Looking at a Variety of Municipal Valuation Metrics Muni vs. Treasuries, Corporates YEAR MUNI - TREASURY RATIO YEAR MUNI - CORPORATE RATIO 200% 80% 175% 150% 75% 70% 65% 125% Average Ratio 0% 75% 50% 60% 55% 50% 45% Munis are getting cheaper vs. corporates 40% Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct- Oct- Muni vs. Core CPI, Conventional Mortgage Rates 7.00 20 YEAR MUNI - CORE CPI YOY SPREAD 21 HISTORICAL 30 YEAR MUNI, MORTGAGE RATES 6.00 18 5.00 4.00 3.00 Average Difference 15 12 Munis are moving away from extreme cheapness 2.00 9 1.00 6 0.00-1.00 3 Muni vs. S&P 500 Dividend Yield 20 YEAR MUNI - S&P500 DIVIDEND RATIO 525% 475% 425% 375% 325% 275% 225% 175% 125% Source: Bloomberg 75% 1
20-year AAA Muni Yield Minus CPI (Ex Food and Energy) When yields are wide relative to inflation, tax-exempt yields fall The spread between 20-year tax-exempts and core CPI has been a reliable indicator of value. Source: Bloomberg 2
Monthly Municipal Supply Build America Bonds are taking approximately 25% of the tax-exempt market away all in the long end New Issue Volume 50 50% 45 45% 40 40% ($ Billion) 35 30 25 20 15 5 BABs Total Volume excluding BABs BABs/Total 35% 30% 25% 20% 15% % 5% l BABs as a % of Total 0 0% Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Source: Bloomberg 3
Tax-exempt Credit Spreads: AAA to A Credit spreads remain very wide compared to the pre-crisis norm 140 30-yr spread bewteen A Rated and AAA Rated G.O.'s 120 0 80 60 40 20 0 1/1/06 /7/06 7/13/07 4/17/08 1/21/ /27/ 8/2/ Source: MMD 4
What to Expect if Bush Tax Cuts Expire The Bush tax cuts (from legislation enacted in 2001 and 2003) are expected to expire December 31, 20 Specific changes include the following (if all tax cuts expire): Existing % bracket will expire Lowest new bracket will be 15% Existing 25% bracket will rise to 28% Existing 28% bracket will rise to 31% Existing 33% bracket will rise to 36% Existing 35% bracket will rise to 39.6% Maximum long-term capital gains rate will increase from 15% to 20% (or 18% on gains from assets held for over 5 years) Qualified dividends will once again be taxed at ordinary income rates (max rate of 39.6%) Increase in taxable equivalent yield Currently, if a muni bond pays 7% and you re in the 2011: Tax bracket increases to 31% 28% tax bracket, your taxable Taxable equivalent yield: 9.7%.14% equivalent yield = 9.7% 5
Ratios Chart Tax-exempt yield ratios have room to fall more The average from 1997 to 2007 was 92.7% 220% 200% 180% 160% 3 YEAR HISTORY - (30 YEAR AAA MMD / 30 YEAR TREASURY RATIO) Ratio Date Max 2.55% 12/18/08 Min 86.14% 4/5/ Average 7.30% Last 99.52% 7/30/ 140% 120% 0% 80% 30-Jul-07 28-Jan-08 29-Jul-08 27-Jan- 29-Jul- 27-Jan- 29-Jul- Sources: MMD, Bloomberg 6
Summary Factors Favoring Tax-Exempts Factors Not Favoring Tax-Exempts BABs reducing supply in long end Wide credit spreads Expiration of Bush tax cuts Ratios still cheap over long-term BABs not extended yet Weak economy could keep spreads wide Conclusion: Ratios could fall more with tax-exempt yields falling even lower than current levels Loop Capital Markets LLC, an investment bank, prepared this document for informational purposes only. Loop Capital Markets LLC does not provide research services, therefore this product is not a research report and it should not be construed as such. The information in this report has been prepared from sources believed to be reliable, but is not guaranteed by Loop Capital Markets LLC. Opinions expressed are subject to change without notice. Loop Capital Markets LLC shall have no liability, contingent or otherwise, to the user or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the data or formulae provided herein or for any other aspect of the performance of these materials. Loop Capital Markets LLCisa Delaware limited liability company. 7