Municipal Fixed Income

Transcription

1 Municipal Fixed Income W EEKLY MARKET REVIEW 04 May 2018 Robert Collins Head of Municipal Fixed Income RFCollins@WilmingtonTrust.com MUNICIPAL RESEARCH Stephen Winterstein Managing Director of Research & Head of Municipal Strategy SWinterstein@WilmingtonTrust.com w m Gerard Durr Senior Municipal Research Analyst GDurr@WilmingonTrust.com Clyde Lane Municipal Research Analyst CBLane@WilmingtonTrust.com Ted Molin Senior Municipal Research Analyst KMolin@WilmingtonTrust.com Karleen Strayer, CFA Senior Municipal Research Analyst KStray er@wilmingtontrust.com Robert Tice Municipal Research Analyst RTice@WilmingtonTrust.com PORTFOLIO MGMT & TRADING Rebecca Rogers Director of Trading & Portfolio Management RRogers@WilmingtonTrust.com Maureen Lawrence Senior Trader MLawrence@WilmingtonTrust.com John Malloy Senior Portf olio Manager Stephen Winterstein Managing Director of Research & Head of Municipal Strategy Key Themes for the Upcoming Week Despite the fact that the 25th of April saw the benchmark 10-year US Treasury (UST) penetrate what in recent years had become the storied and even slightly mystical 3.000% yield ceiling, worries about soaring commodity prices and inflation appeared ethereal and began to abate, calming domestic fixed income markets. With last week s remarkably strong performance and positive momentum, it is sensible to think market participants could together continue to show a firm bid for municipal bonds in the first few upcoming trading sessions. The yield on the S&P Municipal Bond Index closed on Friday at 2.739%, down from 2.804% on 27 April. That decline set the stage for the best weekly performance thus far in 2018 and the third highest in the past year. With the elimination of advanced refundings, we expect the Prerefunded/ETM sector to diminish and eventually all but vanish. Ninety per cent of all prerefunded and escrowed-to-maturity bonds currently in the S&P Municipal Bond Index will mature by the year Further, with a year average effective duration, that sector s total return performance faces the headwind of low price responsiveness to downward yield swings. Core narrative: while last week s positive performance may have provided the foundation for strong performance over the next few trading sessions, institutional municipal investors seem unconvinced over the long term. Concern over how an infrastructure plan will materialize and the future of Private Activity Bonds still looms, and is likely to persist until a final version becomes law, something we do not think will not happen in The yearover-year supply deficit widened last week, and remains a technical positive to the extent that it keeps price declines in check, at least in part during periods of rising interest rates. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 1 of 44

2 Contents Page Municipal Market Commentary 3-8 The Economy and the Fed 3 Yield Curve 4 Municipal-to-US Treasury Yield Ratios 5 AA Municipal-to-AA Corporate Ratios 5 Market Performance 6 Supply and Demand 7 Market Sentiment 8 Core Narrative 8 Yield Curve Analysis 9-21 Selected Municipal, Corporate, and U.S. Treasury Yield Curves Figures Municipal Swap Index Historical Yields Figure 8 13 U.S. Treasury Curve and AAA Municipal Curve Comparison Figures AAA Municipal Curve Slope Analysis Figures Municipal Bond High Yield vs Investment Grade Indices Spread Figures year UST and AAA Municipal Historical Yields and Spread Figure Tax-Exempt Municipal-to-Taxable Fixed Income Yield Ratios AAA Municipal-to-US Treasury (M/UST) Yield Ratios Figure Historical M/UST Yield Ratios Figure M/UST Trailing 30, 90, and 180 Historical Yield Ratios Figures AA Municipal-to-AA Corporate (AAM/AAC) Yield Ratios Figure Historical AAM/AAC Yield Ratios Figure AAM/AAC Trailing 30, 90, and 180 Historical Yield Ratios Figures Municipal Bond Indices Characteristics and Performance Totals and Averages & Performance Figures State, Ratings, and Sector Performance Attribution Figures Trailing 3-, 5-, and 10-Year Risk / Return Analysis Figures Horizon & Scenario Analysis Figures State G.O. Debt Ratings Figure Market Supply & Demand Annual Supply (a twenty-year history) Figure New Issue Calendar Figure Mutual Fund Flows Figure Municipal Market Trade Volume Figure Primary Dealer Municipal Bond Net Positions Figure Municipal Market Sentiment Figures Municipal Market Size and Holders Outstanding Domestic Fixed Income Debt Figure Holders of U.S. Municipal Securities Figures Disclosures, Notes, and Definitions page 2 of 44

3 The Economy and the Fed We thank chief economist Luke Tilley, economist Rhea Thomas, and the rest of Wilmington Trust s economics team for lending perspective and weighing in on a few selected highlights from the past week. US Markets Data this week showed still solid, but slightly slowing momentum. Nonfarm Payrolls were slightly softer than expected (164k vs. 198k expected), but the 3-month moving average is still holding at 208k indicating that the pace of job growth remains robust. The Unemployment Rate dipped to 3.9%, the lowest since December 2000, while the broader U-6 Rate (including part time for economic reasons and marginally attached workers) fell to 7.8%, the lowest since December Despite these indications of a tight labor market, Average Hourly Earnings rose at a still subdued 2.6% year-over-year (y/y) rate. Meanwhile, Core PCE came out as expected, at 1.9% y/y for March, just shy of the Fed s 2.0% target. Given the FOMC s recent statement highlighting the symmetrical nature of its target, we expect that a short term overshoot would be tolerated by the Fed. We continue to expect a total of three Fed rate hikes in 2018, acknowledging the risk of a fourth. On the activity side, both the ISM Manufacturing and Non-Manufacturing Surveys showed both sectors are still expanding but at a slightly slower pace. Both show continued upward price pressures as well as concerns and uncertainty around trade tensions. International Developed Eurozone 1Q GDP confirmed weaker growth momentum but some of this may be due to temporary factors such as weather, a bad flu outbreak, and strikes (+0.4% quarter-over quarter (q/q) vs. +0.7% q/q for 4Q2017). Retail sales disappointed in March, rising just 0.8% y/y vs. expectations of +1.9% y/y, but was likely impacted by the aforementioned temporary factors. Core Inflation was also softer than expected (+0.7% y/y in April, from +1.0% y/y previously) but this dip should be transitory, due to some impact from the shift in the timing of Easter. The Unemployment Rate held steady at 8.5% in March, the lowest since December 2008, indicating the Labor Market remains solid. The UK Services PMI showed only a muted bounce in April, suggesting 1Q weakness may continue, increasing market expectations that the Bank of England will keep rates on hold at this week s monetary policy meeting. Emerging Markets China s Manufacturing PMI data was mixed for April. The official National Bureau of Statistics indicator saw a modest fall, while the Caixin Survey edged up slightly, with new Export Orders showing notable drops in both reports. Service Sector PMIs in both the official NBS and Caixin Indicators saw a modest rise. The mixed nature of the data suggests a slight slowing of momentum in 2Q growth after a stronger than expected GDP print in 1Q. Growth is expected to slow at a gradual pace as a result of ongoing regulation to improve the quality, but recent policy indications suggest a slight easing bias with the intent of helping to offset some of the impact of regulation on growth to help keep the slowing steady. page 3 of 44

4 Week Ahead: US CPI will be the main focus this week, with consensus forecasts expecting a +0.2% m/m rise in Core CPI, which would lift the year-over-year reading to +2.2%. Consensus is looking for +0.3% m/m on Headline CPI, which would push the year-over-year rate up to 2.5%. Though these readings would be above the Fed s 2% inflation target, we expect that with the FOMC s reiteration of a symmetrical inflation target in its statement last week will not worry the Fed as long as Long-Term Inflation expectations remain stable. Worries about soaring commodity prices and inflation appeared ethereal and began to abate, calming domestic fixed income markets over the past week. Yield Curve Despite the fact that the 25 th of April saw the benchmark 10-year US Treasury (UST) penetrate what in recent years had become the storied and even slightly mystical 3.000% yield ceiling, worries about soaring commodity prices and inflation appeared ethereal and began to abate, calming domestic fixed income markets. Even though the short portion of most local yield curves edged a couple basis points (bps) higher, perhaps in lingering anticipation of further Fed hikes, high-grade fixed income securities prices were predominantly firmer beginning at about the 3-year maturity and points beyond. By the week s finish, the ICE Municipal Yield Curve remained unchanged at both the 6-month and 2-year spots, while 1-year maturity edged higher by 1bp (Figs. 1 & 2). The 3- and 5- points were lower 3 and 6bps, respectively, while the 7-year spot fell by 8bps. The 10-year s yield declined by 9bps and the 15-year s by 12bps. The 30-year maturity finished the week lower by 15bps to draw a 2.950% yield. On Wednesday, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index yield fell for the second consecutive week and as many times in twelve, drifting 14bps lower to settle at 1.610% (Fig. 8). That number followed the prior week s decline of 6bps on the 25 th of April. We remind readers that it printed a multiyear high of 1.810% on 18 April The current slope is 1.53 standard deviations below its bp 1-year trailing daily average. Moving past the 6-month point, last week s activity flattened the ICE AAA Municipal Yield Curve by 16bps, top to bottom. The gap between the 1- and 30- year yields fell to 122bps, compared to 138 bps the preceding week (Fig. 1). In the face of rising short-term interest rates the ICE AAA Municipal Yield Curve has in point of fact, steepened 11bps thus far in 2018, but the current slope is 1.53 standard deviations below its bp 1-year trailing daily average (Figs. 11 and 12). Moreover, it is a full 94bps lower than its 1-year maximum of 216bps. Looking at the ICE AAA Municipal Yield Curve from a different standpoint, at 2.410%, the 10-year maturity provides 82% of the interest rate at the 30-year point, whereas on 04 May 2017, that same spot provided only 72% of the long high-grade rate. The 15-year spot currently delivers 90% of the 30-year s yield, the same as the previous Friday s close. With last week s remarkably strong performance and positive momentum, it is sensible to think market participants could together continue to show a firm bid for municipal bonds in the first few upcoming trading sessions. page 4 of 44

5 Municipal yields unambiguously outpaced their UST equivalents to the downside at almost all points out the term structure. Municipal-to-US Treasury (M/UST) Yield Ratios Both the UST and high-grade municipal curves relocated slightly higher or alternatingly remained unchanged at the short end, but began to move lower at the 3-year spot and farther out the curve. Municipal yields unambiguously outpaced their UST equivalents to the downside at almost all points out the term structure (Fig. 10). Most M/UST ratios moved lower, making high-grade municipal bonds relatively less attractive. The 6-month M/UST fell by ratios, to close at %, compared with the prior print of % (Figure 25). Conversely, the 1-year M/UST completed the week a touch higher at %, a ratio rise from the previous week s %. In the interim, the 2-year M/UST subtracted ratios, to close the last five trading sessions at %. The 5-year M/UST shifted lower by ratios to finish the week at %, down from the earlier recording of %. Over the same 1-week period, the 10-year M/UST decreased to %, a drop of ratios from the earlier print of % on the 27 th of April. Lastly, the 30-year M/UST ended with a noticeable ratio plunge from the prior week s %, to finish at %. We present a more complete view of the one-year historical AAA Municipal-to-US Treasury yield ratios in Figures on pages AA Municipal-to-AA Corporate (AAM/AAC) Yield Ratios Like their AAA-rated tax-exempt and UST cousins, municipal bonds in the Aa/AA ratings category became less attractive relative to senior unsecured Aa/AA corporate bonds. Friday s close saw the 6-month AAM/AAC finish the previous five trading days at %, lower by ratios from % on the 27 th of April (Fig. 33). The 1-year AAM/AAC decreased by ratios, closing the week at %, down from the preceding Friday s %. The 2-year AAM/AAC moved downward by ratios, to complete the last five sessions at %. The 5-year dropped to %, a fall of ratios from the prior week s % on the 27 th of April. The 10-year printed a ratio fall to close the week at %. Finally, the 30-year AAM/AAC gapped lower by ratios from the previous week s %, to finish Friday at %. We present a more complete view of the one-year historical AA Municipal-to-AA Corporate yield ratios in Figures on pages page 5 of 44

6 The S&P Municipal Bond Index served up a % total return over the past five trading sessions, with a full % of that coming from price return. Market Performance The yield on the S&P Municipal Bond Index closed on Friday at 2.739%, down from 2.804% on 27 April. That decline set the stage for the best weekly performance thus far in 2018 and the third highest in the past year. For the first week in three, a falling municipal yield curve produced positive returns for all the indices on which we report (Fig. 42). The S&P Municipal Bond Index served up a % total return over the past five trading sessions, with a full % of that coming from price return. While that broad market index has spent much of the first four months of 2018 underwater, and still remains there on a year-to-date basis, last week s brilliant turnaround is encouraging. We remind readers that the S&P Municipal Bond Index closed February and April with year-to-date total returns of % and %, in that order. As of Friday evening, its year-todate figure stood at %. The Intermediate and Short Intermediate indices also ended the week in the black, generating strong performances of % and %, in that order. Likewise, the S&P Municipal Bond Short Index printed % for the week. The High Yield Index finished the week on dry ground delivering performance of % and the High Yield Excluding Puerto Rico Index finished at +0637%. The S&P Municipal Bond California Index turned in a % return, while the New York Index generated % performance for the week. Bringing the ninth consecutive week of positive total returns, the S&P Municipal Bond Puerto Rico Index turned in a % number. As of this past Friday s close, the Commonwealth s year-to-date figure of %. With a year average effective duration, the Prerefunded/ETM sector s total return performance faces the headwind of low price responsiveness to downward yield swings. Briefly glancing at sectors relative performance we note that Tobacco Settlement bonds fared the best over the past five trading sessions, turning in a significant %, while Hospitals were the second best performers with a % print (Fig. 45). Prerefunded securities usually have short durations, so that group ranked at the bottom of the list due to the strong rally in the intermediate and long segments of the term structure. Still, the Prerefunded and Escrowed-to-Maturity (Prerefunded/ETM) sector completed the week in the black, turning in a % total return. It bears mentioning that with the elimination of advanced refundings, we expect the Prerefunded/ETM sector to diminish and eventually all but vanish. Ninety percent of all prerefunded and escrowed-to-maturity bonds currently in the S&P Municipal Bond Index will mature by the year Further, with a year average effective duration, that sector s total return performance faces the headwind of low price responsiveness to downward yield swings. page 6 of 44

7 Supply and demand Municipal market participants are awaiting roughly $6.370 billion in new taxexempt deals in the approaching week (Fig. 57). That figure is about $2.381 billion higher than last week s $3.990 billion. The current slate is $1.172 billion above the $5.199 billion 12-week moving average. As of Friday s close, approximately $ billion in new deals have come to market thus far in That figure compares with $ billion for the same period in 2017, a $ billion shortfall. As of Friday, supply stood at % of where it was on the 04 May That figure is down from % at the end of the previous week. We stand by our estimate of $350 billion in total supply for 2018, a 20% decline from We maintain that retail demand is fragile and could come undone with persistent negative market returns. Last week, the New York Federal Reserve reported that primary dealer firms shrunk their collective municipal bond positions by $4.366 billion. Turning to demand, the Investment Company Institute (ICI) recorded negative net withdrawals of $32 million from municipal bond funds for the Wednesday-to- Wednesday period ending on 25 April (Fig. 58). The current report represents the fourth consecutive week of outflows, bringing the most recent string of redemptions to a total of $1.825 billion. Even during the weeks of positive municipal bond fund currents that immediately preceded this spat of withdrawals, we repeatedly expressed concern that influxes have been decidedly tepid. We maintain that retail demand is fragile and could come undone with persistent negative market returns. Looking forward to the eighteenth ICI Municipal Bond Mutual Fund Flows report for 2018, the next one on the 9 th of May, will cover the five trading days ending on 02 May, when the S&P Municipal Bond Index generated a sturdy % return. We believe the next ICI flows report could turn slightly positive in light of that solid performance. As of the latest print, investors have added a net total of $8.952 billion into municipal bond funds thus far this year, with just six of the seventeen weeks reported so far in 2018 producing negative net flows. Last week, the New York Federal Reserve reported that primary dealer firms shrunk their collective municipal bond positions by $4.366 billion versus the previous report, the most substantial week-over-week decline in over three years. The balance totaling $ billion for the five trading days ending the 25 th of April was down from the $ billion reported for the 18 th of April (Fig. 60). The most recent figure is the lowest since the $ billion reported on 7 March page 7 of 44

8 Dealers erstwhile worries about a sudden and significant rise in interest rates seemed to remain subdued over the past five trading sessions. Market Sentiment Dealers erstwhile worries about a sudden and significant rise in interest rates seemed to remain subdued over the past five trading sessions. Even though they became slightly less positive for their near-term outlook, they also became less pessimistic and tended toward a middle-of-the-road stance. On Friday, Thomson Reuters Municipal Market Data reported that only 12% of dealer firms in their survey were bearish for their 1-week outlook, a slender drop from the 14% recorded on 27 April (Fig. 61). Still, that number is considerably lower than the 78% who landed in the bearish camp on the 20th of April. The neutral group grew for the second consecutive week, and closed Friday with 50%, compared to the prior report s 43% in that category. Dealers who described themselves as bullish over the upcoming week scored 38%, down from 43% the earlier week. Once again, dealers were not quite as upbeat in their 1-2 month outlook, but still more optimistic than last week. As of Friday, no survey participants described themselves as bearish, that was down from the 37% in the previous study (Fig. 62). The neutral group pulled in 86% of survey participants, compared to 50% in the preceding enquiry. Bullish survey members rose to 14%, up from 13% in the previous assessment. Please see Figures 63 through 65 for additional survey information pertaining to the buyside sentiment and dealer inventories. Concern over how an infrastructure plan will materialize and the future of Private Activity Bonds still looms, and is likely to persist until a final version becomes law, something we do not think will not happen in Core Narrative While last week s positive performance may have provided the foundation for strong performance over the next few trading sessions, institutional municipal investors seem unconvinced over the long term. Concern over how an infrastructure plan will materialize and the future of Private Activity Bonds still looms, and is likely to persist until a final version becomes law, something we do not think will not happen in The year-over-year supply deficit widened last week, and remains a technical positive to the extent that it keeps price declines in check, at least in part during periods of rising interest rates. page 8 of 44

9 Yield (%) Figure 1 ICE AAA Municipal Yield Curve (in %) - Recent Trends Maturity Most Recent Last Week-End Last Month- End Last Year-End 5/4/18 4/27/18 4/30/18 12/29/17 D Week Change for the Period (in basis points) D D MTD YTD 6mo yr yr yr yr yr yr yr yr yr yr yr-30yr Slope yr-10yr Slope mo-4yr Slope yr-8yr Slope yr-15yr Slope So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end no t es f o r a description of Slope Analysis Figure 2 ICE AAA Municipal Yield Curve : Year-Over-Year Comparison Maturity 5/4/18 4/27/18 4/4/18 5/4/17 Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 9 of 44

10 Yield (%) Figure 3 Selected Quality ICE Municipal Yield Curves and Spreads Maturity Yield-to-Worst as of (in %) Nominal Spread to AAA (in bps) AAA AA A BBB AA A BBB 6mo yr yr yr yr yr yr yr yr yr yr yr-30yr Slope yr-10yr Slope So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end notes for a description of Slope Analysis Figure 4 Selected Quality ICE Municipal Yield Curves (as of ) Maturity AAA AA A BBB Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 10 of 44

11 Yield (%) Spread (in bps) Figure 5 ICE 10-year BBB Municipal and 10-year AAA Municipal Historical Yields and Spread ICE BBB - AAA Spread (right scale) ICE AAA 10-year Yield ICE BBB 10-Year Yield Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 11 of 44

12 Yield (%) Figure 6 U.S. Treasury and Selected Quality IHS Markit Corporate Yield Curves and Spreads Maturity Yield-to-Worst as of (in %) Nominal Spread to UST (in bps) U.S. Treasury AAA AA A AAA AA A 6mo yr yr yr yr yr yr yr yr yr yr yr-30yr Slope yr-10yr Slope So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, IHS M arkit, Invest o rt o o ls, Inc. Please see the end notes for a description of Slope Analysis Figure 7 U.S. Treasury and Selected Quality IHS Markit Corporate Yield Curves (as of ) Maturity U.S. Treasury AAA AA A Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., IHS Markit, Investortools, Inc. page 12 of 44

13 Yield (%) Figure 8 SIFMA Municipal Sw ap Index Historical Yield Index Value 12-Week Moving Average Source: Wilmington Trust Investment Advisors, SIFMA page 13 of 44

14 Change (in bps) Yield (%) Figure 9 ICE AAA Municipal Yield Curve vs. U.S. Treasury Yield Curve (as of ) Maturity AAA Muni US Treasury Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. Figure 10 Change in the ICE AAA Municipal and U.S. Treasury Yield Curves (for the w eek ending ; in basis points) Maturity AAA Muni US Treasury Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 14 of 44

15 Slope (in bps) Figure 11 Slope Analysis: ICE AAA Municipal 1yr - 30yr Slope (40-Day Bollinger Bands) yr-30yr spread 40-Day Moving Average +2 Std Dev -2 Std Dev Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 12 ICE AAA Municipal 1yr - 30yr Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 4/25/2018 2/22/ /2/2017 5/9/2017 Average Minimum Minimum Date 5/4/2018 5/4/2018 1/2/2018 1/2/2018 Standard Deviation z-score So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end notes for a description of Slope Analysis page 15 of 44

16 Slope (in bps) Figure 13 Slope Analysis: ICEAAA Municipal 2yr - 10yr Slope (40-Day Bollinger Bands) yr-10yr Spread 40-Day Moving Average +2 Std Dev -2 Std Dev Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 14 ICE AAA Municipal 2yr - 10yr Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 4/6/2018 3/6/2018 3/6/2018 5/11/2017 Average Minimum Minimum Date 5/4/2018 5/4/ /29/ /29/2017 Standard Deviation z-score So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end notes for a description of Slope Analysis page 16 of 44

17 Slope (in bps) Figure 15 Slope Analysis: ICEAAA Municipal 6mo - 4yr Short Slope (40-Day Bollinger Bands) mo-4yr (Short) Spread 40-Day Moving Average +2 Std Dev -2 Std Dev Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 16 ICE AAA Municipal 6mo - 4yr Short Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 5/2/2018 2/26/2018 2/26/2018 2/26/2018 Average Minimum Minimum Date 5/4/2018 5/4/2018 1/5/2018 1/5/2018 Standard Deviation z-score So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end notes for a description of Slope Analysis page 17 of 44

18 Slope (in bps) Figure 17 Slope Analysis: ICEAAA Municipal 1yr - 8yr Short Intermediate Slope (40-Day Bollinger Bands) yr-8yr (Short Intermediate) Spread 40-Day Moving Average +2 Std Dev -2 Std Dev Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 18 ICE AAA Municipal 1yr - 8yr Short Int Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 4/6/2018 2/15/2018 2/15/2018 5/9/2017 Average Minimum Minimum Date 5/4/2018 5/4/2018 1/2/2018 1/2/2018 Standard Deviation z-score So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end notes for a description of Slope Analysis page 18 of 44

19 Slope (in bps) Figure 19 Slope Analysis: ICEAAA Municipal 3yr - 15yr Intermediate Slope (40-Day Bollinger Bands) yr-15yr (Intermediate) Spread 40-Day Moving Average +2 Std Dev -2 Std Dev Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 20 ICE AAA Municipal 3yr - 15yr Intermediate Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 4/25/2018 2/27/ /2/2017 5/10/2017 Average Minimum Minimum Date 5/4/2018 5/4/ /29/ /29/2017 Standard Deviation z-score So urce: W ilming t o n T rust Invest ment A d viso rs, IC E Securit ies Evaluat io ns, Inc, Invest o rt o o ls, Inc. Please see t he end notes for a description of Slope Analysis page 19 of 44

20 Yield (%) Spread (in bps) Yield (%) Spread (in bps) Figure 21 S&P Municipal Bond High Yield vs. Investment Grade Indices : Month-end Historical Yields and Spread 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Spread S&P Municipal Bond Investment Grade Index S&P Municipal Bond High Yield Index Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, ICE Securities Evaluations, Investortools, Inc. Figure 22 S&P Municipal Bond High Yield Ex-Puerto Rico vs. Investment Grade Indices : Month-end Historical Yields and Spread 6.00% 5.00% % 3.00% 2.00% 1.00% 0.00% Spread S&P Municipal Bond Investment Grade Index S&P Municipal Bond High Yield ex-puerto Rico Index Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, ICE Securities Evaluations, Investortools, Inc. page 20 of 44

21 Yield (%) Spread (in bps) Yield (%) Spread (in bps) Figure 23 S&P Municipal Bond High Yield vs. High Yield Ex-Puerto Rico Indices : Month-end Historical Yields and Spread 8.00% % 6.00% % 4.00% 3.00% % 1.00% % -60 Spread S&P Municipal Bond High Yield Index S&P Municipal Bond High Yield ex-puerto Rico Index Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, ICE Securities Evaluations, Investortools, Inc. Figure 24 ICE 10-year US Treasury and 10-year AAA Municipal Historical Yields and Spread ICE US Treasury - AAA Spread (right scale) US Treasury 10-year Yield ICE AAA 10-Year Yield Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 21 of 44

22 Ratio (%) Figure 25 ICE AAA Municipal-to-US Treasury (M/UST) Yield Ratios Most Recent Last Week-End Last Month-End Last Year-End Maturity 5/4/2018 4/27/2018 4/30/ /29/ Months % % % % 1 Year % % % % 2 Years % % % % 5 Years % % % % 10 Years % % % % 30 Years % % % % Source: W ilmington Trust Investment Advisors, ICE Securities Evaluations,Inc., Investortools, Inc. Figure 26 ICE AAA Municipal-to-US Treasury Ratio 110% 100% 90% 80% 70% 60% 50% ICE 2-Year AAA Municipal-to-US Treasury Ratio ICE 10-Year AAA Municipal-to-US Treasury Ratio ICE 5-Year AAA Municipal-to-US Treasury Ratio ICE 30-Year AAA Municipal-to-US Treasury Ratio Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 22 of 44

23 M/UST Ratio (in %) M/UST Ratio (in %) M/UST Ratio (in %) Figure 27 6-MonthAAA Municipal-to-US Treasury Ratio (as of ) 100% 90% 80% 70% 60% 50% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. Figure 28 1-Year AAA Municipal-to-US Treasury Ratio (as of ) 100% 90% 80% 70% 60% 50% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. Figure 29 2-Year AAA Municipal-to-US Treasury Ratio (as of ) 100% 90% 80% 70% 60% 50% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. page 23 of 44

24 M/UST Ratio (in %) M/UST Ratio (in %) M/UST Ratio (in %) Figure 30 5-Year AAA Municipal-to-US Treasury Ratio (as of ) 90% 80% 70% 60% 50% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations Figure Year AAA Municipal-to-US Treasury Ratio (as of ) 100% 90% 80% 70% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. Figure Year AAA Municipal-to-US Treasury Ratio (as of ) 110% 100% 90% 80% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. page 24 of 44

25 Ratio (%) Figure 33 ICE AA Municipal-to-IHS Markit AA Corporate (AAM/AAC) Yield Ratios Most Recent Last Week-End Last Month-End Last Year-End Maturity 5/4/2018 4/27/2018 4/30/ /29/ Months % % % % 1 Year % % % % 2 Years % % % % 5 Years % % % % 10 Years % % % % 30 Years % % % % Source: W ilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., IHS M arkit Figure 34 ICE AA Municipal-to-IHS Markit AA Corporate Ratio 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% ICE - IHS Markit 2-Year AA M/AAC Ratio ICE - IHS Markit 10-Year AA M/AAC Ratio ICE - IHS Markit 5-Year AA M/AAC Ratio ICE - IHS Markit 30-Year AA M/AAC Ratio Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc.,, IHS Markit, Investortools, Inc. page 25 of 44

26 AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) Figure 35 6-MonthAA Municipal-to-AA Corporate Ratio (as of ) 90% 80% 70% 60% 50% 40% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations (Muni), IHS Markit (Corp) Figure 36 1-Year AA Municipal-to-AA Corporate Ratio (as of ) 90% 80% 70% 60% 50% 40% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations (Muni), IHS Markit (Corp) Figure 37 2-Year AA Municipal-to-AA Corporate Ratio (as of ) 90% 80% 70% 60% 50% 40% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations (Muni), IHS Markit (Corp) page 26 of 44

27 AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) Figure 38 5-Year AA Municipal-to-AA Corporate Ratio (as of ) 80% 70% 60% 50% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations (Muni), IHS Markit (Corp) Figure Year AA Municipal-to-AA Corporate Ratio (as of ) 80% 70% 60% 50% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations (Muni), IHS Markit (Corp) Figure Year AA Municipal-to-AA Corporate Ratio (as of ) 90% 80% 70% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations (Muni), IHS Markit (Corp) page 27 of 44

28 Figure 41 Selected S&P Municipal Bond Index Totals & Averages as of Number of Market Value Yieldto- Maturity Priced-to Pricedto Date Effective Holdings (in $ billions) Coupon Worst Maturity (in yrs.) Date (in yrs.) Duration Municipal Bond 187,669 $ 2, /7/ /20/ Investment Grade 179,957 $ 2, /9/ /27/ Intermediate 108,122 $ 1, /27/ /11/ Short Intermediate 76,833 $ /8/ /25/ Short 41,746 $ /20/ /10/ High Yield 7,712 $ /4/ /26/ High Yield Ex-Puerto Rico 7,501 $ /4/ /5/ California 26,825 $ /31/ /28/ New York 12,719 $ /16/ /5/ Puerto Rico 287 $ /12/ /26/ Source: W ilmington Trust Investment Advisors, Investortools, Inc., S&P Dow Jones Indices LLC, ICE Securities Evaluations, Inc. Figure 42 Selected S&P Municipal Bond Index Total Returns as of Calendar Week MTD QTD YTD 2017 S&P Municipal Bond % % % % % S&P Municipal Bond Investment Grade % % % % % S&P Municipal Bond Intermediate % % % % % S&P Municipal Bond Short Intermediate % % % % % S&P Municipal Bond Short % % % % % S&P Municipal Bond High Yield % % % % % S&P Municipal Bond High Yield Ex-Puerto Rico % % % % % S&P Municipal Bond California % % % % % S&P Municipal Bond New York % % % % % S&P Municipal Bond Puerto Rico % % % % % Source: W ilmington Trust Investment Advisors, Investortools, Inc., S&P Dow Jones Indices LLC, ICE Securities Evaluations, Inc. Index calculat ions by Invest ort ools, Inc. C ust om Index M anager page 28 of 44

29 Total Return (%) State Rating S&P Municipal Bond Index Total Return Performance Attribution for the Week Ending (in %) Figure 43 Return of Top 10 States by Market Value (in %) Figure 44 Attribution by Lowest Rating (in %) CA NY Aaa / AAA TX FL IL Aa / AA A / A PA NJ Baa / BBB MA WA OH Unrated Speculative Grade Total Return (in %) Total Return (in %) Source for Figs. 36 & 37: Wilmington Trust Investment Advisors, Inc., S&P Dow Jones Indices, ICE Securities Evaluations, Inc., LLC, Investortools, Inc. Lowest Rating Bond issues split across ratings by different agencies are categorized by the lowest letter grade Figure 45 S&P Municipal Bond Index Total Return Performance Attribution by Sector for the Week Ending (in %) Sector Source: Wilmington Trust Investment Advisors, Inc., S&P Dow Jones Indices LLC, ICE Securities Evaluations, Inc., Investortools, Inc.. page 29 of 44

30 Annualized Return (in %) Annualized Return (in %) Figure 46 S&P Municipal Index Trailing 3-Year Annualized Returns (for the period ending 30 April 2018) 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% High Yield Index Ex-Puerto Rico High Yield Index Municipal Bond Index New York Index California Index Investment Grade Index Intermediate Index Short Intermediate Index Short Index Puerto Rico Index -2% -3% -4% -5% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 47 S&P Municipal Index Trailing 5-Year Annualized Returns (for the period ending 30 April 2018) 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% High Yield Index Ex-Puerto Rico High Yield Index California Index New York Index Municipal Bond Index Intermediate Index Investment Grade Index Short Intermediate Index Short Index Puerto Rico Index -4% -5% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. page 30 of 44

31 Annualized Return (in %) Figure 48 S&P Municipal Index Trailing 10-Year Annualized Returns (for the period ending 30 April 2018) 8% 7% 6% 5% 4% 3% 2% 1% High Yield Index New York Index California Index Intermediate Index Municipal Bond Index Investment Grade Index Short Intermediate Index Short Index Puerto Rico Index 0% -1% -2% -3% -4% -5% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. page 31 of 44

32 This exercise applies parallel shifts in the yield curve to the interest rate sensitivity of bonds, reflected by their average effective duration, to project price impacts and assess the effect of interest rate changes on total return expectations. For additional information, please see the end notes. Figure 49 Selected S&P Municipal Bond Index 1-Month Horizon & Scenario Analysis S&P Municipal Bond Intermediate Index (as of ) -50bps -25bps No Change +25bps +50bps Total Return (in %) % % % % % Yield Return (in %) % % % % % Market Return (in %) % % % % % Roll Return (in %) % % % % % So urce: W ilming t o n T rust Invest ment A d viso rs, S&P D o w Jo nes Ind ices, LLC, IC E Securities Evaluations, Inc., Investortools, Inc Figure 50 Selected S&P Municipal Bond Index 1-Month Horizon & Scenario Analysis S&P Municipal Bond Short Intermediate Index (as of ) -50bps -25bps No Change +25bps +50bps Total Return (in %) % % % % % Yield Return (in %) % % % % % Market Return (in %) % % % % % Roll Return (in %) % % % % % So urce: W ilming t o n T rust Invest ment A d viso rs, S&P D o w Jo nes Ind ices, LLC, IC E Securities Evaluations, Inc., Investortools, Inc Figure 51 Selected S&P Municipal Bond Index 1-Month Horizon & Scenario Analysis S&P Municipal Bond Short Index (as of ) -50bps -25bps No Change +25bps +50bps Total Return (in %) % % % % % Yield Return (in %) % % % % % Market Return (in %) % % % % % Roll Return (in %) % % % % % So urce: W ilming t o n T rust Invest ment A d viso rs, S&P D o w Jo nes Ind ices, LLC, IC E Securities Evaluations, Inc., Investortools, Inc page 32 of 44

33 Figure 52 Selected S&P Municipal Bond Index 1-Year Horizon & Scenario Analysis S&P Municipal Bond Intermediate Index (as of ) -50bps -25bps No Change +25bps +50bps Total Return (in %) % % % % % Yield Return (in %) % % % % % Market Return (in %) % % % % % Roll Return (in %) % % % % % So urce: W ilming t o n T rust Invest ment A d viso rs, S&P D o w Jo nes Ind ices, LLC, IC E Securities Evaluations, Inc., Investortools, Inc Figure 53 Selected S&P Municipal Bond Index 1-Year Horizon & Scenario Analysis S&P Municipal Bond Short Intermediate Index (as of ) -50bps -25bps No Change +25bps +50bps Total Return (in %) % % % % % Yield Return (in %) % % % % % Market Return (in %) % % % % % Roll Return (in %) % % % % % So urce: W ilming t o n T rust Invest ment A d viso rs, S&P D o w Jo nes Ind ices, LLC, IC E Securities Evaluations, Inc., Investortools, Inc Figure 54 Selected S&P Municipal Bond Index 1-Year Horizon & Scenario Analysis S&P Municipal Bond Short Index (as of ) -50bps -25bps No Change +25bps +50bps Total Return (in %) % % % % % Yield Return (in %) % % % % % Market Return (in %) % % % % % Roll Return (in %) % % % % % So urce: W ilming t o n T rust Invest ment A d viso rs, S&P D o w Jo nes Ind ices, LLC, IC E Securities Evaluations, Inc., Investortools, Inc page 33 of 44

34 Figure 55 State General Obligation Debt Ratings (as of ) State Moody's S&P State Moody's S&P Alabama Aa1 AA Montana Aa1 AA Alaska Aa3 AA Nebraska Arizona Nevada Aa2 AA Arkansas Aa1 AA New Hampshire Aa1 AA California Aa3 AA- New Jersey A3 A- Colorado New Mexico Aa1 AA Connecticut A1 A New York Aa1 AA+ District of Columbia Aa1 AA North Carolina Aaa AAA Delaw are Aaa AAA North Dakota Florida Aa1 AAA Ohio Aa1 AA+ Georgia Aaa AAA Oklahoma Aa2 AA Guam BB- Oregon Aa1 AA+ Haw aii Aa1 AA+ Pennsylvania Aa3 A+ Idaho Puerto Rico Ca D Illinois Baa3 BBB- Rhode Island Aa2 AA Indiana South Carolina Aaa AA+ Iow a South Dakota Kansas Tennessee Aaa AAA Kentucky Aa3 A+ Texas Aaa AAA Louisiana Aa3 AA- Utah Aaa AAA Maine Aa2 AA Vermont Aaa AA+ Maryland Aaa AAA Virgin Islands Massachusetts Aa1 AA Virginia Aaa AAA Michigan Aa1 AA- Washington Aa1 AA+ Minnesota Aa1 AA+ West Virginia Aa2 AA- Mississippi Aa2 AA Wisconsin Aa1 AA Missouri Aaa AAA Wyoming So urce: B lo o mb erg L.P., M o o d y' s Invest o rs Service, Inc., S&P Glo b al Inc.; N o t e: st at es wit h no outstanding general obligation debt are left blank page 34 of 44

35 Estimated New Issue Calendar (in $ millios) $612 $710 $4,157 $2,583 $3,116 $6,212 $5,210 $3,890 $3,434 $5,377 $4,716 $2,593 $8,649 $7,197 $5,120 $3,464 $6,645 $4,534 $4,860 $3,990 $7,520 $6,370 $12,115 $9,945 $14,938 $20, Municipal Supply (in $ billions) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Current YTD as a % of Previous YTD Figure 56 Total Annual and Year-to-Date Municipal Supply through 30 April 2018 $ % $ % $ % $ % $400 $ % 100% 80% $200 60% $100 40% $- 20% YTD Through April (Left) Total Annual Supply (Left) Current YTD as a% of Previous YTD (Right) Source: WTIA Municipal Fixed Income, The Bond Buyer Figure 57 Estimated Weekly Tax-Exempt Municipal New Issue Calendar $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $- Total 12-Week Moving Average Source: Wilmington Trust Investment Advisors, Inc., Morgan Stanley & Co LLC, JP Morgan, Goldman Sachs page 35 of 44