popular barometer of short-term taxable rates, rose one basis point ( bps ) to 0.25% but was essentially flat.

Transcription

1 SIFMA & LIBOR Stable Municipals and Treasuries diverge on quality and supply First Half of 2012 Review Variable Rate Market The SIFMA Municipal Swap Index, an average of high-grade variable rate bonds, rose from 0.16% in early June close the month at 0.18%. Demand for short-term tax-exempt paper remained solid. s started the month lower due large June inflows from redemptions coming due, rose as invenry was reduced and ended the month lower on anticipated high July redemptions. The market remained calm and orderly despite numerous additional credit downgrades. LIBOR, a popular barometer of short-term taxable rates, rose one basis point ( bps ) 0.25% but was essentially flat. SIFMA Fixed Rate Markets During June yields of US Treasuries dropped early in the month a record low, bounced back up, and then remained level throughout June. The relatively low US Treasury yields are an authentic gauge of fear among invesrs and demonstrate the ongoing concerns facing global capital markets. With worsening macroeconomic signals stemming from the US economy, mounting concerns about China s economy and the continued Figure 1 SIFMA & LIBOR Rates drama in Europe, invesrs are still on edge over the viability of the recovery. Coupled with a global aversion risk and the corresponding flight quality, invesr appetite has only increased for US Treasuries. The 10 year Treasury ended June up by 20 bps at 1.67% from 1.47%. As of June 29 th, the ratios of AAA municipal yields Treasury yields were: Table 1 - AAA / T-Bond Year % 1-Year 0.20 / % 5-Year 0.79 / % 10-Year 1.86 / % 30-Year 3.16 / % Rates SIFMA Muni Swap Rate 30 Day Libor Rate Source: Bloomberg 1 P age

2 Municipal rates diverged from US Treasuries and finished June higher than where they started. Concerns about credit quality and municipal bankruptcies in the news, as well as high issuance volume, kept Municipals from participating in the Treasuries continued rally. The Municipal Market Data ( ) triple-a municipal market scale ended the month higher across the yield curve. The triple-a 10 year yield ended June at 1.86%, 11 bps higher than where it began the month. The 30 year yield meanwhile was up 12 bps 3.16%. Total issuance volume for the month of June increased over the same period in 2011 and Rates Figure 2 10 Year AAA and Treasury continued the upward trend seen during the first five months of the year. In the first half of 2012, the market has seen a 62% increase in tal long-term volume over the same time period in This year, June had $40.7 billion in new issuance as compared $32.0 billion in 2011, which represents a 27% increase. Refundings have continued be a significant portion of the tal volume level. Refunding levels surged during the month of June and continued be a prominent piece of the overall issuance volume making up nearly 136% of municipal issuance in the first half of US Department of Treasury 10 Year AAA 10 Year Treasury Source: Bloomberg First Half of 2012 Review The first six months of 2012 saw municipal bond issuers benefit from, and invesrs suffer from, continued low interest rates. Despite the record low borrowing costs, however, states and municipalities have been reluctant issue new debt in a political and economic environment that is concerned with stagnant revenues and headlines about public worker pension costs. Continuing a trend that gained momentum in 2011, multiple large cities struggled remain solvent through the first six months of 2012 for a variety of reasons and the bond market will be watching and waiting for their sries unfold going forward. The biggest sry so far in 2012 continues be the record low interest rate environment. s, which had declined as 2011 wore on, continued sinking in the New Year, particularly for longer term bonds. Whereas 10 year AAA rated G.O. bonds declined only 2 basis points from the first trading of January the last one of June, the 30 year yield fell from , a 41 bps drop. Meanwhile, other 30 year municipals of lower investment grades slid similar amounts, suggesting that there was little flight quality effect in the rise 2 Page

3 of municipal bond prices despite the continued market problems abroad. There were two related facrs that almost certainly did have an effect on declining municipal bond yields; the looming tax cliff and constrained supply. The so-called federal tax cliff, approaching at the end of 2012 as several previously enacted tax cuts expire simultaneously, has worried many invesrs that their marginal tax rates will be increasing in 2013 and beyond if the federal government doesn t act extend them. As the prospective tax rates of bond invesrs goes up, the value of tax free income them goes up as well, thereby inducing them bid up municipal bonds and accept lower yields because they are anticipating that on an after tax basis, the yields will still be competitive with investments from other sources of income. Perhaps the biggest impact, however, is the relative lack of new municipal bonds coming in the market. Although tal issuance of tax-free muni bonds was up 79% according Thomson Reuters, the amount of new money being borrowed increased a much more modest 21%. Refundings, the issuance of new bonds pay off higher interest rate old bonds akin a mortgage refinancing, was up an incredible 170% as issuers sought lower their financing costs on existing debt. An estimated 65% of 2012 issuance has been issued either fully or partially for the purpose of refunding existing debt. The low proportion of new money issuances is actually leading a municipal bond market that is shrinking in overall size as the pace of debt maturing outstrips new issues coming in existence, leaving fewer options for invesrs seeking tax-free income. Weighing against the rise in muni bond prices, albeit not very strongly as evidenced by their current yields, are the continuing fiscal problems that many cities are coping with. Sckn, CA opted file for Chapter 9 bankruptcy just before the end of June as it couldn t reach an agreement with credirs lower its debts and close its budget deficit. Detroit remains in a precarious position with its credit rating lowered deep in junk Published by Stern & Co. Credit Analysis Department grade terriry as it copes with the effects of a declining population and lower property values. There are not many precedents for U.S. municipalities filing for bankruptcy, and the limited case hisry that exists encourages the belief that general obligation bondholders will not be forced in significant concessions. There is some reason believe, however, that some of the current crop of cities in or on the verge of bankruptcy may be so deeply indebted that bondholder haircuts are inevitable. If that were happen, many invesrs will be forced look at the municipal bond market in a whole new light and an adjustment in prices may become a reality. For the present though, the first six months have proven be a tremendous opportunity for bond issuers, either reduce their current debt service burden or fund a new project for their constituents. The Wall Street Journal, and Tomson Reuters 3 Page

4 June 2012 Selected Bond Issues and Essential Service Revenue 6/4/2012 $13.10 Butler County, OH Aa1 / / 12/1/ % 59 6/4/2012 $9.37 Eureka, CA Public Financing 6/11/2012 $7.69 Blue Springs, MO 6/11/2012 $11.09 City of Hilliard, OH 6/11/2012 $5.00 Village of Hobart, WI 6/11/2012 $26.39 Springfield, MO 6/25/2012 $5.68 South Hutchinson, KS 6/25/2012 $6.33 Mount Vernon, IL School District #201 Water System Revenue Refunding Special Obligation Sewer System Improvement / AA- / 10/1/ % 120 / AA / 3/1/ % 42 Bank Qualified Aa1 / / 12/1/ % 58 / AA / 3/1/ % 67 Aa2 / / 4/1/ % 54.5 Subject Annual Appropriation A2 / / 9/1/ % 57 Bank Qualified / A / 12/1/ % 119 Bank Qualified - Non-Callable 6.5% Coupon Health Care Secr 6/11/2012 $ /18/2012 $ /18/2012 $51.89 Paulding County, GA Hospital Brazoria County, TX Health Facilities Development Corporation Floyd County, GA Hospital Wellstar Health System Brazosport Regional Health System Revenue Anticipation Certificates Aa2 / AA / 4/1/ % 85 / BBB- / 7/1/ % 255 Aa2 / / 7/1/ % 98 6/25/2012 $28.01 Tampa Health System Catholic Health East A2 / A / A+ 11/1/ % 180 6/25/2012 $11.41 Boone County, MO Boone County Hospital Center A3 / / A 8/1/ % 149 Backed by County Guarantee Backed by County Guarantee Non-Callable 4 Page The material contained herein has been prepared from sources and data we believe be reliable but we make no guaranty as its accuracy or completeness. The information is of a certain date and time and subject change without notice. This material contains information that is intended only for use by the named recipient. No part of this information may be reproduced, sred or transmitted in any form or by any means without prior permission of Stern & Co., Member SIPC. If you are not the named recipient and have received this information in error, you should not review the information or generalmail@sternbrothers.com and then destroy the information. This material is for informational purposes only and is not an investment recommendation, nor is it an offer buy or sell or a solicitation of an offer buy or sell any security or investment product. As always, you should be aware that investments

5 Education Secr 6/18/2012 $ /18/2012 $ /18/2012 $38.20 Grand Rapids Community College, MI Portage County Port, OH Quad Cities, IL Regional Economic Development Northeast Ohio Medical University Revenue Augustana College Revenue / AA / 5/1/ % 112 A3 / A- / 6/1/ % 200 Baa1 / / 10/1/ % 214 6/25/2012 $46.21 Florida Atlantic University Finance Corporation Student Housing Revenue A1 / A+ / 8/1/ % 78 Development Secr 6/4/2012 $ /4/2012 $5.65 Brentwood, CA Infrastructure Financing California Infrastructure and Economic Development Bank Infrastructure Revenue / A- / 9/1/ % 175 SRI International A3 / / 9/1/ % 149 Assured Guaranty 6/4/2012 $15.11 Indio, CA Finance Assessment Revenue / BBB / 9/1/ % % on 9/1/12 - call on 9/1/22 6/11/2012 $20.54 American Municipal Power Freemont Energy Center Project Revenue A1 / A / A 2/1/ % NA Taxable 6/18/2012 $50.00 Build NYC Resource Corporation YMCA of Greater New York Baa1 / A- / 8/1/ % 111 6/18/2012 $ /25/2012 $15.30 Cobb County, GA Development Summit County, OH Development Finance Learning Center Foundation Revenue Civic Theatre Project Not Rated 7/1/ % / AA+ / 12/1/ % 118 Repayment Source: Hotel Occupancy Tax Source: Bloomberg 5 Page The material contained herein has been prepared from sources and data we believe be reliable but we make no guaranty as its accuracy or completeness. The information is of a certain date and time and subject change without notice. This material contains information that is intended only for use by the named recipient. No part of this information may be reproduced, sred or transmitted in any form or by any means without prior permission of Stern & Co., Member SIPC. If you are not the named recipient and have received this information in error, you should not review the information or generalmail@sternbrothers.com and then destroy the information. This material is for informational purposes only and is not an investment recommendation, nor is it an offer buy or sell or a solicitation of an offer buy or sell any security or investment product. As always, you should be aware that investments