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Friday, July 27, 2018 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 7/20/18 | 1.86 | 1.99 | 2.16 | 2.41 | 2.60 | 2.68 | 2.77 | 2.85 | 2.89 | 2.96 | 3.03 |
| 7/23/18 | 1.88 | 1.99 | 2.19 | 2.42 | 2.64 | 2.72 | 2.83 | 2.92 | 2.96 | 3.04 | 3.10 |
| 7/24/18 | 1.92 | 2.02 | 2.19 | 2.42 | 2.63 | 2.74 | 2.83 | 2.91 | 2.95 | 3.02 | 3.08 |
| 7/25/18 | 1.90 | 2.01 | 2.20 | 2.42 | 2.66 | 2.74 | 2.82 | 2.90 | 2.94 | 3.00 | 3.06 |
| 7/26/18 | 1.89 | 1.99 | 2.19 | 2.41 | 2.69 | 2.78 | 2.86 | 2.95 | 2.98 | 3.05 | 3.10 |
Source: U.S. Department of the Treasury, as of 07/26/2018
A Municipal Trader’s Perspective
Municipal bonds have continued to provide solid returns this summer as the supply/demand imbalance prevails. New issue supply is down 20% year-over-year and demand remains robust as evidenced this week by tax-exempt mutual funds receiving their biggest influx of cash since the end of January.
While all eyes have been on the flattening Treasury yield curve, it bears noting that the municipal curve is considerably steeper. We see this divergence presenting two distinct opportunities …
1) Raise capital by selling short munis (5 years and in). The investment grade two-year municipal yield/treasury ratio is currently well below 70%, the lowest ratio in roughly four years, and short-term munis continue to receive extremely aggressive bids. Whether you simply need to raise cash or are looking to swap into longer durations, now is an opportune time to liquidate short tax-exempt bonds.
2) Stretch beyond 10 years and lock in 3.00%+ tax-free yields. The ratios for AA bank qualified munis maturing 12 years and beyond are at or above 100% of treasuries. This week we underwrote a Aa2 Wisconsin general obligation bank qualified bond yielding 3.00% at PAR in March, 2030. For a Sub-S bank in the 29.6% tax bracket, that equates to a 4.26% after-tax yield. The 2038 maturity came to market as 3.50% at PAR, equating to 4.97% after-tax (roughly 200 basis points over the corresponding treasury). With supply expected to remain light, this yield pick-up may narrow as the year progresses.
Please contact your Capital Markets rep if you wish to explore either of these strategies for your own portfolio.
While all eyes have been on the flattening Treasury yield curve, it bears noting that the municipal curve is considerably steeper. We see this divergence presenting two distinct opportunities …
1) Raise capital by selling short munis (5 years and in). The investment grade two-year municipal yield/treasury ratio is currently well below 70%, the lowest ratio in roughly four years, and short-term munis continue to receive extremely aggressive bids. Whether you simply need to raise cash or are looking to swap into longer durations, now is an opportune time to liquidate short tax-exempt bonds.
2) Stretch beyond 10 years and lock in 3.00%+ tax-free yields. The ratios for AA bank qualified munis maturing 12 years and beyond are at or above 100% of treasuries. This week we underwrote a Aa2 Wisconsin general obligation bank qualified bond yielding 3.00% at PAR in March, 2030. For a Sub-S bank in the 29.6% tax bracket, that equates to a 4.26% after-tax yield. The 2038 maturity came to market as 3.50% at PAR, equating to 4.97% after-tax (roughly 200 basis points over the corresponding treasury). With supply expected to remain light, this yield pick-up may narrow as the year progresses.
Please contact your Capital Markets rep if you wish to explore either of these strategies for your own portfolio.
YIELD CURVES: US TREASURY VS. AA MUNICIPAL BQ
Source: Bloomberg
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
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