Municipal Market Weekly Ramirez Municipal Strategy

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1 ***INSTITUTIONAL USE ONLY*** Municipal Market Weekly Page 1 Municipals traded down in sympathy with Treasuries and stocks ended mixed on strong 2Q18 corporate earnings and US economic growth, although 2Q18 US GDP narrowly missed expectations. Yields also rose due to easing trade tensions and higher yields in Japan. Treasury curves were flatter and MMD curves were steeper on the week, consistent with YTD trend. Primary market supply of $6.2 bil. received a mixed reception due to some saturation of names, including $850 mil. NYC TFA bonds which struggled in the retail order period. Secondary trading flows were average for most of the week, except for Tues when BWICs exceeded $1.3 bil. and 3,147 line items vs the weekly average of $840 mil. and 3,072 line items. New issue Muni supply this week declines to a manageable $5.40 bil., or 77% of the 12-week average, led by $974 mil. Washington State Convention Center (Aa3/A+). Muni mutual funds experienced inflows of $550 mil. bringing the YTD inflow total to ~$7.33 bil. The S&P Main Muni index lost 17 bps on the week, reducing YTD gains to 23 bps, while Treasuries lost 35 bps on the week, bringing YTD returns to -154 bps. Treasuries sold off on Monday spurred largely by speculation that BOJ would change monetary policy with benchmark yields all closing above 50- day moving average. The 10yr Treasury traded down 7bps to 2.96%, the cheapest level since mid-june. Treasuries ended mixed on Tues. with no real catalysts and the Treasury s $35 bil. 2-yr auction was well-received with highest bid/cover since Jan. Trade disputes took a backseat to strong corporate earnings on Tues., led by industrials, technology, and health care. Wed. had US-EU trade talks that kept risk sentiment subdued ahead of ECB rate decision on Thurs. However, there was a breakthrough on Wed. between the US and the EU on trade tariffs where Trump said the Europeans will work toward lower tariffs and other trade barriers. Economic data on Wed. was mixed. Thurs. had a solid 7yr Treasury auction and the ECB held rates steady, but Japan s 10y yield climbed to 0.1%, the highest in 1 year, which along with movements in German bunds, rattled markets. Thurs. also had disappointing Facebook earnings, leading to FB shares declining $120 bil. in market value, the largest single-day loss in US stock market history and dragging down the S&P and NASDAQ down on the day. Friday had 2Q18 GDP that narrowly missed expectations at 4.1% vs consensus of 4.2%, creating an equity market sell-off to end the week despite GDP growth being the highest in four years. Investor expectations following the strong 2Q18 GDP are for a 2H18 slowdown, likely meaning range-bound rates. Munis outperformed Treasuries across the curve in July, although on the year, only the 2yr and 5yr MMD spots have outperformed by 21.3 ratios and 8.4 ratios, respectively. The 2yr and 5yr MMD spots should continue to outperform in 2018 as investors (retail in particular) focus on shorter duration amidst a continued flat yield curve and still subdued inflation. Munis now read rich vs 3yr averages in the 2yr, 5yr, and 10yr spots and fairly valued in the 30yr spot. Treasury 2s30s was 2 bps flatter on the week at 41 bps while 2s10s was 2 bps flatter at 28 bps; the 2yr T-bill yield rose 8 bps to 2.67%, the 10yr note yield rose 6 bps to 2.95%, and the 30yr bond yield rose 6 bps to 3.08%. MMD 2s30s was 4 bps steeper on the week at 139 bps and MMD 2s10s was 1 bps steeper at 83 bps. MMD in 2yrs was cut 4 bps to 1.61%, outperforming Treasuries by 0.3 ratios to end at an ultra-tight 60.2%, the lowest 2yr ratio in almost four years (Sept, 2014). MMD in 5yrs was cut 4 bps to 1.95%, outperforming by 0.4 ratios to end at a rich 66.7%. MMD in 10yrs was cut 5 bps to 2.44%, outperforming by 0.2 ratios to a rich 82.4%. MMD in 30yrs was cut 8 bps to 3.00% and underperformed by 0.6 ratios to end at a fairly valued 97.1%. SIFMA was unchanged at 0.94%, or 45% of 1-month LIBOR and 64% of 1yr MMD. Notable rating actions last week included: >Illinois: Moody s changed Baa3 GO rating outlook to stable from negative >Minnesota: S&P upgraded GO rating to AAA from AA+ >Michigan: S&P upgraded GO rating to AA from AA- >California: Moody s changed Aa3 GO rating outlook to positive from stable Gross new issue supply this week is $5.40 bil. at 73% of the 12-week moving average of $6.94 bil., with negotiated transactions representing $3.78 bil., or 78% of the total supply. The negotiated market is led by $974 million Washington State Convention Center (Aa3/A+) on Wednesday and $330 million San Antonio, TX (Aaa/AAA/AAA) on Tuesday. These transactions should do well given demand for different names. Competitively, Maryland is selling $510 million GO bonds on Wednesday. Gross supply YTD is down -15% YoY at $180.5 bil., which is tracking slightly better vs our full-year 2018 estimate of -27% YoY ($317 bil.). The 30-day net supply is -$22.5 bil., comprised of $8 bil. new issues and -$30.53 bil. of redemptions (-$18.97 bil. maturing and -$11.56 bil. announced calls). The states that stand to experience the largest change in outstanding debt include California (-$5.51 bil.), New York (-$4.80 bil.), Texas (-$3.68 bil.), New Jersey (-$2.01 bil.), and Georgia (-$1.09 bil.). Spread compression and a flat 2s30s MMD (139 bps) has created high valuations within most Muni sectors and across the yield curve, creating lower incentive for credit risk or duration extension beyond ~15 yrs. Despite the rich valuations, value exists in AA and A rated Hospitals, A rated Higher Ed, A rated Power, and High Yield, all with spread Sharpe ratios above 2.5 in 10yrs (Pg 3). We also like AA rated general market names where 10yr spreads are ~70% of A rated general market spreads vs the historical relationship of ~58%. We like structures with maturities of yrs with 5-8 yr calls, which capture 80-90% of the MMD yield curve, have optimal roll (~50 bps), and are cheaper vs shorter and expensive structures with 2-4 yr calls. This week should be dominated by central bank meetings, including the FOMC meeting on Wed., where the Fed will release its policy statement that may clarify the outlook for a fourth rate increase in 2018, following a third increase in 2018 widely expected in Sept. The ECB and BOJ will also meet. July US employment data will be released on Aug. 1 by ADP and by the Labor Dept on Aug. 3. The Treasury on Wed., Aug. 1 will have the US refunding announcement and unveil plans for increasing auction sizes during 3Q18 to fund the growing federal deficit sparked by the 2017 tax cuts. We also have more corporate earnings announcements, construction spending, PCE deflator, Manufacturing PMI, ISM Manufacturing, factor orders, durable goods, PMI, Trump vs the Fed, Trump vs Mueller. Peter L. Block Managing Director Credit Strategy (212) peter.block@ramirezco.com Cem Baloglu AVP Credit Strategy (212) cem.baloglu@ramirezco.com John Young Managing Director Underwriting (212) john.young@ramirezco.com Alan Greco Managing Director Sales & Trading (212) alan.greco@ramirezco.com

2 2018 Strategy Ladder or 70/30 Barbell strategy (depending on mandate) Defensive posture; 5yr-7yr eff duration Intermediate bonds (14-16yr) with shorter calls (5-8yrs); cheaper vs shorter calls, capture ~90% of curve, fast reinvestment, optimal rolldown Page 2 Scenarios Scenario Bear Base Bull Strategy Ladder (Short) 70/30 Bar Ladder 30/70 Bar Ladder Crv Shft (avg bps)* Quality AA GO / A Rev AA GO / A Rev AA GO / A Rev TR % Proj. 1.51% 2.73% 1.66% 3.87% 3.92% OAS (bps) Eff Dur (yrs) WAM Cnvx *W.A. bps shift = implied by FWD rates Best rolldown is generally 8-15yrs. Coupon: 5%+ (lower convexity vs 4%) Credit: AA GOs, A rated or better (select names) Scenarios MMD Callable Curve (5% Cpn) - 12M FWD Total Return Projections* Mty 1-30y 1-5y 6-10y 11-15y 16-20y 21-25y 26-30y Eff Dur Unch 3.61% 2.32% 3.41% 3.68% 3.80% 3.68% 3.73% 1Y Fwd Rates 2.95% 1.91% 2.77% 2.95% 3.05% 3.00% 3.15% Parallel +25 bps 1.19% 1.62% 1.59% 1.33% 1.23% 0.98% 0.93% Parallel +50 bps -1.22% 0.93% -0.19% -1.00% -1.32% -1.72% -1.85%

3 Page 3 10Y 30Y MUNI TAX-EXEMPT SPREADS 2Y STATISTICS 7/30/18 Avg Min Max SD Z-Scr Value AA GO Fair A GO Fair BBB REV Rich AA GO Cheap A GO Rich BBB REV Fair HY Rich SECTOR CREDIT SPREADS (10Y) 2Y STATISTICS Sector Rating 7/27/18 Avg Min Max SD 3Y Z-Scr Value Sharpe GO AA Fair 0.9 A Rich 1.3 HOSP AA Fair 2.2 A Fair 5.6 HI ED AA Rich -1.0 A Fair 2.5 TRANS AA Fair -0.1 A Fair 1.5 POWER AA Fair -0.6 A Rich 2.5 WTR / AA Fair 0.0 SWR A Rich 1.0 HY <BBB Rich 2.3

4 Rates & Ratios Page 4 Market Performance Indicators WEEK ENDING: 7/27/18 TOTAL RETURN (%) YIELD (%) Eff WTD YTD Lo Hi Mean Vol Z-score INDEX Dur WTD 3Q18 2Q18 1Q /27/18 Δ Δ 12M 12M 12M 12M 12M 3Y TREASURY-TERM TREASURY - ALL SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-TERM SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-QUALITY MUNI-EXEMPT MUNI-TAXABLE HIGH-GRADE 'A' RATED 'BBB' RATED HIGH YIELD MUNICIPAL-SECTOR PRE-RE GO DED TAX WTR-SWR PUB PWR HEALTHCARE HIGHER ED TRANSPORT HOUSING TOBACCO IDB GLOBAL / CORP GLOBAL AGG US CORP-IG US CORP-HY Rich Fair Cheap *Rich/Cheap: +/ Z-scr This Wk Last Wk Beg Qtr Beg Yr Mean Value WTD MTD QTD YTD 7/27/18 7/20/18 7/2/18 1/2/18 12M 3Y 12M 3Y Perf Perf Perf Perf AAA MMD / UST Ratios Ratios Ratios Ratios 2 Yr 60% 61% 65% 81% 70% 80% Rich Rich -0.3 Out -4.4 Out -4.4 Out Out 5 Yr 67% 67% 72% 75% 72% 78% Rich Rich -0.4 Out -5.7 Out -5.7 Out -8.4 Out 10 Yr 82% 83% 86% 81% 85% 90% Rich Rich -0.2 Out -3.1 Out -3.1 Out 1.5 Under 30 Yr 97% 96% 98% 91% 97% 99% Fair Fair 0.6 Under -1.1 Out -1.1 Out 6.0 Under UST BPS BPS BPS BPS 2 Yr Cheap Cheap Yr Cheap Cheap Yr Cheap Cheap Yr Fair Cheap AAA MMD BPS BPS BPS BPS 2 Yr Fair Cheap Yr Fair Cheap Yr Fair Cheap Yr Fair Fair

5 Page 5 Muni Primary Market Gross Supply ($ in millions) As of 7/27/18 Last Week 6, wk Moving Avg. 6,942.8 YTD 180,533.4 Weekly Visible Supply ($ in millions) Week of 7/30/18 Total 5,401.4 Comp. 1,287.9 Neg. 4,113.5, Ramirez 30-Day Visible Supply ($ in millions) Current 2018 High 2018 Low Total $ Date $ Date Total 7, ,770.7 (5/15) 2,017.8 (6/28) Comp. 3, ,795.3 (5/14) (1/26) Neg. 4, ,760.4 (7/16) (6/28) Source: Bond Buyer Top Competitive Issuances Coming to Market Issuer State Amount ($ 000 s) Maryland St MD 510,000 FL St Dept Trans FL 180,000 Florida St BOE PECO FL 148,650 Spartanburg Co SD #7 SC 55,000 Onondaga Co NY 51,957 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Washington St Convention (Lodging Tax Bonds) WA 973,600 San Antonio TX 330,000 Killen Indep Sch Dist TX 273,850 New Haven CT 218,030 NE Investment Fin Auth (SF Hsg Rev Bonds) NE 171,045 Underwriters will attempt to market $5.40 bil. of municipals in the week of 7/30, led in the negotiated space by $974 mil. Washington St Convention, $330 mil. San Antonio, and $274 mil. Killen ISD. The competitive calendar is highlighted by $510 mil. Maryland St. Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role El Monte Water Authority CA 18,760 SAR Senior New Haven CT 218,030 Loop Co-Manager Economic Calendar Monday (7/30) Tuesday (7/31) Wednesday (8/1) Thursday (8/2) Friday (8/3) Pending Home Sales MoM Personal Income MBA Mortgage Applications Initial Jobless Claims Trade Balance Dallas Fed Manf. Activity Personal Spending ADP Employment Change Continuing Claims Change in Nonfarm Payrolls U.S. to Sell USD51 Bln 3-Month Bills U.S. to Sell USD45 Bln 6-Month Bills Employment Cost Index Markit US Manufacturing PMI Bloomberg Consumer Comfort Change in Manufact. Payrolls Chicago Purchasing Manager Construction Spending MoM Factory Orders Unemployment Rate Conf. Board Consumer Confidence ISM Manufacturing Durable Goods Orders Markit US Services PMI U.S. to Sell USD65 Bln 4-Week Bills ISM Prices Paid Durables Ex Transportation Markit US Composite PMI FOMC Rate Decision ISM Non-Manf. Composite

6 Page 6 Muni Market Demand Tax-exempt mutual funds reported inflows for the third consecutive week for the week ending July 18, with an inflow of $550 million. This compares to the 12-week moving average of a $388 million inflow. US Lipper Fund Flows Source: Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Inflow: Inflow: Money Market Outflow: Outflow: Taxable Inflow: Inflow: Equities Outflow: Inflow: Source: Lipper Fund Flows Muni Market Supply Over the next 30 days, we see net muni market supply at $22.50 bil., comprised of $8.03 bil. new issues, $18.97 bil. maturing, and $11.56 bil. announced calls. The states that stand to experience the largest change in outstanding debt include California (-$5.51 bil.), New York (-$4.80 bil.), Texas (-$3.68 bil.), New Jersey (-$2.01 bil.), and Georgia (-$1.09 bil.)., Ramirez, Ramirez

7 Page 7 Ramirez Managed Deals $18,760,000 El Monte Water Authority Revenue Bonds Series 2018A Issue: Rated AA (insured) / A- (underlying). Pricing - Thursday, August 2, Ramirez & Co. is Senior Manager of this transaction. The proceeds of the Bonds will be used to finance improvements to the City s Water Enterprise (System), refund certain outstanding debt, purchase insurance and a debt service reserve surety from Build America Mutual Assurance Company (BAM), and pay costs of issuance. Security: The Bonds are secured by net revenues of the System, which consist of gross revenues and the amounts in the Water Rate Stabil ization Fund (Fund) less the cost of maintaining and operating the System. The Fund will be funded at $400,000 at closing and the Authority shall make periodic deposits into the Fund from legally available gross revenues. The Bonds are further secured by a debt service reserve surety policy provided by BAM. The timely payment of principal of and interest on the Bonds are insured by BAM. Other legal provisions include a 1.25x rate covenant and 1.25x additional bonds test. Credit Overview: The El Monte Water Authority (Authority) was established pursuant to a Joint Exercise of Powers Agreement in 1999 between the City of El Monte (City) and the former El Monte Community Development Agency. The Authority was created to provide financing for public capital improvements for the City. The City encompasses 10 square miles in Los Angeles County (County), approximately 12 miles east of Los Angeles. The City is the economic hub of the San Gabriel Valley, anchored by the agriculture industry. The estimated 2018 population of the City is 117,204. Wealth levels are below average with per capita income and median household income at 52% and 73% of national medians, respectively. As of May 2018, the unemployment rate was 4.0%, which is above the national average of 3.6%. The Authority leased the System from the City pursuant to the Water Lease (Lease). Pursuant to the Water Enterprise Management Agreement (Agreement), the City currently maintains and operates the System on behalf of the Authority. The System s service area encompasses the central business district and the northwestern and southern portions of the City. The System s customer base is comprised of 3,678 accounts, which accounts for approximately 20% of the City s population. The top ten ratepayers account for 8.5% of water sales revenues for fiscal Water sales to residential customers typically account for 62% of water sales revenues. The System s current water supply is groundwater collected from the Main San Gabriel Groundwater Basin (Basin). The System is comprised of five active wells and one standby well, a one million gallon storage tank with three booster pumps, a 200,000 gallon elevated storage tank, three emergency connections, and over 40 miles of transmission and distribution pipelines. The System s current production is sufficient to meet customer demand. The System expects to start accepting treated groundwater from the Arden Groundwater Treatment Plant in fiscal 2019 to replace the wells. The Authority is allotted a groundwater production amount each fiscal year by the Basin Watermaster. If the System exceeds that allotment, it is required to purchase replacement water to recharge the Basin. The City has sole rate-setting authority. The City is in the middle of its five-year rate plan, which included a rate increase in January 2018 and a rate increase of approximately 9.4% effective in January The System s water rates are reasonable at $39.39 per month, or 1.2% of median household income. Subordinate to the Bonds is the System s 2010 Enterprise Sublease (Sublease). The System leased property from the City and is obligated to make sublease payments to the City s General Fund. The System s share of the payments under the 2010 Sublease is $200,000. As the obligation is unstructured, the System made its last payment in Management expects to start making debt service payments again in Fiscal 2017 net revenues provided 1.29x pro forma maximum annual debt service (MADS) on the senior bonds and 1.13x on pro forma all-in MADS. If the funds in the Water Rate Stabilization Fund are included, pro forma MADS coverage increases to 1.57x on the senior bonds and 1.38x all-in. Total debt is nearly $28.8 million, or roughly $7,830 per customer. The System does not have any additional debt plans. The System s five-year capital plan totaled $8.9 million, in which $6.4 million is being funded with this issuance and the remainder will be financed through revenues generated from the rate hikes.

8 Page 8 Samuel A. Ramirez & Co., Inc. 61 Broadway, 29th Floor New York, NY Samuel A. Ramirez & Co., Inc., member FINRA, MSRB, SIPC. This material is proprietary to Samuel A. Ramirez & Co., Inc. or ( Ramirez ) and may not be disclosed to any third party or used for any other purpose without the prior written consent of Ramirez. Unless otherwise agreed in writing between you and Ramirez & Co, we are acting solely as a principal/underwriter in an arm s length commercial transaction in which Ramirez has financial and other interests that differ from yours. Ramirez is not acting as a municipal advisor, financial advisor or fiduciary and the information provided should not be construed as advice within the meaning of Section 15B of the Securities Exchange Act of The information in this document should not be considered research1 or its content be construed as a solicitation or recommendation. This material has been prepared for informational purposes only without regard to any particular user's investment objectives, financial situation, or means, and Ramirez is not soliciting any action based upon it. The Information contained is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Ramirez does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and or counsel. The Information should not be relied upon for the maintenance of your books and records or for any tax, accounting, legal or other purposes. Subject to applicable law, you may disclose any aspects of any potential transaction or structure described herein that are necessary to support U.S. federal income tax benefits. The information in this document reflects prevailing conditions and our views as of this date which, are subject to change. In preparing this material, we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from internal and public sources or which was provided to us by or on behalf of Ramirez or which was otherwise reviewed by Ramirez. Even when this material contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of Ramirez. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. 1 For purposes of the debt Rule FINRA 2242, a debt security excludes any equity security, municipal security and security-based swap (each as define under the Exchange Act) and any US Treasury (as defined in FINRA Rule 6710 (p)).