Tuesday, September 26, 2017
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Robert Brickson • Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler  Tom Toburen • Josh Kiefer • Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
9/19/17	.97	1.04	1.19	1.31	1.40	1.55	1.84	2.07	2.24	2.57	2.81
9/20/17	.98	1.04	1.20	1.32	1.45	1.60	1.89	2.12	2.28	2.59	2.82
9/21/17	.99	1.04	1.19	1.31	1.45	1.59	1.89	2.11	2.27	2.57	2.80
9/22/17	.97	1.03	1.19	1.30	1.46	1.58	1.88	2.10	2.26	2.57	2.80
9/25/17	.97	1.05	1.19	1.30	1.44	1.56	1.85	2.07	2.22	2.53	2.76

                   

Source: U.S. Department of the Treasury, as of 9/25/17

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Pre-refunded Municipal Bonds: Treasury Debt in Disguise

Pre-refunding outstanding high cost debt is a way for issuers to take advantage of lower interest rates.  To do so, borrowers typically issue new debt at lower rates and then place the proceeds under the authority of a trustee in an escrow account.  Those proceeds are then used to buy U.S. Treasuries and/or State and Local Government Securities (SLUGS) that guarantee the remaining payments of the original bond to a specified date,  which is usually the first call date. 

As such, pre-refunded municipal bonds are essentially Treasury debt in disguise. The question for those who own these securities is whether to keep them.

Reasons to Keep a Pre-Refunded Bond:

• Credit quality – credit quality of these securities inherit the high quality of the U.S. Treasuries or SLUGs used as collateral.

• Known redemption – the bonds have been pre-refunded to a specified call date, removing any uncertainty as to the length of investment and number of coupons to expect.

• Higher yield – the bonds are still tax-free municipals, so even though most of the credit value has been extracted once pre-refunded, the tax-equivalent yield is typically still higher than treasuries and agencies.

Reasons to sell:

• Credit risk – pre-refunded bonds lower the credit risk taken in your portfolio and you may need or want to sell to help rebalance.

• Credit value extracted – the bonds will richen immediately upon pre-refunding, as most of the value from the credit risk will have been extracted. 

• Shortened duration – the specific redemption date may be shorter than what you have anticipated causing your portfolio to be short of its target duration.

In today’s market, there may be more reason to sell pre-refunded bonds, as the bank qualified muni yield curve has outperformed the U.S. Treasury curve in the front end where most pre-refunded bonds exist (see graph below).  Front end municipal bonds are generally rich.  Accordingly, holders may be able to liquidate these securities at relatively low take-out yields to switch into higher yielding bonds. 

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.

•Not FDIC Insured •No Bank Guarantee •May Lose Value