Municipal Fixed Income

Transcription

1 Municipal Fixed Income WEEKLY MARKET REVIEW 13 January 2017 Robert Collins Head of Municipal Fixed Income Stephen Winterstein Managing Director of Research & Chief Municipal Strategist Key Themes for the Upcoming Week MUNICIPAL RESEARCH Stephen Winterstein Managing Director & Chief Strategist Gerard Durr Senior Municipal Research Analyst Clyde Lane Municipal Research Analyst Ted Molin Senior Municipal Research Analyst Karleen Strayer Senior Municipal Research Analyst Robert Tice Municipal Research Analyst PORTFOLIO MGMT & TRADING Rebecca Rogers Director of Trading & Portfolio Management Maureen Lawrence Senior Trader John Malloy Senior Portfolio Manager Please direct comments or questions to: Leslie Varrelman Fixed Income Product Specialist We added three new tables on page 16, which will become regular components of this publication. Figures 24 through 26 provide a 1-month Horizon and Scenario Analysis of the S&P Municipal Bond Intermediate, Short-Intermediate, and Short Indices, respectively. We present a return analysis of those three benchmarks, looking 1-month ahead, under several potential interest rate movements. Further, we unbundle the components of return into yield contribution, price contribution, and the roll down the yield curve. The first two weeks of 2017 were a follow-through of the last two weeks of 2016, and served as a reprieve from the general 4Q2016 rout. Overall, investors tone appeared to be moderately constructive and, in our view, the municipal bond market gives the impression that it is poised to enter week three of 2017 in a positive mood. As we mentioned in last week s edition of this publication, we yet believe there may be several catalysts driving changes in M/USTs over the coming weeks, including volatility of UST yields and news headlines associated with tax-reform and unfunded pension problems. Besides these stimuli, the municipal market gives us the impression that it is back to business as usual. As such, we append our list with the typical supply and demand dynamics that could further influence M/UST swings. As of Friday s close, the S&P Municipal Bond Index s year-to-date total return stood at %. That figure is already % ahead of the performance of that same benchmark for all of To be sure, however, in November investors saw the rapidity with which positive longer-term investment performance can evaporate. Readers should be aware that the aforementioned volatility of UST yields, news headlines associated with taxreform and unfunded pension problems, along with supply and demand dynamics, can move the municipal bond market in either direction both forcefully and swiftly. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 1 of 25

2 For the third week in a row, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index s yield faded. Yield curve High-grade tax-exempt interest rates sank once again last week, as the S&P AAA Municipal Yield Curve came down across the term structure. The rates at the 6-month and 1-year maturities dropped 13 and 8 basis points (bps), respectively (Figs. 1 & 2). The 3-, 5-, and 7-year tenors declined by 14, 13, and 10bps, in that order, while the yield on the 10-year dropped by 8bps. The 30-year position on the curve showed some strength as well, as the yield at that spot fell by 9bps. For the third week in a row, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index s yield faded. Last Wednesday s print was 0.67%, a 1bp reduction from the previous week s 0.68% (Fig. 3). Sans the 6-month spot, last week s drop in yields flattened the S&P AAA Municipal Yield Curve by 1bp, front to back, lowering the difference between the 1-year and 30- year yields to 202bps, from 203bps the previous week (Fig. 6). At the same time, the spread between 2-year and 10-year edged up 2bps to 108bps on Friday (Fig. 7). The first two weeks of 2017 were a follow-through of the last two weeks of 2016, and served as a reprieve from the overall 4Q2016 rout. Overall, investors tone appeared to be moderately constructive, and in our view, the municipal bond market gives the impression that it is poised to enter week three of 2017 in a positive mood. Last week s goings-on saw municipal bonds leave their corresponding US Treasuries behind at key maturities. Municipal-to-US Treasury (M/UST) Yield Ratios Last week s goings-on saw municipal bonds leave their corresponding US Treasuries behind at key maturities. The 1-year M/UST printed %, down from the previous Friday s %, and an ratio drop from the % print on the 30 th of December (Fig. 14). The 2-year M/UST ended the last five trading days at %, ratios lower than the last week s %. The 5-year closed Friday at %, falling ratios from the previous week s %, and the 10-year M/UST finished at %, down a full ratios from %. Finally, the 30- year M/UST dropped ratios to end the week at %. As was similar to forces at work a fortnight ago, M/UST ratios were largely driven by a more prominent shift in municipal yields relative to corresponding US Treasury yields. However, last week s outperformance occurred across the term structure, as opposed to the previous week, when outperformance was relegated merely to spots inside the 12- year maturity on the curve (Fig. 5). The S&P AAA Municipal Curve s fall outpaced the US Treasury curve s by 13bps at both the 6-month and 3-year maturities, and by 8bps at the 1- and 2-year locations. Tax-exempt interest rate declines outstripped US Treasuries by 10 and 5bps at the 5- and 10-year tenors. Beyond the 13-year point, The S&P AAA Municipal Curve fell by 6 or 7bps at each moment out to and including the 30-year term. As we mentioned in last week s edition of this publication, we yet believe there may be several catalysts driving changes in M/USTs over the coming weeks, including volatility of UST yields, and news headlines associated with tax-reform and unfunded pension problems. Besides these stimuli, the municipal market gives us the impression that it is back to business as usual. As such, we append our list with the typical supply and demand dynamics that could further influence M/UST swings. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 2 of 25

3 The tax-exempt municipal market continued the second week of the New Year with an unquestionably upbeat disposition. The S&P Municipal Bond Index returned an inspiring %... Market performance The tax-exempt municipal market continued into the second week of the New Year with an unquestionably upbeat disposition. The S&P Municipal Bond Index returned an inspiring % (Fig. 17), as the Intermediate, Short Intermediate, and Short indices finished the week providing solid performances of %, %, and %, in that order. Meanwhile, the S&P Municipal Bond High Yield Index delivered % total return. Following the tilt of the broad market, the California and New York indices closed up with % and %, correspondingly. Likewise, the resilient Puerto Rico Index ended in the black with a one-week return of %. The municipal bond market s performance for the first two weeks of 2017 gives investors some breathing room. As of Friday s close, the S&P Municipal Bond Index s year-to-date total return stood at %. That figure is already % ahead of the performance of that same benchmark for all of To be sure, however, in November investors saw the rapidity with which positive longer-term investment performance can evaporate. We suggest that readers be aware that the aforementioned volatility of UST yields, news headlines associated with tax-reform and unfunded pension problems, along with supply and demand dynamics can move the municipal bond market in either direction both forcefully and swiftly. Supply and demand New issuance in the municipal bond market is under way in earnest. The upcoming week should give investors about $7.588 billion in supply. This immediately following last week s $8.692 billion. The past two weeks are the strongest in terms of supply since the week of 5 December, when the calendar was $9.548 billion (Fig 28). While cause and effect relationships of these matters are extraordinarily difficult to draw, the strength of the municipal bond market over the past four weeks may be taking hold. Looking at demand, the Investment Company Institute once again reported substantial municipal bond fund net outflows of $2.213billion for the trailing five business days ending 4 January (Fig. 29). We note that investment grade municipal bond mutual fund flows can be in response to changing yields and the effect on shares net asset values. As performance of the municipal market has steadied, we still continue to be hopeful that fund outflows will slow, and perhaps yet turn positive in the near future. In fact, outflows reached their recent nadir of -$4.478 billion reported on 21 December Since then, the last two reports withdrawals have been sequentially less. While cause and effect relationships of these matters are extraordinarily difficult to establish, the strength of the municipal bond market over the past four weeks may be taking hold. Nevertheless, last week marked the tenth consecutive week that investors made net withdrawals from tax-exempt municipal bond funds, totaling $ billion. Market Sentiment On Friday, Thomson Reuters Municipal Market Data reported that traders became less constructive for both the week and months ahead. For the 1-week outlook, the bearish category registered 14%, the same as last week (Fig. 31). The neutral respondents increased to71% for the same period, versus 29% in the last report. Only 15% of traders had a bullish 1-week outlook, which was down substantially from 57% on 06 December. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 3 of 25

4 Looking out 1-2 months, traders recorded their bearish responses at 29% the previous report printed 14% (Fig. 32). The neutral category for the 1-2 month outlook fetched 57% versus the prior print of 71%. Longer term, bullish traders fell a mere tick to 14% versus the former account of 15%. The buy-side also shifted to a more bearish posture for their 1-week outlook (Fig. 33). Thomson Reuters reported 12% of portfolio managers were bearish for the near term, as opposed to none in the previous report. Both the neutral and bullish categories declined to 44%, down from 50% each on the prior survey. Longer term, portfolio managers were more bearish for the 1-2 month horizon, as well (Fig. 34). Bearish managers jumped to 22%, whereas they were nonexistent on 06 January. The neutral group weighed in at a 55%, down from 67%. The buy-side shrank its bullish responses for the longer term to 23%, downward from33%. For the fifth consecutive survey, dealer firms reported no heavy positions, whilst the medium category tumbled to 0%, too. That figure was down from 29% in the previous survey. Those who reported light inventories jumped to 100%, up from71% (Fig. 35). Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 4 of 25

5 Yield (%) Figure 1 S&P AAA Municipal Yield Curve (in %) - Recent Trends Maturity Most Recent Last Week-End Last Month- End Last Year-End 1/13/17 1/6/17 12/30/16 12/31/16 D Week Change for the Period D MTD 6mo yr yr yr yr yr yr yr yr yr yr D YTD 1yr-30yr Slope yr-10yr Slope mo-4yr Slope yr-8yr Slope yr-15yr Slope Source: W ilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc Figure 2 S&P AAA Municipal Yield Curve : Year-Over-Year Comparison Maturity 1/13/17 1/6/17 12/13/16 1/13/16 Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc Page 5 of 25

6 Yield (%) Yield (%) Figure 3 SIFMA Municipal Sw ap Index Historical Yield Index Value 12-Week Moving Average Source: Wilmington Trust Investment Advisors, SIFMA Figure 4 S&P AAA Municipal Yield Curve vs. U.S. Treasury Yield Curves as of Maturity AAA Muni US Treasury Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Page 6 of 25

7 Spread (in bps) Change (in bps) Figure 5 Change in the S&P AAA Municipal and U.S. Treasury Yield Curves for the Week Ending (in basis points) Maturity AAA Muni US Treasury Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 6 Slope Analysis: S&P 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, S&P Dow Jones Indices, LLC, Investortools, Inc. Please see the end notes for a description of Slope Analysis Page 7 of 25

8 Spread (in bps) Spread (in bps) Figure 7 Slope Analysis: S&P AAA 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, S&P Dow Jones Indices, LLC, Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 8 Slope Analysis: S&P AAA 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, S&P Dow Jones Indices, LLC, Investortools, Inc. Please see the end notes for a description of Slope Analysis Page 8 of 25

9 Spread (in bps) Spread (in bps) Figure 9 Slope Analysis: S&P AAA 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, S&P Dow Jones Indices, LLC, Investortools, Inc. Please see the end notes for a description of Slope Analysis Figure 10 Slope Analysis: S&P AAA 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, S&P Dow Jones Indices, LLC, Investortools, Inc. Please see the end notes for a description of Slope Analysis Page 9 of 25

10 Yield (%) Spread (in bps) Yield (%) Spread (in bps) Figure 11 S&P 10-year BBB Municipal and 10-year AAA Municipal Historical Yields and Spread S&P BBB - AAA Spread (right scale) S&P AAA 10-year Yield S&P BBB 10-Year Yield Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 12 S&P Municipal Bond High Yield vs. Invesment 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 Yield Index S&P Municipal Bond High Yield Index Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Page 10 of 25

11 Yield (%) Spread (in bps) Figure 13 S&P 10-year US Treasury and 10-year AAA Municipal Historical Yields and Spread S&P US Treasury - AAA Spread (right scale) US Treasury 10-year Yield S&P AAA 10-Year Yield Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 14 S&P AAA Municipal-to-US Treasury Yield Ratios Most Recent Last Week-End Last Month-End Last Year-End Maturity 1/13/2017 1/6/ /30/ /31/ % % % % % % % % % % % % % % % % % % % % Source: W ilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc Page 11 of 25

12 Ratio (%) Figure 15 S&P AAA Municipal-to-US Treasury Ratio 120% 110% 100% 90% 80% 70% 60% S&P 2-Year AAA Municipal-to-US Treasury Ratio S&P 10-Year AAA Municipal-to-US Treasury Ratio S&P 5-Year AAA Municipal-to-US Treasury Ratio S&P 30-Year AAA Municipal-to-US Treasury Ratio Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 16 Selected S&P Municipal Bond Index Totals & Averages as of Number of Market Value Yieldto- Maturity Priced-to Priced-to Date Effective Holdings (in $ billions) Coupon Worst Maturity (in yrs.) Date (in yrs.) Duration Municipal Bond 97,126 $ 1, /3/ /21/ Investment Grade 91,281 $ 1, /26/ /5/ Intermediate 51,722 $ /3/ /2/ Short Intermediate 42,726 $ /17/ /24/ Short 26,065 $ /19/ /28/ High Yield 5,845 $ /29/ /14/ California 16,599 $ /23/ /16/ New York 8,390 $ /16/ /23/ Puerto Rico 618 $ /27/ /21/ Source: W ilmington Trust Investment Advisors, Investortools, Inc., S&P Dow Jones Indices LLC Index calculat ions by Invest ort ools, Inc. C ust om Index M anager Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 12 of 25

13 State Rating Figure 17 Selected S&P Municipal Bond Index Total Returns as of Calendar Week MTD QTD YTD 2016 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 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 Index calculat ions by Invest ort ools, Inc. C ust om Index M anager S&P Municipal Bond Index Total Return Performance Attribution for the Week Ending Figure 18 Return of Top 10 States by Market Value (in %) Figure 19 Attribution by Lowest Rating (in %) CA NY AAA / Aaa TX FL IL AA / Aa A / A PA NJ BBB / Baa MA WA OH Unrated Speculative Grade Total Return (in %) Total Return (in %) Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 13 of 25

14 Annualized Return (in %) Total Return (%) Figure 20 S&P Municipal Bond Index Total Return Performance Attribution by Sector for the Week Ending (in %) Sector Source: Wilmington Trust Investment Advisors, Inc., Standard & Poor s Securities Evaluations, Inc., S&P Dow Jones Indices, LLC, Investortools, Inc.. Figure 21 S&P Municipal Index Trailing 3-Year Annualized Returns (for the period ending 31 December 2016) 11% 10% 9% 8% 7% High Yield Index 6% Puerto Rico Index 5% Municipal Bond Index California Index 4% New York Index Investment Grade Index 3% Intermediate Index 2% Short Intermediate Index 1% 0% Short Index -1% -2% -3% -4% -5% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 14 of 25

15 Annualized Return (in %) Annualized Return (in %) Figure 22 S&P Municipal Index Trailing 5-Year Annualized Returns (for the period ending 31 December 2016) 11% 10% 9% 8% 7% High Yield Index 6% 5% California Index 4% New York Index Municipal Bond Index 3% Intermediate Index Investment Grade Index 2% 1% Short Intermediate Index 0% Short Index -1% Puerto Rico Index -2% -3% -4% -5% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 23 S&P Municipal Index Trailing 10-Year Annualized Returns (for the period ending 31 December 2016) 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Short Index Intermediate Index California Index New York Index Municipal Bond Index Investment Grade Index Short Intermediate Index High Yield Index Puerto Rico Index 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 15 of 25

16 Figure 24 Selected S&P Municipal Bond Index 1-month Horizon & Scenario Analysis 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. S&P Municipal Bond Intermediate Index (as of ) Maturity -50bps -25bps No Change +25bps +50bps Total Return (in %) 2.702% 1.462% 0.239% % % Yield Return (in %) 0.185% 0.185% 0.185% 0.185% 0.185% Market Return (in %) 2.459% 1.221% % % % Roll Return (in %) 0.057% 0.056% 0.055% 0.055% 0.054% 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, Invest o rt o o ls, Inc Figure 25 Selected S&P Municipal Bond Index 1-month Horizon & Scenario Analysis S&P Municipal Bond Short Intermediate Index (as of ) Maturity -50bps -25bps No Change +25bps +50bps Total Return (in %) 1.771% 0.970% 0.178% % % Yield Return (in %) 0.138% 0.138% 0.138% 0.138% 0.138% Market Return (in %) 1.590% 0.790% % % % Roll Return (in %) 0.043% 0.042% 0.042% 0.041% 0.041% 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, Invest o rt o o ls, Inc Figure 26 Selected S&P Municipal Bond Index 1-month Horizon & Scenario Analysis S&P Municipal Bond Short Index (as of ) No Maturity -50bps -25bps Change +25bps +50bps Total Return (in %) 1.014% 0.573% 0.133% % % Yield Return (in %) 0.109% 0.109% 0.109% 0.109% 0.109% Market Return (in %) 0.879% 0.437% % % % Roll Return (in %) 0.027% 0.026% 0.026% 0.026% 0.026% 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, Invest o rt o o ls, Inc Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 16 of 25

17 Estimated New Issue Calendar (in $ millios) $468 $105 $1,559 $3,020 $3,741 $2,689 $6,722 $5,773 $5,094 $6,102 $5,865 $8,306 $7,665 $8,587 $8,563 $7,544 $8,210 $8,267 $10,376 $10,440 $9,814 $9,548 $8,692 $7,588 $12,468 $13,815 $13,191 $13, Municipal Supply (in $ billions) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Current YTD as a % of Previous YTD Figure 27 Total Annual and Year-to-Date Municipal Supply through 31 December 2016 $ % $ % $ % $ % $300 60% 80% $200 40% $100 20% $- 0% YTD Through December (Left) Total Annual Supply (Left) Current YTD as a% of Previous YTD (Right) Source: WTIA Municipal Fixed Income, The Bond Buyer Figure 28 Estimated Weekly Municipal New Issue Calendar $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $- Total 12-Week Moving Average Source: Wilmington Trust Investment Advisors, Inc., Morgan Stanley & Co LLC, JP Morgan, Goldman Sachs Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 17 of 25

18 Par Value Volume (in $ billions) $(4,451) $(2,402) $(3,511) $(4,289) $(3,701) $(4,478) Net Flow s (in $ millions) $(2,961) $(2,213) $(70) $(132) $1,104 $1,771 $1,457 $1,527 $1,398 $1,465 $1,642 $1,315 $1,148 $679 $754 $1,459 $1,054 $787 $159 $144 $567 Figure 29 Estimated Weekly Municipal Bond Mutual Fund Flow s (trailing 6 months) $4,000 $2,000 $- $(2,000) $(4,000) $(6,000) $(8,000) Municipal Bond Fund Flows 12-Week Moving Average Source: Wilmington Trust Investment Advisors, Inc., Investment Company Institute Figure 30 Daily Municipal Trade Volume (trailing 6 months in par value $ billions) $25 $20 $15 $10 $5 $- Par Value Par Value 30-day Moving Average Source: Wilmington Trust Investment Advisors, Inc., Municipal Securities Rulemaking Board, Bloomberg LP Page 18 of 25

19 Sentiment (in %) Yield (in %) Sentiment (in %) Yield (in %) Figure 31 MMD 1-Week Municipal Market Trader Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 S&P AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, S&P Evaluations Figure 32 MMD 1-2 Months Municipal Market Trader Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 S&P AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, S&P Evaluations Figures are derived from a survey conducted by Thomson Reuters Municipal Market Data of approximately 600 buy-side and sell-side firms. It is distributed on Thursday mornings and results are reported on Friday afternoons. The 1-week and 1-2 month reports are forward-looking. The survey is unscientific in the sense that the selections of Bull, Bear, and Neutral, or Heavy, Moderate, and Light are not defined in the survey itself by specific parameters, but are left to the respondents subjective opinions as to the definition of those alternative definitions. Page 19 of 25

20 Sentiment (in %) Yield (in %) Sentiment (in %) Yield (in %) Figure 33 MMD 1-Week Municipal Market Portfolio Manager Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 S&P AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, S&P Evaluations Figure 34 MMD 1-2 Months Municipal Market Portfolio Manager Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 S&P AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, S&P Evaluations Figures are derived from a survey conducted by Thomson Reuters Municipal Market Data of approximately 600 buy-side and sell-side firms. It is distributed on Thursday mornings and results are reported on Friday afternoons. The 1-week and 1-2 month reports are forward-looking. The survey is unscientific in the sense that the selections of Bull, Bear, and Neutral, or Heavy, Moderate, and Light are not defined in the survey itself by specific parameters, but are left to the respondents subjective opinions as to the definition of those alternative definitions. Page 20 of 25

21 Est. Outstanding Debt (in $ Billions) Dealer Postions (in %) Yield (in %) Figure 35 MMD 1-Week Municipal Market Dealer Positions Survey 100% % 80% % 60% % % 30% % 10% % 1.25 S&P AAA 10-Year Municipal (Right) Light (Left) Medium (Left) Heavy (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, S&P Evaluations Figure 36 Estimated Outstanding U.S. Bond Market Debt as of 30 September 2016 $16,000 $14,000 $12,000 $13, $10,000 $8, $8, $8,000 $6,000 $4,000 $2,000 $3, $1, $2, $1, $0 Municipal Treasury Mortgage Related Corporate Debt Federal Agency Money Markets Asset-Backed Source: Wilmington Trust Investment Advisors, Inc., SIFMA, Federal Reserve System Figures are derived from a survey conducted by Thomson Reuters Municipal Market Data of approximately 600 buy-side and sell-side firms. It is distributed on Thursday mornings and results are reported on Friday afternoons. The 1-week and 1-2 month reports are forward-looking. The survey is unscientific in the sense that the selections of Bull, Bear, and Neutral, or Heavy, Moderate, and Light are not defined in the survey itself by specific parameters, but are left to the respondents subjective opinions as to the definition of those alternative definitions. Page 21 of 25

22 U.S. Municipal Securities ( in $ Billions) Figure 37 Holders of U.S. Municipal Securities as of 30 September 2016 (in $ Billions) $1,800 $1,600 $1,400 $1,200 $1, $1,000 $ $800 $600 $ $ $400 $200 $0 Individuals Mutual Funds Banking Institutions Insurance Companies $ Other Source: Wilmington Trust Investment Advisors, Inc., SIFMA, Federal Reserve System Figure 38 Holders of U.S. Municipal Securities as of 30 September 2016 ( in %) 4.23% 14.50% Individuals 41.54% Mutual Funds 14.81% Banking Institutions Insurance Companies Other 24.91% Source: Wilmington Trust Investment Advisors, Inc., SIFMA, Federal Reserve System Notes for Figures 37 & 38: Mutual Funds include mutual funds, money market funds, closed-end funds and exchange traded funds. Banking Institutions includes U.S., banks in U.S. affiliated areas, credit unions, and broker dealers. Insurance Companies include property-casualty and life insurance companies. Other includes nonfinancial corporate business, nonfinancial non-corporate business, state and local governments and retirement funds, government-sponsored enterprises and foreign holders. Page 22 of 25

23 Selected S&P Municipal Bond Indices Annualized Returns and Volatility Index Name 1 Year 3 Year 5 Year 10 Year 3-Year Annualized Standard Deviation 5-Year Annualized Standard Deviation 10-Year Annualized Standard Deviation Municipal Bond Index +0.77% +4.39% +3.56% +4.20% 3.29% 3.74% 4.72% Investment Grade Index +0.46% +4.17% +3.32% +4.17% 3.25% 3.69% 4.65% Intermediate Index +0.16% +3.43% +2.91% +4.43% 3.30% 3.43% 4.10% Short Intermediate Index +0.05% +1.67% +1.69% +3.34% 1.94% 1.86% 2.42% Short Index +0.37% +0.76% +0.95% +2.34% 0.83% 0.73% 1.29% High Yield Index +4.93% +7.34% +7.06% +4.59% 4.91% 5.43% 8.61% California Index +0.27% +4.89% +4.28% +4.52% 3.68% 4.11% 5.28% New York Index +0.56% +4.25% +3.43% +4.21% 3.17% 3.52% 4.42% Puerto Rico Index % +4.60% -1.32% +1.47% 10.18% 10.53% 9.21% Source: W ilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc Returns & Statistics are as of 31 December 2016 Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results The S&P Municipal Bond Index is a broad, market value-weighted index that seeks to measure the performance of the U.S. municipal bond market. It tracks fixed-rate bonds exempt from federal income tax, though they may be subject to the alternative minimum tax (AMT), with par outstanding of at least $2 million. The index includes bonds of all quality ratings from AAA to nonrated, including defaulted bonds and from all sectors of the bond market. The S&P Municipal Bond Index constituents undergo a monthly review and rebalancing. The S&P Municipal Bond Investment Grade Index consists of bonds in the S&P Municipal Bond Index that are rated at least BBB- by Standard & Poor s, Baa3 by Moody s or BBB- by Fitch Ratings. For the avoidance of doubt, the lowest rating is used in determining if a bond is eligible for the Index. S&P Dow Jones Indices looks at the long term rating, either insured or uninsured, and the underlying rating for index inclusion. All bonds must also have a minimum maturity of three years and a maximum maturity of up to, but not including, fifteen years as measured from the rebalancing date. The S&P Municipal Bond Intermediate Index consists of bonds in the S&P Muni Bond Index with a minimum maturity of three years and a maximum maturity of up to, but not including, 15 years as measured from the rebalancing date. The S&P Municipal Bond Short Intermediate Index consists of bonds in the S&P Muni Bond Index with a minimum maturity of 1 year and a maximum maturity of up to, but not including, eight years as measured from the rebalancing date. The S&P Municipal Bond Short Index consists of bonds in the S&P Municipal Bond Index with a minimum maturity of six months and a maximum maturity of up to, but not including, four years as measured from the rebalancing date. The S&P Municipal Bond High-Yield Index consists of bonds in the S&P Municipal Bond Index that are not rated or whose ratings are less than or equal to BB+ by Standard & Poor s, Ba1 by Moody s or BB+ by Fitch Ratings. Bonds that are prerefunded or escrowed to maturity are not included in this index. The lowest long-term underlying rating, either insured or uninsured, is used in determining if a bond is eligible for the Index. The State level municipal bond sub-indices consists of bonds in the S&P Municipal Bond Index that have been issued by municipalities or municipal authorities within the respective states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. States and municipalities may have issues across the duration and quality spectrums or may be more concentrated to certain sub-indices, such as in the S&P Investment Grade or High Yield bond indices. For example, the S&P Municipal Bond Puerto Rico Index consists of bonds in the S&P Municipal Bond Index issued by the Commonwealth of Puerto Rico, and municipalities and municipal authorities within the Commonwealth. Individually these entities may have issues across the duration and quality spectra; however, as a general matter they have been increasingly concentrated in the S&P High Yield Bond Index. The Securities Industry and Financial Markets Association Municipal (SIFMA) Swap Index is designed to reflect activity in high-grade, weekly-reset Variable Rate Demand Notes (VRDN). It represents the average reset rate of qualifying VRDNs, subject to exclusions to ensure diversity of market participants and exclusion of outlier events that may skew an equal weighted index. In Page 23 of 25

24 order for an issue to qualify for inclusion in the index a VRDN must have an outstanding amount over $10 million, reset weekly, pay interest monthly, have the highest short-term rating from S&P or Moody s, and may not be subject to the Alternative Minimum Tax. Beginning 2014, VRDNs also must be reported to the Municipal Securities Rulemaking Board. The Index excludes reset rates falling outside +/- 1 standard deviation (i.e., ignores the top 16.7% and bottom 16.7%) of reported rates and can include only one quote per issuer through a given remarketing agent, and each agent is limited to no more than 15% of the number of securities in the index. Designed and overseen by SIFMA, the Index is calculated and published by Bloomberg. Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs, which would reduce returns. Disclosures Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management and other services. Wilmington Trust Investment Advisers, Inc., a subsidiary of M&T Bank, is a SEC-registered investment adviser providing investment management services to Wilmington Trust and M&T affiliates and clients. Brokerage services, mutual funds services and other securities are offered by M&T Securities, Inc., a registered broker/dealer, wholly owned subsidiary of M&T Bank, and member of the FINRA and SIPC. Wilmington Funds are entities separate and apart from Wilmington Trust, M&T Bank, and M&T Securities. These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports. Investment products are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by Wilmington Trust, M&T, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. The information in this commentary has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer, recommendation or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor s objectives, financial situation and particular needs. The investments or investment strategies discussed herein may not be suitable for every investor. There is no assurance that any investment strategy will be successful. Past performance is no guarantee of future results. Horizon & Scenario Analysis: The purpose of the Horizon & Scenario Analysis is to provide a sense of possible return outcomes, across a select group of indices with distinct average durations, for given changes in yield over a specific time period. This exercise applies parallel shifts in the yield curve to the interest rate sensitivity of bonds of various maturities, reflected by their average effective duration, to project price impacts and assess the effect of interest rate changes on total return expectations. Effective duration is an estimate of the price change in a security for a given a change in market yield. For example, a bond with a duration of 4 years implies that for a 0.25% (25bps) increase in market yield, the value of the bond would be expected to change - 1%. If the yield change were -0.25%, then the expected change in value would be 1%. The effective duration is thus applied in the projection to the various maturity points along the yield curve. While the yield curve can shift in a broad variety of ways steepening, flattening, twisting, etc. we limit our movements to parallel shifts. That is, each maturity on the curve is shifted by the same amount. Expected impacts to total return are provided, as well as three components: price return, yield return, and roll return. The larger the size of a scenario s yield shift, the more pronounced the price change, upward or downward. Meanwhile interest, based on yield-to-worst and incorporating amortization, is accrued daily and assumes the changes to market rates thus yield return gradually reflects the effect of higher or lower market rates as proceeds are reinvested. The roll component reflects bonds changing outstanding maturities, and corresponding shift down the yield curve, and is presumed to remain constant across scenarios. The roll down the yield curve (i.e., toward maturity) will produce a positive contribution to total return if the yield curve is upward sloping (i.e., normal ), and a negative contribution if the curve is downward sloping. This material is intended to illustrate potential total return effects across a range of yield environments and investment horizons and, further, to demonstrate the risks of investing in various ranges along the yield curve, commonly represented by the effective duration measure. Slope Analysis: The slope of the yield curve measures the rate gap between two points in the yield curve representing shorterand longer-term yields. A low slope indicates a flat yield curve, where shorter- and longer-term rates are close to each other. The slope increases as the yield curve steepens, due to rising long rates and/or falling short rates, reflecting the higher gap between the yields of shorter and longer maturity bonds. In our slope analysis, we plot the trailing 40-day moving average of the slopes of the short v. long bond (1-30 year) and the intermediate range (2-10 year). We also plot +/- 2 standard deviation of the 40 trailing Page 24 of 25

25 daily slopes the trio are commonly referred to as Bollinger bands to offer context to the moving average in light of the overall volatility of changes in the slope. Together, this is intended to indicate current steepness of the yield curve relative to recent trends. Municipal bonds typically provide a lower yield than comparable taxable bonds in consideration of the tax-advantaged status of the interest payments from these bonds, which are exempt from federal taxes and may be exempt from applicable state and/or local taxes in the states and/or municipalities where they were issued. Capital gains do not share this tax advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. The Alternative Minimum Tax may negate some or all of the tax benefits available through municipal securities. Quality ratings are used to evaluate the likelihood of default by a bond issuer. Independent rating agencies, such as Standard & Poor's and Moody's Investors Service, analyze the financial strength of each bond's issuer. Moody's ratings range from Aaa (highest quality) to C (lowest quality). Bonds rated Baa3 and better are considered "Investment Grade". Bonds rated Ba1 and below are "Speculative Grade" (also High Yield ). Similarly, Standard & Poor's ratings range from AAA to D. Bonds rated BBBand better are considered "Investment Grade" and bonds rated BB+ and below are "Speculative Grade". All investments carry some degree of risk. This report uses return volatility, as measured by standard deviation, as a proxy for risk. Volatility serves as a collective, quantitative estimate of risks present to varying degrees across securities and asset classes (e.g., liquidity, credit and default risks). Certain types of risk may be underrepresented by this measure. Investors should develop a thorough understanding of the risks of any investment prior to committing funds. Third party trademarks and brands are the property of their respective owners. Page 25 of 25