (TM3) Past performance is not an indication of future results. During the same time, the (MMD) 30-year triple-A benchmark has fallen 29 basis points to 2.54 percent, a two-year low and down 143 basis points year-over year. The 30-year yield is only seven basis points higher than its all-time low of 2.47 percent, which was also set on November 28, 2012 (See Figure 2). Supply Tax-exempt new issue supply is expected to total $6.6 billion this week, up from $4.94 billion last week and more than the 2014 weekly average of $5.7 billion. Supply is expected to remain above average during January. The Bloomberg 30-day visible municipal supply was $8.5 billion on January 5, which is above the 12-month average of $7.7 billion. Despite declining almost 14 percent during the first half of 2014, supply increased more than 16 percent during the second half of 2014. However, 44 weeks of inflows into municipal bond funds during 2014 enabled the market to accommodate the supply increase during the 2H2014. Demand Reinvestment demand remains strong which will help offset this week’s supply increase. U.S. municipal bond funds posted the 26th inflow in 27 weeks. As reported on January 14, net inflows were $688.5 million, compared with inflows of $1.3 billion the prior week, a 12-month high. Historically, January redemption needs, due to investors needing to reinvest principal and coupon payments, have totaled around $30 billion. Please see pages 8-10 of this report for Important Disclosures, Disclaimers and Analyst Certification Page 1 of 10 Municipal Market Update Inflows into municipal bond funds, a proxy for demand, rebounded in 2014. According to Lipper FMI—after ending 2013 with 31 consecutive weeks of outflows—municipal bond funds experienced net inflows 44 out of 52 weeks during 2014, totaling more than $13.1 billion. U.S. municipal bond funds posted 24 consecutive weeks of inflows from July 16 until seeing a modest outflow during the final week of 2014. New issue spotlight Among the high quality deals scheduled to price this week is a $474 million King County, WA sewer system revenue bond sale. King County’s sewer system provides treatment services to 33 municipal and 3 non-municipal agencies in King and Snohomish counties, as well as the Muckleshoot Tribe. The system service area covers 415 square miles in the Seattle metropolitan area with a population of approximately 1.5 million residents. The city of Seattle represents the largest user of the system at 40.1% and the city of Bellevue represents the second largest user at 8.7%. The system’s bonds are secured by a senior lien on net revenues of the county's sewer system. King County sewer revenue bonds are rated “Aa2” with a stable outlook by Moody’s Investors Service (Moody’s) and “AA+” with a stable outlook by Standard & Poor’s (S&P). The system's high credit ratings are based on its role as the major wastewater treatment provider in a broad and economically diverse region with high median household income levels. Partially offsetting its credit strengths is the system’s large capital improvement plan totaling $1.1 billion during fiscal years 2014 through 2019 and an additional $2 billion through 2030. Based on recent trades, King County sewer system revenue bonds are relatively undervalued in the secondary market. On January 6, King County sewer system revenue bond (CUSIP 495289ZE3), due January 2025 and callable January 2021 at par, traded at a dollar price of $117.377 to yield 2.974 percent (yield-to-maturity), which was 87 basis points higher (cheaper) than the Bloomberg Washington municipal benchmark. This spread is January 15, 2015 more than two standard deviations wider than the 12-month average, suggesting that the bonds are undervalued relative to the Bloomberg Washington municipal benchmark. If there is a mean reversion these bonds would be likely to outperform (See Figure 3). Credit spread tightening Municipal bond outperformance and historically low yields lead many investors to move down the credit scale in search of yield during 2014, causing the difference between yields on lower quality bonds and high quality bonds to narrow (i.e. credit spread tightening). Credit spread refers to the difference in yield between two issues that are identical in all respects other than their credit quality. Wells Fargo Advisors (WFA) Municipal Research continues to point out that a preference for lower rated bonds is not without risk in a still challenging credit environment, since lower rated credits might experience weak performance should spreads widen back to their recent averages. The current spread relationship suggests that tripleB bonds are currently fully valued relative to high quality municipal bonds, which suggests that investors may not be compensated for the added credit risk that triple-B bonds can represent. Since peaking at an all-time high of 354 basis points on March 31, 2009 the credit spread between 10-year triple-B rated municipal bonds and triple-A municipal bonds has tightened to 97 basis points as of January 14, a six-year low (See Figure 4). Triple-B rated bonds, as tracked by the S&P Municipal Bond BBB Rating Band Index, returned 12.5 percent in 2014, outperforming the broader municipal market, which returned 8.8 percent, as tracked by the S&P National AMT-Free Municipal Bond Index. Value conscious investors may want to consider locking in gains and reinvesting in higher quality bonds, with the understanding that it may not be possible to find the same kind of yield after a rebalance. Investors who live in states that do not tax out-of-state municipal bonds may also want to consider out-of-state bonds for additional yield opportunities. Page 2 of 10 Municipal Market Update January 15, 2015 Figure 1: MMD “AAA” GO 10YR to 30YR Yield Curve Slope (Oct. 24, 2008 – Jan. 14, 2015) 206 bps @ 1/30/09 (All-Time High) 121 bps Three-Year Average 83 bps @ 10/24/08 76 bps @ 1/14/15 (Six-Year Low) Source: Thomson Municipal Market Monitor (TM3), WFA Municipal Research Past performance is not an indication of future results. Figure 2: MMD “AAA” General Obligation 30YR Yield (Jan. 14, 2012 – Jan. 14, 2015) 4.51% @ 9/5/13 (Three-Year High) 3.17% @ 1/17/12 3.33% Three-Year Average 2.47% @ 11/28/12 (All-Time Low) 2.54% @ 1/14/15 (Two-Year Low) Source: Thomson Municipal Market Monitor (TM3), WFA Municipal Research Past performance is not an indication of future results. Page 3 of 10 Municipal Market Update January 15, 2015 Figure 3: King County, WA (CUSIP 495289ZE3) (Jan. 14, 2014 – Jan. 14, 2015) Source: Bloomberg Past performance is not an indication of future results. Figure 4: MMD GO 10YR “Baa” to “AAA” Credit Spread (Jan. 14, 2009– Jan. 14, 2015) 354 bps @ 3/31/09 (All-time High) 152 bps @ 1/14/14 (12-Month High) 97 bps @1/14/15 (Six-Year Low) 185 bps (Six-Year Average Line) 131 bps @ 5/28/13 Source: Thomson Municipal Market Monitor (TM3) Page 4 of 10 Municipal Market Update Municipal Credit Monitor The WFA Municipal Credit Monitor table (MCM) shows the weekly change in the spread relationship between the yield to maturity of representative holdings of WFA clients’ municipal bonds and the Bloomberg “AAA” municipal benchmark. The Municipal Credit Monitor table can be used to help identify undervalued and overvalued states, sectors and credits by highlighting the change in yield spreads and the magnitude of the yield spread in terms of the standard deviation from their averages. Bond prices and yields have an inverse relationship. Widening yield spreads are highlighted in red to indicate cheapening in bond prices relative to the January 15, 2015 “AAA” municipal benchmark. Tightening yield spreads are highlighted in green to indicate bond prices that are getting richer relative to the “AAA” municipal benchmark. Standard deviations highlighted in red are greater than or equal to two standard deviations above the average, indicating cheapness relative to the “AAA” municipal benchmark. Standard deviations highlighted in green are greater than or equal to two standard deviations below the average, indicating richness relative to the “AAA” municipal benchmark. While standard deviations highlighted in yellow are between one and two standard deviations away from the average, and should be monitored for relative value. Page 5 of 10 Municipal Market Update SELLING 01/12/2015 01/12/2015 01/12/2015 01/12/2015 01/12/2015 01/12/2015 01/12/2015 01/12/2015 01/16/2015 01/12/2015 ISSUE NYC TRANSITIONAL FIN AUTH KING CNTY -SWR -REF -A ILLINOIS FIN AUTH -REF -A MET TRANSPRTN AUTH -A1 OR DEPT OF TRANSPRTN -REF TOBACCO SETTLE FIN CO -A TOBACCO SETTLE FIN CO -B KING CNTY -REF -A FL ST BOE-PUB ED- REF-A LAKELAND -HOSP January 15, 2015 ST AMT (MM) NY 750.000 WA 474.025 IL 410.470 NY 400.000 OR 381.305 RI 336.065 RI 257.590 WA 247.825 FL 236.495 FL 180.000 TAX N N N N N N N N N N Weekly Calendar SR. MGR STATUS SAMUEL A RAMIREZ & CO INC FINAL JP MORGAN SECURITIES LLC FINAL GOLDMAN SACHS & COMPANY THUR JP MORGAN SECURITIES LLC THUR MORGAN STANLEY & CO INC FINAL CITIGROUP GLOBAL MKTS INC DAY/DAY CITIGROUP GLOBAL MKTS INC DAY/DAY JP MORGAN SECURITIES LLC FINAL 18 HOUR NOTICE JP MORGAN SECURITIES LLC THUR RATING Aa2/AA Aa1/AA+ A1/A+ NR/AAAa1/AAA APPLIED/APPLIED NR/ Aa1/AAA Aa1/AAA NR/ SECURITY Appropriations Water & Sewer Hospital Public Transportation Non-Toll Highway Tobacco Master Settlement Agreement Tobacco Master Settlement Agreement General Obligation General Obligation Hospital Source: Bloomberg Noteworthy Downgrades Moody's Issuer Name Current Rating Previous Rating Dallas County Schools, TX East Ramapo Central School District, NY Albany Capital Resource Corporation, NY East Allegheny School District, PA Multnomah-ClackamasCosSD28JT(Centennial), OR A3 Baa2 Baa3 Baa3 A1 Aa3 Baa1 Baa2 Baa2 Aa3 S&P Issuer Name Current Rating Previous Rating New York State Dorm Auth (Brooklyn Law School) Jefferson Parish Hosp Svc Dist #1, LA Stevenson Utils Brd, AL Grosse Ile Twp Schs, MI Cameron Ed Corp, TX (Faith Family Academy) BBB BBBBBBA BB+ BBB+ BBB AAABBB- Source: Moody’s Investors Service and Standard & Poor’s Downgrade Date 12/23/2014 12/22/2014 12/18/2014 12/16/2014 12/15/2014 Downgrade Date 1/13/2015 1/13/2015 1/12/2015 1/9/2015 12/31/2014 NR = Not Rated. NA = Rating is currently not available. WR = Withdrawn Rating APPLIED = Rating has been applied for by the issuer, but not yet assigned by the rating agency. “e” after a rating = The expected rating for a particular bond. Page 6 of 10 Municipal Market Update January 15, 2015 Municipal Credit Monitor as of January 14, 2015 Benchmark1 1.931 Yield Spread-to- Spread Change # BPs Current Spread is # Std Dev Current Spread is (Moody's/S&P) Yield Benchmark3 (Weekly)4 (12-Month) (12-Month) (12-Month) Above or Below Avg.5 Above or Below Avg.6 Aa3/A Aa1/AA+ Aaa/AAA Aa3/AAAa1/AAA A1/A Aaa/AAA A3/AAaa/AAA Aa1/AA+ Aaa/AAA Aa2/AAAa1/AA+ Aaa/AA+ Aa1/AA+ Aaa/AAA 2.110 2.013 2.018 2.261 2.082 2.446 1.894 3.291 1.920 2.050 1.950 2.182 2.064 2.022 2.108 1.942 17.9 8.2 8.7 33.0 15.1 51.5 -3.7 136.0 -1.1 11.9 1.9 25.1 13.3 9.1 17.7 1.1 -33.00 -21.90 -17.90 -0.70 -20.40 16.60 -9.00 -18.60 -11.30 -15.40 -9.20 -41.10 -12.70 3.10 -20.60 -21.10 17.2 -0.2 0.8 25.2 10.3 19.4 -5.9 108.7 -10.4 11.9 -1.3 24 9.1 -4.3 11.2 0.2 53.2 32.9 32.5 39.2 40.4 62.5 11.4 167.5 12.6 39.2 15.3 81.4 30.5 14.6 40.9 23.7 31.8 15.3 11.7 33.8 20.2 42.4 -0.2 138.2 -0.9 24.3 5.2 43.4 18.9 8.4 23.8 7.5 -13.94 -7.08 -2.98 -0.76 -5.11 9.13 -3.51 -2.15 -0.15 -12.42 -3.27 -18.28 -5.64 0.65 -6.08 -6.38 -1.5 -0.9 -0.4 -0.3 -0.7 0.8 -1.2 -0.1 0.0 -2.1 -1.4 -1.1 -1.1 0.2 -1.0 -1.6 2.079 2.203 3.502 2.023 1.714 2.241 2.092 14.8 27.2 157.1 9.2 -21.7 31.0 16.1 -9.10 -48.70 42.20 -25.70 -15.60 -22.50 5.10 5.9 25.8 71 -22.3 -38.5 -5.3 -4.9 57.6 110.6 220.8 65.4 33.6 55 19 28.4 72.3 133.6 28.9 -3.3 23.6 9.0 -13.64 -45.05 23.50 -19.72 -18.43 7.42 7.07 -0.8 -1.6 0.9 -0.7 -0.9 0.5 1.4 9.135 3.194 4.088 3.368 3.029 4.442 4.099 3.831 3.410 720.4 126.3 215.7 143.7 109.8 251.1 216.8 190.0 147.9 -5.90 -42.70 68.90 44.30 1.50 108.00 6.40 41.50 39.00 554.8 119.7 135.8 98.9 87.8 134.9 184.4 155.9 92.3 758.5 174.7 224.4 143.7 117.1 251.1 229.4 361.8 147.9 664.3 145.6 173.2 121.1 107.0 197.2 211.3 288.4 113.4 56.07 -19.27 42.53 22.61 2.79 53.88 5.47 -98.39 34.47 1.2 -1.3 2.0 1.9 0.5 2.0 0.6 -1.5 2.5 Ratings States2 California New York Texas Pennsylvania Florida New Jersey North Carolina Illinois Virginia Ohio Georgia Michigan Massachusetts South Carolina Washington Maryland Sectors7 AA+ general ob A+ general ob BBB general ob Transportation AA+ Education AAA Healthcare AA Utilities AA Credits8 Commonwealth of Puerto Rico Dallas/Fort Worth International Airport County of Miami-Dade FL New Jersey Transportation Trust Fund Authority Municipal Electric Authority of Georgia Port Authority of New York & New Jersey Chicago IL GO Detroit, MI Water New York City GO Source: Bloomberg B2/BB A2/A+ Aa2/AA A2/AA1/A Aa3/AABaa1/A+ Ba2/BBB+ Aa2/AA Lowest Spread Highest Spread Average Spread 1 BVAL Muni 10-Yr Benchmark curve is the baseline curve for BVAL tax-exempt munis. It 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 nonparametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues calendars, and other Bloomberg proprietary contributed prices. Represents 5% couponing. 2 State Specific Yield Curves maturing in approximately 10 years 3 Difference between the state, sector, or credit yield and the benchmark yield, in basis points 4 Bond prices and yields have an inverse relationship. Yield spread changes highlighted in red have widened week-over-week, indicating bond prices have gotten cheaper relative to the benchmark. Yield spread changes highlighted in green have narrowed week-over-week, indicating bond prices have gotten richer relative to the benchmark. 5 Basis points (bps) highlighted in red are above the 12-month average. Basis points (bps) highlighted in green are below the 12-month average 6 Standard deviations highlighted in red are greater than or equal to two standard deviations above the 12-month average, indicating relative cheapness. Standard deviations highlighted in green are greater than or equal to two standard deviations below the 12-month average, indicating relative richness. Standard deviations highlighted in yellow are between one and two standard deviations away from the 12-month average, and should be monitored for relative value. 7 Muni Fair Value Yield Indices maturing in approximately 10 years 8 Yield-to-maturity of representative CUSIPs and indexes maturing in approximately 10 years Page 7 of 10 Municipal Market Update January 15, 2015 IMPORTANT DISCLOSURES Wells Fargo Advisors buys and sells securities discussed in this report on a principal basis. Disclosure information . . . For important disclosure information, please contact: Wells Fargo Advisors Attn: Advisory Services (Disclosure Information) One North Jefferson, St. Louis, MO 63103 Or call phone (888) 410-9203 Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. ANALYST CERTIFICATION: The Analyst who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Disclaimers Prices and figures are as of the date of publication unless specified otherwise. Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. Taxable equivalent Yield (TEY) is the pretax yield that a taxable bond needs to possess for the yield to be equal to that of a tax-free municipal bond. Relative Value is a method of determining an asset's value that takes into account the value of similar assets. Calculations that are used to measure the relative value of stocks include the enterprise ratio and price-toearnings ratio. Standard deviation of return measures the average deviations of a return series from its mean, and is often used as a measure of risk. A large standard deviation implies that there have been large swings in the return series of the manager. Page 8 of 10 Municipal Market Update January 15, 2015 Explanation of Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch) longer-term corporate debt (greater than one year to maturity) rating scales: Ratings of Baa3/BBB- or higher (above the dotted line) are considered investment grade. Ratings of Ba1/BB+ or lower (below the dotted line) are considered high yield (also known as junk bonds). Moody's S&P/ Fitch Aaa Aa1 Aa2 Aa3 AAA AA+ AA AA- A1 A2 A3 A+ A A- The highest quality debt, with minimal credit risk. High quality and subject to very low credit risk. Upper-medium grade and subject to low credit risk. Baa1 BBB+ Baa2 BBB Subject to moderate credit risk; considered medium-grade, and Baa3 BBBas such may possess certain speculative characteristics. ---------------------------------------------------------------------------------------------------Ba1 BB+ Ba2 BB Judged to have speculative elements; subject to substantial credit risk. Ba3 BBB1 B2 B3 B+ B B- Considered speculative and are subject to high credit risk. Caa1 Caa2 Caa3 CCC+ CCC CCC- Judged to be of poor standing and are subject to very high credit risk. Ca CC Highly speculative and are likely in, or very near, default with some prospect of recovery of principal and interest. C C The lowest rate class of bonds; these obligations are typically in default with little prospect for recovery. S&P National AMT-Free Municipal Bond Index is a broad, comprehensive, market value-weighted index designed to measure the performance of the investment-grade tax-exempt U.S. municipal bond market. S&P Municipal Bond BBB Rating Band Index includes all bonds in the S&P Municipal Bond Index that have a Standard & Poor’s rating of between ‘BBB+’ and ‘BBB-‘; a Moody’s rating of between ‘Baa1’ and ‘Baa3’ and a Fitch rating of between ‘BBB+’ and ‘BBB-‘. If there are multiple ratings, the lowest rating is used. An index is unmanaged and not available for direct investment. Wells Fargo Advisors research analysts receive no compensation in connection with the firm’s investment banking business. Analysts may be eligible for annual bonus compensation based on the overall profitability of the firm, which takes into account revenues derived from all the firm’s business activities, including its investment banking business. The Advisory Services Group (“ASG”) of Wells Fargo Advisors works with information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents as well as other sources. ASG Strategists provide investment advice based on their own observations and analysis (both fundamental and quantitative) for the clients of Wells Fargo Advisors and its affiliates. The Advisory Services Group does not assign ratings to or project target prices for any of the securities mentioned in this report. Page 9 of 10 Municipal Market Update January 15, 2015 The Advisory Services Group (ASG) of Wells Fargo Advisors receives research from affiliated and unaffiliated correspondent research providers with which Wells Fargo Advisors has an agreement to obtain research reports. Each correspondent research report reflects the different assumptions, opinions, and the methods of the analysts who prepare them. Any opinions, prices or estimates contained in this report is as of the date of this publication and is subject to change without notice. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. First Clearing, LLC Member SIPC is a registered broker dealer and non-bank affiliate of Wells Fargo & Company. ©2015 Wells Fargo Advisors, LLC. All rights reserved. Page 10 of 10