Friday, March 23, 2018
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer  Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen

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
3/16/18	1.71	1.78	1.96	2.08	2.31	2.44	2.65	2.78	2.85	2.96	3.08
3/19/18	1.70	1.80	1.99	2.08	2.31	2.45	2.65	2.78	2.85	2.97	3.09
3/20/18	1.76	1.81	1.97	2.08	2.34	2.49	2.69	2.82	2.89	3.01	3.12
3/21/18	1.71	1.74	1.95	2.06	2.31	2.46	2.69	2.82	2.89	3.01	3.12
3/22/18	1.67	1.72	1.95	2.05	2.29	2.43	2.63	2.76	2.83	2.94	3.06

                                                                                      Source: U.S. Department of the Treasury, as of 3/22/18  

A Municipal Traders Perspective

A basic tenet of the municipal bond market has been the notion that general obligation bonds equal “safety.”  Make no mistake that for the most part that still holds true, but in recent years we have seen the security of general obligation bonds tested in several high-profile cases such as City of Detroit and Commonwealth of Puerto Rico.  In Detroit’s case, the bankruptcy judge ruled that the general obligation bonds were “unsecured” debt, and making good on local pensions took precedence over repaying bondholders.  Stories like these along with headlines about underfunded pension liabilities and budget deficits have led to a renewed focus on the ultimate security behind a GO pledge.   But while the tales of municipal bankruptcies are alarming, keep in mind that these are the highly isolated incidents of highly distressed issuers whose mismanagement and financial plights were broadcast well in advance of actual bankruptcy proceedings.   The overall rate of default of rated municipal bonds is still miniscule by historical standards (only .15% from 2007-2016 according to a Moody’s report.) 

We often encounter bank portfolio investment policies that limit municipal purchases to general obligation bonds only.  If that is true of your own policy, now may be a good time to review your limitations and consider allowing the addition of essential purpose revenue bonds to your asset mix.  There has been a general shift in ideology over the past 5-10 years that dedicated revenues streams may indeed provide security on par or even superior to the general obligation pledge. 

So far this year, new issue municipal supply is down 30% versus 2017 and is not expected to pick up dramatically.   By broadening your choices to high quality revenue bonds as well as GO’s, you will have more bonds to choose from along with the likelihood of picking up additional yield on like-rated bonds.  The chart below depicts the average spread between AA+ bank qualified G.O.’s and AA+ bank qualified revenue bonds.     Please let us know if we can assist you in considering revisions to your policy or a more thorough understanding of the creditworthiness of revenue bonds.


Source: Bloomberg, L.P. March 22, 2018 4:08 pm
 

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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