Municipal Fixed Income

Transcription

1 Municipal Fixed Income WEEKLY MARKET REVIEW 30 June 2017 Robert Collins Head of Municipal Fixed Income MUNICIPAL RESEARCH Stephen Winterstein problems 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 Stephen Winterstein Managing Director of Research & Chief Municipal Strategist Key Themes for the Upcoming Week Domestic equity markets fell last week, with technology and utilities getting the worst of it. Financials surged as a result of the Fed s stress tests. International markets fared much better, as the MSCI Europe, Australasia, and Far East (EAFE) and Emerging Markets (EM) Indices advanced. There were selloffs and higher yields in worldwide fixed income markets last week. Comments from Mark Carney (Bank of England) and Mario Draghi (European Central Bank) in particular drove interest rates in the UK and Europe to three-month highs. Their remarks were viewed as hawkish. We think the ECB will try in the ensuing six months to communicate their next steps of tapering asset purchases in 2018, without causing a taper tantrum like happened in the U.S. in As of this writing, Illinois has still failed to pass a budget for the third consecutive fiscal year, and risks becoming downgraded by at least one ratings agency to junk (high yield or speculative grade; see disclosure end notes) status. Meanwhile, both New Jersey and Maine were unsuccessful in approving budgets, which may well result in either full or partial government shutdowns. Although municipal market professionals are closely watching as these news stories unfold, with the July 4 th holiday splitting the week and falling on Tuesday, municipal market activity should be quiet. We think little significance could be drawn from a potential shift in the yield curve over the upcoming week because of the expected lack of depth and breadth in the municipal market. PORTFOLIO MGMT & TRADING Rebecca Rogers Director of Trading & Portfolio Management RRogers@WilmingtonTrust.com Maureen Lawrence Senior Trader MLawrence@WilmingtonTrust.com John Malloy Senior Portfolio Manager JMalloy@WilmingtonTrust.com Core narrative: next week should be extremely quiet due to the July 4 th holiday. In view of the current supply-demand equilibrium, it seems to us that a scarcity of new issuance weighs in favor of a sideways market over the upcoming four trading days. We think one wild card is the negative news regarding several states failure to approve budgets for the upcoming fiscal year. More specifically, Illinois legislative gridlock could prompt at least one of the ratings agencies to cut the state s General Obligation debt to below investment grade. If retail investors react negatively to such an action, we could see fund flows turn negative next week, inducing another week of negative market returns. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 1 of 38

2 The Economy and the Fed In order to provide a framework for last week s municipal fixed income market performance, we include several observations from Wilmington Trust Investment Advisors economics team, led by chief economist Luke Tilley. The Federal Reserve announced the results of the Comprehensive Capital Analysis and Review (CCAR) or Stress Tests of the nation s largest banks. All thirty-four banks passed the examination for the first time ever. Domestic equity markets fell last week, with technology and utilities getting the worst of it. Financials surged as a result of the Fed s stress tests (see below). International markets fared much better, as the MSCI EAFE and EM Indexes advanced. There were selloffs and higher yields in worldwide fixed income markets last week. Comments from Mark Carney (Bank of England) and Mario Draghi (European Central Bank) in particular drove interest rates in the UK and Europe to three-month highs. Their remarks were viewed as hawkish. We think the ECB will try in the ensuing six months to communicate their next steps of tapering asset purchases in 2018, without causing a taper tantrum like happened in the U.S. in The Federal Reserve announced the results of the Comprehensive Capital Analysis and Review (CCAR) or Stress Tests of the nation s largest banks. All thirty-four banks passed the examination for the first time ever. Passage allows banks to return capital to shareholders via buybacks and dividends, which were announced alongside the results. Yield Curve By 11:44AM EDT on Monday, 26 June, the benchmark 10-year U.S. Treasury (UST) note drew a 2.120% yield, its lowest of the week. That level was 2 basis points (bps) under the previous Friday s close of 2.142%. By the finish of trading on that day, the ICE AAA Municipal Yield Curve was unchanged out to the 9-year maturity. High-grade interest rates fell by 1bp from the 9- to 13-year point, beyond which they fell by 2bps. By the end of the week, the benchmark 10-year UST was trading at a 2.304% yield, up 16bps from the previous Friday s close. Tuesday was characterized by a reversal from Monday s rally, and the 10-year U.S. Treasury yield began its four-day upward trek. By the close of trading on the 27 th of June, the ICE AAA Municipal Curve shifted higher by 2 to 4bps across most of the term structure. Then, on Wednesday, conditions worsened with yet another upward swing of between 2bps on the short end of the curve and 5bps at the long end. Thursday marked the third consecutive day of elevated tax-exempt interest rates, as the curve moved up by another 5 to 8bps at most maturity points. By the end of the week, the benchmark 10-year UST was trading at a 2.304% yield, up 16bps from the previous Friday s close. The ICE AAA Municipal Yield Curve finished the past five trading days with the 6-month maturity higher by 6bps. The 1-, 2-, and 3-year points were weaker by 8, 11, and 10bps, respectively. The 5-year maturity moved up 12bps, while the 7- and 10-year spots were each higher by 14bps. The 30-year yield moved up by 11bps to end the week drawing a 2.790% yield. page 2 of 38

3 With the July 4th holiday splitting the week and falling on Tuesday, municipal market activity should be quiet. Both the UST and high-grade municipal curves shifted markedly higher last week, as tax-exempt bonds were weaker than their corresponding USTs inside of the 5- year maturity. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index yield reset 4bps higher at 0.910% (Fig. 3). That 7-day rate was raised for the third consecutive week after having fallen six of the past nine weeks, and is only 1bp off of its multi-year peak of 0.920%, which occurred on 19 April Overlooking the 6-month point, last week s adjustments in tax-exempt rates steepened the ICE AAA Municipal Yield Curve by 3bps, front to back, growing the difference between the 1- and 30-year yields to 187bps, from 184bps the previous Friday (Fig. 6). At 187bps, the slope of the high-grade municipal yield curve is just off of its 180-day low of 182bps, and 23bps below its 210bp average for that same period (Fig. 7). The spread between the 2- and 10-year expanded by 3bps, as well and closed at 93bps on Friday, also only a few basis points higher than the flattest level that portion of the curve has been in the past six months (Figs. 8 and 9). As of this writing, Illinois has still failed to pass a budget for the third consecutive fiscal year, and risks becoming downgraded by at least one ratings agency to junk status. Meanwhile, both New Jersey and Maine were unsuccessful in approving budgets, which may well result in either full or partial government shutdowns. Although municipal market professionals are closely watching as these news stories unfold, with the July 4 th holiday splitting the week and falling on Tuesday, municipal market activity should be quiet. We think little significance could be drawn from a potential shift in the yield curve over the upcoming week because of the expected lack of depth and breadth in the municipal market. Municipal-to-US Treasury (M/UST) Yield Ratios Both the UST and high-grade municipal curves shifted markedly higher last week, as tax-exempt bonds were weaker than their corresponding USTs inside of the 5- year maturity. On the other hand, UST yields outpaced high-grade municipal bonds to the upside from the 5-year point and out the curve. The 1-year M/UST gapped up ratios on the week, to close at %, while the 2-year M/UST grew by ratios to end Friday at %, up from the prior print of % (Fig. 21). The 5-year M/UST finished at %, increasing by ratios from the previous week s %. Despite the fact that the 10-year UST yield moved up by 15.6bps, while the AAA municipal edged higher by 14bps, the M/UST still added a miniscule ratios to close the past five trading days at % versus the earlier print of % on the 23 rd of June. We note that with the UST 10-year yield increasing by more than the 10-year ICA AAA Municipal yield, one would expect the M/UST ratio to decline at that point on the curve. However, with such a similar directional and absolute movement in yields between two securities whose beginning yields are in close proximity with each other, the ratio change can occasionally deliver a counterintuitive result. Finally, the 30-year M/UST ended ratios lower than last week s figure, to finish at %. page 3 of 38

4 With a % return, the S&P Municipal Bond Index made its worst showing in eighteen weeks, when that same benchmark produced % for the five trading days ending 3 March. AA Municipal-to-AA Corporate (AAM/AAC) Yield Ratios Yield ratios for AA municipal bond and senior unsecured AA corporate bonds grew last week. The 1-year AAM/AAC closed the week at %, ratios higher than the preceding Friday s % (Fig. 28). The 2-year measure soared by ratios to end the last five trading days at %. The 5-year printed %, an increase of ratios from the prior week s % on the 23 rd of June, and the 10-year was greater, printing up ratios at %. The 30- year AAM/AAC added ratios to last week s %, to close on Friday at %. Market performance Municipal market performance was decidedly negative last week, with returns for all the indices on which we report ending in the red. With a % return, the S&P Municipal Bond Index made its worst showing in eighteen weeks, when that same benchmark produced % for the five trading days ending 3 March (Fig. 35). In fact, last week s display was enough to manufacture a negative return for the month. June printed a % performance, the worst such report since the November 2016 rout, when that broad-market benchmark returned %. While not nearly as dour as the one registered last autumn, June s performance was the first down month thus far in Even so, as of Friday evening s close, the S&P Municipal Bond Index still donned a % year-to-date return. The Intermediate, Short-Intermediate, and Short indices closed the week with total returns of %, %, and %, in that order. The California and New York indices finished under water with performances of % and %, respectively. The S&P Municipal Bond Puerto Rico Index served up a % total return, bringing its year-to-date number to %. At $ billion in deals, last month was the weakest June, in terms of new issuance, since 2014, when that same month delivered $ billion. Supply and demand New issuance for the forthcoming holiday-shortened week should approach $130 million, the lightest since the five trading days beginning 26 December 2016 and the third smallest slate since the week of 29 December 2014 (Fig. 49). As of Friday s close, year-to-date municipal bond issuance stood at $ billion, a $ billion or % shortfall compared to the same period ending 30 June 2016, when supply stood at $ billion (Fig. 48). At $ billion in deals, last month was the weakest June, in terms of new issuance, since 2014, when that same month delivered $ billion. We still contend that 2017 s scarcity of municipal supply has probably functioned as a support to prices, keeping yields somewhat suppressed. While supply for the first half of the year is % behind last year, we stand by our $400 billion estimate for We believe the year-over-year shortage will continue to serve as a constructive contribution to municipal market performance. page 4 of 38

5 The most recent report was still somewhat lean and typical of the most recent series of inflows since the beginning of the year. Switching to demand, on Wednesday, the Investment Company Institute (ICI) registered $840 million of net flows into municipal bond funds for the preceding five trading days ending 21 June (Fig. 50). The most recent report was still somewhat lean and typical of the latest series of inflows since the beginning of the year. As of Wednesday, the 12-week moving average stood at a positive $574 million. We are still troubled that the positive flow trend is fragile, and that putting together a string of negative market returns like the most recent one could reverse this fourteen week run. Nevertheless, twenty-three of the twenty-five weeks reported so far in 2017 have seen net inflows, with investors ploughing $ billion of capital into municipal bond mutual funds. On Thursday, the New York Federal Reserve reported that primary dealer firms municipal bond positions increased by a substantial $3.755 billion versus the previous week. The most recent report of $ billion for the five trading days ending the 21 st of June was materially higher than the prior $ billion reported for the 14 th of June (Fig. 52). Primary dealers largest positions are in maturities beyond 10 years with that category representing a full 51% of their collective municipal bond holdings, followed by variable rate demand notes (VRDNs), which constitute about 22%. Seeing the complete lack of supply and the likely trading inactivity over the upcoming holidayshortened week, the existing equilibrium will probably not be disrupted over the next four trading days. Seeing the complete lack of supply and the likely inactivity over the upcoming holiday-shortened week, the existing equilibrium will probably not be disrupted over the next four trading days. One force that could upset this balance is the negative news of the aforementioned budget problems in Illinois, New Jersey, and to a lesser degree, Maine. Even so, if the year-over-year deficit of new supply refuses to go away, we would likely remain constructive on the investment grade municipal market for the near term. Market Sentiment On Friday, the sell-side recorded a slightly more pessimistic outlook for the taxexempt bond market over the near-term horizon and moved marginally away from the neutral zone. For the 1-week view, Thomson Reuters Municipal Market Data noted that traders continued with no bullish vision, keeping that category at nil for the second week in a row (Fig. 53). The neutral group fell to 50%, down from 67% the prior week. The bearish crowd increased by 17%, printing 50% for the one-week outlook. Looking out 1-2 months, traders scored 0% under the bullish banner for the third consecutive week (Fig. 54). The neutral division captured all votes, and printed 100%, up from 83% in the previous survey. For the upcoming week, the buy-side was conspicuously absent from the bullish category, printing 0% for the second week (Fig. 55). The neutral group fell to 33%, down from 75% in the prior survey. The bearish set edged higher to 67%, up from 25% on the 23 rd of June. Buy-side investors remained over-weighted in the neutral category for the 1-2 month horizon. While the erstwhile analysis had 100% of contributors in that category, last week s version showed a reduction to 67%. The remainder of participants scored in the bearish slot, the first time they made a showing in four weeks (Fig. 56). page 5 of 38

6 The most recent assessment indicated that dealers were evenly split between heavy and medium inventories, coming in at 17% in each space (Fig. 57). Dealers have registered their inventories as heavy only eleven times in the past two years. In the most recent survey 66% of participants labeled their positions as medium. Core Narrative Next week should be extremely quiet due to the July 4 th holiday. In view of the current supply-demand equilibrium, it seems to us that a scarcity of new issuance weights in favor of a sideways market over the upcoming four trading days. We think one wild card is the negative news regarding several states failure to approve budgets for the upcoming fiscal year. More specifically, Illinois legislative gridlock could prompt at least one of the ratings agencies to cut the state s General Obligation debt to below investment grade. If retail investors react negatively to such an action, we could see fund flows turn negative next week, inducing another week of negative market returns. page 6 of 38

7 Yield (%) Figure 1 ICE AAA Municipal Yield Curve (in %) - Recent Trends Maturity Most Recent Last Week-End Last Month- End Last Year-End 6/30/17 6/23/17 5/31/17 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 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 6/30/17 6/23/17 5/31/17 6/30/16 Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., Investortools, Inc. page 7 of 38

8 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 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. page 8 of 38

9 Change (in bps) Figure 5 Change in the ICE 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, ICE Securities Evaluations, Inc., Investortools, Inc. page 9 of 38

10 Spread (in bps) Figure 6 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 7 ICE AAA Municipal 1yr - 30yr Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 6/5/2017 5/2/2017 3/13/2017 3/13/2017 Average Minimum Minimum Date 6/26/2017 6/26/2017 6/26/2017 7/6/2016 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 10 of 38

11 Spread (in bps) Figure 8 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 9 ICE AAA Municipal 2yr - 10yr Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 6/5/2017 4/3/2017 3/13/2017 3/13/2017 Average Minimum Minimum Date 6/26/2017 6/26/2017 6/26/2017 9/29/2016 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 11 of 38

12 Spread (in bps) Figure 10 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 11 ICE AAA Municipal 6mo - 4yr Short Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 6/29/2017 4/3/2017 3/13/ /2/2016 Average Minimum Minimum Date 6/7/2017 6/7/2017 6/7/ /3/2016 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 12 of 38

13 Spread (in bps) Figure 12 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 13 ICE AAA Municipal 1yr - 8yr Short Intermediate Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 6/30/2017 4/3/2017 3/13/2017 3/13/2017 Average Minimum Minimum Date 6/14/2017 6/14/2017 6/14/2017 9/29/2016 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 13 of 38

14 Spread (in bps) Figure 14 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 15 ICE AAA Municipal 3yr - 15yr Intermediate Slope (history for the period ending ) 30 days 90 days 180 days 360 days Last Maximum Maximum Date 6/5/2017 5/10/2017 3/9/2017 3/9/2017 Average Minimum Minimum Date 6/26/2017 6/26/ /30/2016 7/6/2016 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 14 of 38

15 Yield (%) Spread (in bps) Yield (%) Spread (in bps) Figure 16 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. Figure 17 S&P Municipal Bond High Yield vs. Investment Grade Indices : Month-end Historical Yields and Spread 8.00% % 6.00% 5.00% % % 2.00% 1.00% % 0 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. page 15 of 38

16 Yield (%) Spread (in bps) Yield (%) Spread (in bps) Figure 18 S&P Municipal Bond High Yield Ex-Puerto Rico vs. Investment Grade Indices : Month-end Historical Yields and Spread 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 ex-puerto Rico Index Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, ICE Securities Evaluations, Investortools, Inc. Figure 19 S&P Municipal Bond High Yield vs. High Yield Ex-Puerto Rico Indices : Month-end Historical Yields and Spread 8.00% 7.00% 6.00% 5.00% % 3.00% 2.00% 1.00% 0.00% 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. page 16 of 38

17 Yield (%) Spread (in bps) Figure 20 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. Figure 21 ICE AAA Municipal-to-US Treasury (M/UST) Yield Ratios Most Recent Last Week-End Last Month-End Last Year-End Maturity 6/30/2017 6/23/2017 5/31/ /31/ % % % % % % % % % % % % % % % % % % % % Source: W ilmington Trust Investment Advisors, ICE Securities Evaluations,Inc., Investortools, Inc. page 17 of 38

18 M/UST Ratio (in %) Ratio (%) Figure 22 ICE AAA Municipal-to-US Treasury Ratio 120% 110% 100% 90% 80% 70% 60% 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. Figure 23 1-Year AAA Municipal-to-US Treasury Ratio (as of ) 140% 120% 100% 80% 60% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. page 18 of 38

19 M/UST Ratio (in %) M/UST Ratio (in %) M/UST Ratio (in %) Figure 24 2-Year AAA Municipal-to-US Treasury Ratio (as of ) 110% 100% 90% 80% 70% 60% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. Figure 25 5-Year AAA Municipal-to-US Treasury Ratio (as of ) 100% 80% 60% 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% Trailing 30 Days Trailing 90 Days Trailing 180 days Average % % % Last % % % Maximum % % % Minimum % % % Source: Wilmington Trust Investment Advisors, ICE Securities Evaluations, Inc. page 19 of 38

20 M/UST Ratio (in %) 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. Figure 28 ICE AA Municipal-to-IHS Markit AA Corporate (AAM/AAC) Yield Ratios Most Recent Last Week-End Last Month-End Last Year-End Maturity 6/30/2017 6/23/2017 5/31/ /31/ % % % % % % % % % % % % % % % % % % % % Source: W ilmington Trust Investment Advisors, ICE Securities Evaluations, Inc., IHS M arkit page 20 of 38

21 AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) Figure 29 1-Year AA Municipal-to-AA Corporate Ratio (as of ) 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 30 2-Year AA Municipal-to-AA Corporate Ratio (as of ) 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 31 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) page 21 of 38

22 AAM/AAC Ratio (in %) AAM/AAC Ratio (in %) Figure Year AA Municipal-to-AA Corporate Ratio (as of ) 80% 70% 60% 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 22 of 38

23 Figure 34 Selected S&P Municipal Bond Index Totals & Averages as of Number Yieldto- Priced- of Market Value Maturity Priced-to to Date Effective Holdings (in $ billions) Coupon Worst Maturity (in yrs.) Date (in yrs.) Duration Municipal Bond 99,344 $ 1, /16/ /9/ Investment Grade 93,425 $ 1, /12/ /7/ Intermediate 53,212 $ /16/ /21/ Short Intermediate 43,815 $ /16/ /18/ Short 24,614 $ /14/ /19/ High Yield 5,919 $ /6/ /17/ High Yield Ex-Puerto Rico 5,400 $ /7/ /11/ California 17,294 $ /2/ /20/ New York 8,484 $ /19/ /23/ Puerto Rico 613 $ /27/ /23/ Source: W ilmington Trust Investment Advisors, Investortools, Inc., S&P Dow Jones Indices LLC, ICE Securities Evaluations, Inc. Figure 35 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 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. page 23 of 38

24 Total Return (%) State Rating S&P Municipal Bond Index Total Return Performance Attribution for the Week Ending (in %) Figure 36 Return of Top 10 States by Market Value (in %) Figure 37 Attribution by Lowest Rating (in %) CA NY AAA / Aaa TX FL IL AA / Aa A / A PA NJ BBB / Baa MA OH WA 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 38 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, ICE Securities Evaluations, Inc., LLC, Investortools, Inc.. page 24 of 38

25 Annualized Return (in %) Annualized Return (in %) Figure 39 S&P Municipal Index Trailing 3-Year Annualized Returns (for the period ending ) 9% 8% 7% 6% 5% 4% 3% 2% 1% High Yield Index Ex-Puerto Rico High Yield Index California Index Municipal Bond Index New York Index Intermediate Index Investment Grade Index Short Intermediate Index Puerto Rico Index Short Index 0% -1% -2% -3% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Figure 40 S&P Municipal Index Trailing 5-Year Annualized Returns (for the period ending ) 9% 8% 7% High Yield Index Ex-Puerto Rico 6% High Yield Index 5% 4% 3% New York Index Intermediate Index California Index Municipal Bond Index Investment Grade Index 2% 1% 0% Short Index Short Intermediate Index -1% -2% Puerto Rico Index -3% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. page 25 of 38

26 Annualized Return (in %) Figure 41 S&P Municipal Index Trailing 10-Year Annualized Returns (for the period ending ) 9% 8% 7% 6% 5% 4% 3% 2% Intermediate Index California Index High Yield Index New York Index Municipal Bond Index Investment Grade Index Short Intermediate Index Short Index Puerto Rico Index 1% 0% -1% -2% -3% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% Annualized Standard Deviation of Returns Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. page 26 of 38

27 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 42 Selected S&P Municipal Bond Index 1-Month Horizon & Scenario Analysis S&P Municipal Bond Intermediate Index (as of ) Maturity -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 43 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 %) % % % % % 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 44 Selected S&P Municipal Bond Index 1-Month Horizon & Scenario Analysis S&P Municipal Bond Short Index (as of ) Maturity -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 27 of 38

28 Figure 45 Selected S&P Municipal Bond Index 1-Year Horizon & Scenario Analysis S&P Municipal Bond Intermediate Index (as of ) Maturity -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 46 Selected S&P Municipal Bond Index 1-Year Horizon & Scenario Analysis S&P Municipal Bond Short Intermediate Index (as of ) Maturity -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 47 Selected S&P Municipal Bond Index 1-Year Horizon & Scenario Analysis S&P Municipal Bond Short Index (as of ) Maturity -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 28 of 38

29 Estimated New Issue Calendar (in $ millios) $105 $2,689 $130 $3,585 $3,445 $3,944 $6,103 $8,692 $7,588 $6,468 $5,826 $5,894 $4,602 $5,800 $5,142 $6,750 $5,766 $5,593 $4,495 $8,220 $7,788 $6,818 $5,829 $7,628 $6,554 $9,771 $9,486 $11, Municipal Supply (in $ billions) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Current YTD as a % of Previous YTD Figure 48 Total Annual and Year-to-Date Municipal Supply through $ % $ % 140% $ % $ % 80% $200 60% $100 40% 20% $- 0% YTD Through June (Left) Total Annual Supply (Left) Current YTD as a% of Previous YTD (Right) Source: WTIA Municipal Fixed Income, The Bond Buyer Figure 49 Estimated Weekly Municipal New Issue Calendar $18,000 $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 page 29 of 38

30 Par Value Volume (in $ billions) Estimated ETF Issuance (in $ millios) $(3,702) $(4,478) $(2,960) $(2,218) $(249) $1,587 $1,111 $620 $908 $961 $585 $238 $327 $41 $539 $495 $309 $352 $1,051 $697 $204 $596 $473 $606 $158 $1,114 $487 $840 Figure 50 Estimated Weekly Municipal Bond Mutual Fund Flow s (trailing 6 months) $5,000 $2,500 $- $(2,500) $(5,000) $(7,500) Long-Term Mutual Fund Flows 12-Week Moving Average Source: Wilmington Trust Investment Advisors, Inc., Investment Company Institute Figure 51 Daily Municipal Trade Volume (trailing 6 months in par value $ billions) $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $- Par Value Par Value 30-day Moving Average Source: Wilmington Trust Investment Advisors, Inc., Municipal Securities Rulemaking Board, Bloomberg LP page 30 of 38

31 Sentiment (in %) Yield (in %) Primary Dealer Positions (in $ millios) $23,830 $21,260 $19,565 $19,876 $20,317 $21,390 $19,112 $20,541 $20,292 $18,816 $17,597 $20,542 $21,870 $22,135 $21,738 $19,564 $20,637 $20,611 $19,577 $17,100 $17,851 $19,564 $19,177 $18,441 $18,864 $20,437 $24,192 Figure 52 Primary Dealer Municipal Bond Net Positions (in $ millions) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $- <= 13 Months > 13 Months <= 5 Years > 5 Years <= 10 Years > 10 Years VRDNs Source: Wilmington Trust Investment Advisors, Inc., Federal Reserve Bank of New York Figure 53 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, ICE Securities Evaluations, Inc. 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 31 of 38

32 Sentiment (in %) Yield (in %) Sentiment (in %) Yield (in %) Figure 54 MMD 1-2 Months Municipal Market Trader Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 ICE AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, ICE Securities Evaluations, Inc. Figure 55 MMD 1-Week Municipal Market Portfolio Manager Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 ICE AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, ICE Securities Evaluations, Inc. 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 32 of 38

33 Dealer Postions (in %) Yield (in %) Sentiment (in %) Yield (in %) Figure 56 MMD 1-2 Months Municipal Market Portfolio Manager Sentiment Survey 100% % 80% % 60% % % 30% % 10% % 1.25 ICE AAA 10-Year Municipal (Right) Bear (Left) Neutral (Left) Bull (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, ICE Securities Evaluations, Inc. Figure 57 MMD 1-Week Municipal Market Dealer Positions Survey 100% % 80% % 60% % % 30% % 10% % 1.25 ICE AAA 10-Year Municipal (Right) Light (Left) Medium (Left) Heavy (Left) Source: Wilmington Trust Investment Advisors, Inc., Thomson Reuters Municipal Market Data, ICE Securities Evaluations, Inc. 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 33 of 38

34 U.S. Municipal Securities ( in $ Billions) $ $ $ $ $ $ $ $ $1, $1, Est. Outstanding Debt (in $ Billions) $3, $1, $ $1, $3, $1, $ $1, $8, $8, $8, $8, $13, $13, Figure 58 Estimated Outstanding U.S. Bond Market Debt as of 31 December 2016 (year-over-year comparison in $ billions) $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Municipal Treasury Mortgage Related Corporate Debt Federal Agency Money Markets Asset-Backed 12/31/ /31/2015 Source: Wilmington Trust Investment Advisors, Inc., SIFMA, Federal Reserve System Figure 59 Holders of U.S. Municipal Securities as of 31 December 2016 (year-over-year comparison in $ billions) $2,500 $2,000 $1,500 $1,000 $500 $0 Individuals Mutual Funds Banking Institutions Insurance Companies 12/31/ /31/2015 Other Source: Wilmington Trust Investment Advisors, Inc., SIFMA, Federal Reserve System Notes for Figures 52 & 53: 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 34 of 38

35 Figure 60 Holders of U.S. Municipal Securities as of 31 December 2016 ( in %) 4.21% 14.20% Individuals 15.05% 42.89% Mutual Funds Banking Institutions Insurance Companies Other 23.65% Source: Wilmington Trust Investment Advisors, Inc., SIFMA, Federal Reserve System Notes for Figures 52 & 53: 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 35 of 38

36 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 % % % % 3.052% 3.605% 4.707% Investment Grade Index % % % % 3.033% 3.553% 4.636% Intermediate Index % % % % 3.185% 3.360% 4.104% Short Intermediate Index % % % % 1.907% 1.868% 2.430% Short Index % % % % 0.876% 0.765% 1.293% High Yield Index % % % % 4.438% 5.286% 8.624% High Yield Index Ex-Puerto Rico % % % N/A 3.971% 4.885% N/A California Index % % % % 3.406% 3.946% 5.271% New York Index % % % % 2.993% 3.437% 4.415% Puerto Rico Index % % % % 9.958% % 9.497% Source: W ilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc. Returns & Statistics are as of 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 non-rated, 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 S&P Municipal Bond High Yield Index Ex-Puerto Rico 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, excluding bond issued within the Commonwealth of Puerto Rico. 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. page 36 of 38