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
02/13/20	1.59	1.59	1.56	1.48	1.44	1.42	1.43	1.53	1.61	1.91	2.07
02/14/20	1.60	1.58	1.56	1.49	1.42	1.40	1.42	1.51	1.59	1.89	2.04
02/18/20	1.61	1.58	1.56	1.47	1.41	1.37	1.39	1.48	1.55	1.85	2.00
02/19/20	1.61	1.58	1.56	1.47	1.42	1.39	1.41	1.50	1.56	1.86	2.01
02/20/20	1.61	1.58	1.55	1.46	1.39	1.35	1.37	1.45	1.52	1.81	1.97

Look Beyond Bank Qualified Bonds for Value in the Municipal Market

Despite forecasts of record issuance in the municipal market this year, the volume of traditional “bank qualified” bonds coming to market is still not keeping pace with demand.   Municipal issuers are limited to a total issuance of no more than $10 million in the calendar year (still no increase from the limit that was put in place in 1986) in order to be meet the requirements for “bank qualification.”  Particularly in those states that offer in-state tax exemption, there is an ongoing shortage of bank qualified bonds, especially those that offer yields of 2.00 or higher.

If you are seeking in-state bonds for pledging and state exemption, it may be worth considering the purchase of NON-bank-qualified bonds.  A quick reminder of the math surrounding bank qualified bonds tells us that a bank may deduct 80% of its cost of funds for carrying a bank qualified bond, but there is zero deduction for carrying a non-bank qualified bond.   In either case, a slight yield “haircut” must be factored in to arrive at a taxable-equivalent yield.

Let’s consider the calculation for the following bank qualified offering which came to market several weeks ago (assuming a Sub-S bank in roughly 30% tax bracket and 60 basis points cost of funds) …

AA (A+) McPherson Co USD # 423, Kansas (Moundridge) G.O.       2.00%   9-1-2036   @   PAR




Now let’s consider the same calculation for a non-bank qualified bond in the same maturity…

A-1/AA   Wyandotte County Unified Government, Kansas G.O.    2.125%    8-1-2036   @ 2.20




So currently in this example, the taxable equivalent yield of the non-bank qualified bond actually edges out the bank qualified bond’s yield.  Clearly, what happens to cost of funds over the life of the bond can and will alter this calculation.  But if you believe that the low rate environment is here to stay, it may be worth looking outside of the “bank qualified” box to find in-state 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