Portfolio Managers Report: Municipal Bond Swap Strategy

Friday, December 13, 2024
MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino • Brian Schaff Natalie Regan • Aaron Stoffer • David Farris • Jeff Macy Josh Kiefer • Tom Toburen • Todd Czinege • Trey Valentine • Cody Kreutziger

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
12/06/24	4.43	4.39	4.35	4.18	4.10	4.06	4.03	4.08	4.15	4.41	4.33
12/09/24	4.43	4.39	4.35	4.19	4.12	4.08	4.07	4.13	4.20	4.46	4.38
12/10/24	4.40	4.38	4.34	4.21	4.14	4.10	4.09	4.15	4.22	4.49	4.41
12/11/24	4.37	4.36	4.32	4.20	4.15	4.12	4.14	4.20	4.27	4.56	4.48
12/12/24	4.32	4.33	4.31	4.22	4.19	4.16	4.18	4.25	4.33	4.62	4.55

The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is always subject to change. This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close of business 12/12/2024.

Municipal Bond Swap Strategy

On Wednesday of this week, we discussed bond swaps in this publication. To expand on that topic a bit further, we turn to your municipal bond holdings in particular. When rates bottomed out in the 2020-2021 time-frame and cost of funds was near zero, many banks began purchasing non-bank qualified bonds. The TEFRA penalty was negligible, and the supply of non-bank qualified bonds was much more plentiful and diverse. While that was a reasonable strategy at the time, now that the cost of funds has risen, it is worth taking a look at those bonds in your portfolio that may be subject to 100 % disallowance of cost of carry.

We recently conducted a swap for a regional bank where non-bank qualified bonds were sold at an average taxable-equivalent give-up yield of 5.21% and the proceeds reinvested into BQ bonds with an average taxable-equivalent yield of 5.31%. The time needed to recover the loss was not even four months, but more significantly, a 72-basis point TEFRA penalty was eliminated by selling the bonds subject to 100% disallowance of cost of carry.

Many of the non-BQ holdings in bank portfolios carry 4-5% coupons and are highly rated bonds. While they may not be as valuable to bank portfolios today, there is still a strong bid in the marketplace for bonds with these characteristics. New issue supply in the municipal market is beginning to wind down for 2024 so secondary bonds for the bid will likely receive more attention in the last few weeks of the year. If you would like to explore the possibility of simply reducing your holdings of non-BQ and/or formulating a swap to replace your 100% TEFRA penalty bonds with bank qualified bonds, we would be happy to analyze your portfolio and suggest a strategy. As always, we appreciate your trust in us and look forward to talking with you soon.

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