Municipal Fixed Income

Transcription

1 Municipal Fixed Income WEEKLY MARKET REVIEW 06 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 The municipal market entered the New Year with a calmer tone, but with only four trading days behind us in 2017, investors should not be lulled into complacency. With speculation surrounding the new U.S. Presidential administration and looming potential for tax-reform in the headlines, be prepared for a near-term skip in either direction. We believe there may well be three primary catalysts driving changes in M/USTs over the ensuing week: volatility of UST yields, news headlines associated with tax-reform as it relates municipal bonds, and unfunded pension problems. In the 16 December edition of this publication, we wrote that we expected the municipal bond market to wrap up 2016 with a flat to slightly negative trailing 12-month return. Albeit slightly on the other side of our prediction, the firmness in the final two weeks put the 1-year total return for the S&P Municipal Bond Index at %. While we ended last week with a more positive air, it shouldn t be surprising to readers that we still see the same potential yield curve impetuses driving broader municipal market performance. Going back to 1986, January has typically been the lightest month for supply, averaging only 6% of annual issuance. This week s $8.692 calendar is stronger than the $7.172 billion for the same week last year, and may herald an abnormally heavy-duty January. Look for our 2017 new issuance forecast in our 4Q2016 Municipal Fixed Income Commentary. John Malloy Senior Portfolio Manager JMalloy@WilmingtonTrust.com Please direct comments or questions to: Leslie Varrelman Fixed Income Product Specialist LVarrelman@WimingtonTrust.com Investment grade municipal bond mutual fund flows can be in response to changing yields and their effect on shares net asset values. As performance of the municipal market has steadied, we remain optimistic that fund outflows could slow, and perhaps yet turn positive in the near future. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. Page 1 of 23

2 the final weeks of the year witnessed a muchawaited pause and then a turnaround that spilt into January Yield curve Coming into December, the municipal bond market was in the throes of what seemed to be the beginning stage of a secular, non-stop freefall, with tax-exempt interest rates almost continually moving higher across the term structure. But the final weeks of the year witnessed a much-awaited pause and then a turnaround that spilt into January. Last week, the S&P AAA Municipal Yield Curve sank across the term structure, as the 6- month and 1-year points decreased by 3 and 2 basis points (bps), respectively (Figs. 1 & 2). The 3-, 5-, and 7-year maturities declined by 6, 8, and 9bps, in that order, while the yield on the 10-year dropped by 7bps. The 30-year point of the curve showed some strength as well, as the yield at that spot fell by 6bps. For the second week in a row, the SIFMA Municipal Swap Index s yield waned. Last Wednesday s print was 0.68%, a 4bp reduction from the previous week s 0.72% (Fig. 3). Last week s dip in yields flattened the S&P AAA Municipal Yield Curve by 4bps, front to back, lowering the difference between the 1-year and 30-year yields to 203bps, down from 207bps the previous week (Fig. 6). At the same time, the spread between 2-year and 10-year slid down 2bps to 106bps on Friday (Fig. 7). The municipal market entered the New Year with a calmer tone, but with only four trading days behind us in 2017, market participants should not be lulled into complacency. With speculation surrounding the new U.S. Presidential administration taking charge later this month and looming potential for tax-reform in the headlines, we believe investors should be prepared for a near-term skip in either direction. Municipal-to-US Treasury (M/UST) Yield Ratios The latest rally saw municipal bonds outpace many of their corresponding US Treasuries at key maturities. The 1-year M/UST printed %, down from the previous Friday s % (Fig. 14). The 2-year M/UST closed at %, ratios lower than the last week s %. The 5-year closed Friday at %, falling ratios from the previous week s %. The 10-year M/UST finished at %, down a full ratios from %. Finally, the 30-year ratio dropped a mere ratios to end the week almost flat at %. Municipal bond investors can be slower than their US Treasury counterparts to respond to changes in market tone and direction Municipal bond investors can be slower than their US Treasury counterparts in responding to changes in market tone and direction. For this reason, ratio changes can often be driven by a dramatic shift in the US Treasury curve, while the municipal curve s fluctuations are typically less pronounced. Contrary to this, last week s M/UST ratio movements inside the 12-year maturity were largely driven by two phenomena: a more prominent shift in municipal yields relative to corresponding US Treasury yields and, at three points along the term structure, these two curves moved in opposite direction (Fig. 5). The S&P AAA Municipal curve s fall outpaced the US Treasury curve s by between 3 and 8bps in the 5- to12-year maturity range. Moreover, the yield of the S&P AAA Municipal curve moved down 5bps at the 2-year maturity, while the yield at the same point on the US Treasury Curve actually rose by 2bps. Similar counter shifts took place at the 3- and 4-year points. Some of this behavior may have been due to a year-end drop in municipal new issuance supply and healthy demand in the short part of the curve, despite the comparative softness in the 2- and 3-year UST. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. page 2 of 23

3 We believe there may well be three primary catalysts driving changes in M/USTs over the ensuing week: volatility of UST yields, news headlines associated with tax-reform as it relates municipal bonds, and unfunded pension problems. The tax-exempt municipal market started the New Year with a decidedly positive pitch, as the S&P Municipal Bond Index returned an encouraging % Market performance The tax-exempt municipal market started the New Year with a decidedly positive pitch, as the S&P Municipal Bond Index returned an encouraging % (Fig. 17). The Intermediate, Short Intermediate, and Short indices finished the week delivering performances of %, %, and %, in that order. Meanwhile, the S&P Municipal Bond High Yield Index provided a constructive % total return. Shadowing the leaning of the broad market benchmark, the California and New York indices closed up with % and , correspondingly. Likewise, the Puerto Rico Index ended on dry ground with a one-week return of %. In the 16 December edition of this publication, we wrote that we expected the municipal bond market to wrap up 2016 with a flat to slightly negative trailing 12-month return. Albeit slightly on the other side of our prediction, the firmness in the final two weeks put the 1-year total return for the S&P Municipal Bond Index at %. While we ended last week with a more positive air, it shouldn t be surprising to readers that we still see the same potential yield curve impetuses driving broader municipal market performance. Nevertheless, last week marked the ninth consecutive week that investors made net withdrawals from tax-exempt municipal bond funds, totaling $ billion. The Taper Tantrum prompted investors to drain municipal bond funds of $ billion over 33 weeks, from 29 May 2013 through 8 January 2014 Supply and demand As we suggested beforehand, supply in the final weeks of December did indeed dwindle to trace amounts, and while the last four trading days produced a predictably light $2.689 billion in new municipal bond deals, this upcoming week appears to be ramping up quite nicely. The week of 9 January should give investors about $8.692 billion in new issuance, the strongest week since that of the 5 th of December (Fig 25). Going back to 1986, January has typically been the lightest month for supply, averaging only 6% of annual issuance. This week s $8.692 calendar is stronger than the $7.172 billion for the same week last year, and may herald an abnormally heavy-duty January. Looking at demand, despite the municipal market s quietening in the final weeks of the year, outflows persisted. The Investment Company Institute reported substantial municipal bond fund net outflows of $3.684, $4.467, and $2.961 billion for the final three weeks of December, respectively (Fig. 26). Investment grade municipal bond mutual fund flows can be in response to changing yields and their effect on shares net asset values. As performance of the municipal market has steadied, we remain optimistic that fund outflows could slow, and perhaps yet turn positive in the near future. Nevertheless, last week marked the ninth consecutive week that investors made net withdrawals from tax-exempt municipal bond funds, totaling $ billion. To put this figure into perspective, The Taper Tantrum prompted investors to drain municipal bond funds of $ billion over 33 weeks, from 29 May 2013 through 8 January Thus far in the current episode, investors have accomplished almost 40% of that feat in a tad more than a quarter of the time. Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. page 3 of 23

4 Market Sentiment Thomson Reuters did not conduct their survey for the weeks ending 23 and 30 December. On Friday, they reported that traders became considerably more upbeat for the week ahead, whilst they were somewhat more reserved for 1-2 months ahead. For the 1-week outlook, the bearish category registered 14%, up from 11% three weeks ago (Fig. 28). The neutral respondents dropped off to 29% for the same period, versus 67% in the last report. A full 57% of Traders reported a bullish 1-week outlook, up from only 22% on the 16 th of December. Looking out 1-2 months, traders recorded their bearish responses at 14% the previous report printed 11% (Fig. 29). The neutral category for the 1-2 month outlook fetched 71% versus the prior print of 44%. Longer term, bullish traders fell to a mere 15% versus the former account of 45%. The buy-side shifted to a more positive posture for their 1-week outlook (Fig. 30). Thomson Reuters reported that no portfolio managers were bearish for the near term, as opposed to 38% in the previous report. The neutral category remained unchanged at 50%, and the bullish group printed 50%, versus 12% on the prior survey. Longer term, portfolio managers were more neutral for the 1-2 month horizon (Fig. 31). Bearish managers disappeared altogether, whereas they stood at 37% on 16 December. The neutral group weighed in at a sturdy 67%, up from 38%. The buy-side increased its bullish responses for the longer term to 33%, up from 25%. Precisely as they did in the last report, dealer firms reported 0% heavy positions, whilst the medium category tumbled to 29%, from 50% in the previous survey. Those who reported light inventories jumped to 71%, up from 50% (Fig. 32). Investing involves risks and you may incur a profit or a loss. Past performance is no guarantee of future results. page 4 of 23

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 1/6/17 12/30/16 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 ilmingt on Trust Invest ment Advisors, S&P Dow Jones Indices, LLC, Invest ort ools, Inc Figure 2 S&P AAA Municipal Yield Curve : Year-Over-Year Comparison Maturity 1/6/17 12/30/16 12/6/16 1/6/16 Source: Wilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc page 5 of 23

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 23

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 23

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 23

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 23

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 23

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 1/6/ /30/ /30/ /31/ % % % % % % % % % % % % % % % % % % % % Source: W ilmington Trust Investment Advisors, S&P Dow Jones Indices, LLC, Investortools, Inc page 11 of 23

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/ /24/ Investment Grade 91,281 $ 1, /26/ /30/ Intermediate 51,722 $ /3/ /6/ Short Intermediate 42,726 $ /17/ /23/ Short 26,065 $ /19/ /27/ High Yield 5,845 $ /29/ /29/ California 16,599 $ /23/ /19/ New York 8,390 $ /16/ /8/ Puerto Rico 618 $ /27/ /27/ 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 23

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 23

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 23

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 23

16 Estimated New Issue Calendar (in $ millios) $- $468 $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 $12,468 $13,815 $13,191 $13, Municipal Supply (in $ billions) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Current YTD as a % of Previous YTD Figure 24 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 25 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 16 of 23

17 Par Value Volume (in $ billions) $(4,451) $(2,402) $(3,511) $(4,289) $(3,684) $(4,467) Net Flow s (in $ millions) $(2,961) $(70) $(132) $1,176 $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 26 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 27 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 17 of 23

18 Sentiment (in %) Yield (in %) Sentiment (in %) Yield (in %) Figure 28 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 29 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 18 of 23

19 Sentiment (in %) Yield (in %) Sentiment (in %) Yield (in %) Figure 30 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 31 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 19 of 23

20 Est. Outstanding Debt (in $ Billions) Dealer Postions (in %) Yield (in %) Figure 32 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 33 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 20 of 23

21 U.S. Municipal Securities ( in $ Billions) Figure 34 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 35 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 34 & 35: 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 21 of 23

22 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 highgrade, 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 22 of 23

23 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. Investment management and fiduciary services are provided by Wilmington Trust Company, operated in Delaware only; Wilmington Trust, N.A., a national bank; and Manufacturers and Traders Trust Company (M&T Bank), member FDIC. 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. 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 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 23 of 23