know what you own with a customized portfolio
TRANSCRIPT
1
FEBRUARY 07, 2022
Municipal Bond Investor Weekly
High Net Worth Wealth Solutions and Market Strategies // Fixed Income Solutions
TED RUDDOCK
Managing Director High Net Worth
THE WEEK AHEAD
1. Where to next for muni yields --- Last week munis rallied during the week, pushing yields lower --- and along with them, the relative value to Treasuries. The 10 year muni to Treasury ratio started last week at 86% --- by week end it was at 75%. With supply limited this week, prices could firm further, pushing yields and relative value lower across the curve.
2. The real action the Fed will be watching is in the employment situation --- and the numbers are as clear as mud --- as Scott Brown reported, lots of adjustments, numbers appear to be up, average earnings as calculated are higher, but the non-seasonally adjusted numbers for January were down 2.8 million, disproportionately in low wage jobs.
3. Everyone will be watching the CPI release on Thursday: Noise, noise, and more noise.
DREW O’NEIL
Director Fixed Income Strategy
MONDAY’S COMMENTARY Looking for Relative Value: Try Texas
Page 2
THE NUMBERS THIS WEEK
Municipal yields fell last week, following several weeks of solid increases. The short end of the AAA municipal curve saw little change while intermediate and long-term yields fell by 9-10 basis points. As municipal yields were falling last week, Treasury yields were rising, propelled by Friday’s strong employment numbers, which led to declining muni-Treasury ratios for the week. Still, year-to-date municipal yields have increased significantly with the 5, 10, and 30 year AAA yields higher by 63, 41, and 36 basis points, respectively.
Year TreasuryMunicipal
(AAA)
Municipal
(A)
Municipal
TEY*
(AAA)
Municipal
TEY* (A)
Muni
(AAA)/Tsy
Ratio
Muni TEY*
(AAA)/Tsy
Ratio
1 2023 0.89 0.65 0.95 1.11 1.61 74% 124%
2 2024 1.31 0.87 1.19 1.47 2.02 67% 112%
5 2027 1.78 1.20 1.59 2.03 2.68 67% 114%
10 2032 1.93 1.45 1.80 2.46 3.04 75% 127%
20 2042 2.29 1.70 2.02 2.87 3.41 74% 125%
30 2052 2.23 1.84 2.17 3.11 3.67 83% 140%*Taxable equivalent yield @ 40.8% tax rate
Maturity Range Avg. Maturity Duration Yield to Worst TEY*
1 to 5 3.0 2.80 1.16% 1.95%
5 to 10 7.5 6.42 1.58% 2.67%
10 to 20 15.0 8.17 1.88% 3.17%*Taxable equivalent yield @ 40.8% tax rate. Assumes a 10-year call.
2.03
2.46
3.11
2.65
3.05
3.70
1.78 1.932.23
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
AAA Municipal TEY A Muni GO TEY Treasury
Traditional ladder strategies (table on right) highlight limited opportunities on the short end of the curve. Duration focused strategies can extract additional yield available with longer maturities, while mitigating risk with shorter calls. Yield curve highlights taxable equivalent yields.
MUNICIPAL BOND INVESTOR WEEKLY
2
LOOKING FOR RELATIVE VALUE: TRY TEXAS
Each month in the municipal bond market, there are billions of dollars in motion --- issuers selling new bonds to
support infrastructure investments, selling refunding bonds to lower debt service costs, bonds reaching final maturity
and bonds being called for early redemption. On average, well over $30 billion is moving just on bonds maturing
and being called. What makes February a unique month is Texas: Texas issuers dominate redemptions this month,
with nearly 1 out every 3 dollars being redeemed nationally (at Raymond James, among our retail clients, that
number is even higher.)
The Lone Star State is the second largest state in the country, both in size and population, and Texas municipal
issuers rank third in issuance (behind CA and NY) with $415 billion in bonds outstanding (Bloomberg). February
and August are traditional debt service payment months for many Texas issuers, particularly school districts.
Consequently, those months see substantial amounts of money in motion from both regularly scheduled principal
and interest payments, but more importantly redemptions from refunded bonds. Many investors will be looking to
replace those bonds --- and likely looking for more Texas bonds.
Why Texas bonds? In a word, or more appropriately, an acronym: PSF - Permanent School Fund. The Texas
Permanent School Fund is the oldest state sponsored credit enhancement facility --- similar in effect to traditional
bond insurance --- that provides investors with a guaranteed debt service payment if the issuer defaults. PSF is
rated Aaa / AAA / AAA by Moody’s, S&P and Fitch. That extra level of security --- above and beyond the typically
strong rating of the Texas school district issuing the bonds --- provides an extra level of comfort to investors. Not
all Texas school districts are backed by a PSF guarantee, but many are. And they offer an excellent relative value
--- like the Forney Independent
School District (ISD) bonds issued
last week.
Raymond James Public Finance
Team participated in underwriting the
new money issue for Forney TX ISD,
located about 30 miles east of Dallas.
The school district, with an enrollment
of just under 13,000 students, was
issuing $161 million in new money to
build new schools, and renovate
existing facilities. The school district’s
“stand-alone” bond rating is a
respectable A+; however, it applied
for and received the backing of the
Permanent School Fund and Forney
ISD bonds were sold with AAA
ratings. The maturity structure of the
bonds was a bit unusual, with
maturities starting in 2033 and
continuing with serial maturities until
2042 then three term bonds in 2044,
2048 and 2052. The bonds would
have various coupons ranging from
2% to 4% (see table in the chart on
next page.) The key point here is the exceptional “relative value” these bonds offer over conventional Treasury
securities. Both have the highest credit rating at AAA. But look at the difference in the yields as highlighted in
the chart. (Note: for an apples-to-apples comparison, we have converted the Forney tax-exempt yields to taxable
The Texas Permanent School Fund (PSF) was created with a
$2,000,000 appropriation by the Texas Legislature in 1854 expressly for
the benefit of the public schools of Texas. The Constitution of 1876
stipulated that certain lands and all proceeds from the sale of these lands
should also constitute the PSF. An additional act later gave more public
domain land and rights to the PSF.
Through the Bond Guarantee Program, the Texas Permanent School Fund
(TPSF) is pledged to guarantee bonds issued by Texas school districts this
enhancing their credit rating. This program is designed for school districts
with credit ratings lower than AAA. Bonds issued under the Bond
Guarantee Program are rated AAA, this allowing participating school
districts to borrow at a lower cost.
Since 1985, the bond guarantee program has provided credit
enhancement for ~$225 billion of public school debt. As of December 31,
2021, $97 billion in bonds for public schools are outstanding. The PSF fund
market value of securities and investments was $56 billion. The ratio of
debt to investments is 1.73x. Like the bond insurance companies, the Fund
pays investors debt service when due and is not required to accelerate
debt payment upon default. For additional information on PSF, click here
for the updated Disclosure Document.
MUNICIPAL BOND INVESTOR WEEKLY
3
equivalent yields, assuming investors are in the highest federal tax bracket (37%) and also subject to the Net
Investment Income Tax (3.8%) for a combined liability of 40.8%.) Last Thursday, when the deal was priced, the 10
year Treasury was 1.85% --- the taxable equivalent yield on the Forney 10 year bonds was 3.04% --- 120 basis
points higher. At 30 years, the Treasury bond was offering a yield of 2.13%. The Forney ISD bonds, with a par
coupon of 2.875% --- had a taxable equivalent yield of 4.86% --- nearly 275 basis point higher --- more than
double the yield on long Treasuries. These bonds offer investors exceptional value, as do many other Texas
municipal issuers, especially those that benefit from the PSF guarantee.
This week Raymond James Public Finance Banking Team is Senior Manager on South San Antonio ISD, Sabine
Pass ISD and co-managers on Arlington ISD and Denton ISD. In addition, our Dallas-based traders are always on
the lookout for good values in the secondary market --- whether it’s PSF bonds, insured Texas MUDs (municipal
utility districts) or any number of other high quality issuers across the state. Let our team find some Texas-sized
relative values for your municipal bond portfolio!!
NAVIGATING TODAY’S MARKET
According to The Bond Buyer, $5.4 billion in municipal new issuance is expected this week. Some of the larger
deals expected to come to market include: the Port of Portland, OR (-/AA-) is selling $511 million of AMT Portland
International Airport revenue bonds; Ohio (Aa1/AA+/AA+) is bringing a $427 million taxable general obligation deal
to market; Orange County Health Facilities Authority, CA (A2/A+) is issuing $327 million of hospital revenue bonds;
the Greater Orlando Aviation Authority (Aa3/AA-/AA-) is selling $286 million of airport facilities revenue bonds;
Arlington Independent School District (Aaa/AAA) is issuing $195 million of unlimited tax school building and
3.04
4.34
3.61
4.86
1.852.07 2.13
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Forney TX ISD Unlmited Tax BondsTX Permanent School Fund Guarantee Aaa / AAA / AAA
(Underlying rating A+)
Treasury Yields (1/27/22)
Forney ISD Taxable Equivalent Yields (Sale Date) Assumes Top Federal Liability at 40.8%Yield variation affected by coupon structure - see table
AAA rated Forney ISD offers yields ~120 - 275 basis points over Treasuries
Sources: Raymond James, Bloomberg LP
MUNICIPAL BOND INVESTOR WEEKLY
4
refunding bonds, in a PSF-backed deal; and the San Diego County Water Authority Financing Authority
(Aa2/AAA/AA+) is bringing a $170 million water revenue bond deal to market. See table below for additional
issuance.
HISTORICAL YIELDS
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Municipal AAA 10-Year Municipal AAA 2-Year Fed Funds (Upper Bound)
Date Amount Issuer ST Description Moody's/S&P/Fitch Maturity
2/7 $7MM City of Locust Grove GA General Obligation Transportation Sales Aa3 / / 06/01/23-27
2/8 $9MM Pike County School District GA General Obligation Sales Tax Bonds, Aa1 / / (A2 / / ) 10/01/23 - 27
2/8 $43MM Maine Governmental Facilities ME Lease Rental Revenue Bonds, Series Aa3 /AA- / 10/1/22-41
2/8 $8MM Denton Independent School TX Unlimited Tax Refunding Bonds /AA /AA 8/15/2023
2/8 $26MM Denton Independent School TX Unlimited Tax Refunding Bonds /AAA /AAA ( /AA /AA ) PSF 8/15/2022-35
2/8 $35MM Denton Independent School TX Unlimited Tax Refunding Bonds /AA /AA 8/15/2022-35
2/8 $39MM Battle Creek Public Schools MI 2022 School Building and Site Bonds /AA / ( /A / ) 05/01/2025-47
2/8 $195MM Arlington Independent School TX Unlimited Tax School Building and Aaa /AAA / (Aa1 /AA / ) 02/15/23-47
2/9 $25MM South San Antonio Independent TX Unlimited Tax Refunding Bonds /AAA / ( /A / ) PSF 08/15/2024-27, 35-
2/9 $19MM Sabine Pass Independent School TX Unlimited Tax School Building Bonds /AAA / ( /AA- / ) PSF 8/15/2024-51
2/9 $1MM Public Finance Authority WI Taxable Student HSG Rev Bonds (NCCD- /BB / 7/1/2030
2/9 $41MM Public Finance Authority WI Student HSG Rev Bonds (NCCD- /BB / 07/01/2024-
2/9 $10MM Parishwide School District of LA General Obligation School Bonds, Series /AA / ( /A+ / ) BAM 03/01/2023-42
2/9 $104MM New York City Housing NY 2022 Series A Housing Impact Bonds Aa2 / / 08/01/2026-
2/9 $13MM Joliet School District No 86 (Will IL General Obligation Limited Tax School ( /A+ / ) 03/01/2023-31
2/9 $145MM City of Norwich, Connecticut CT General Obligation Bonds, Issue of 2022 NR /AA /NR 8/1/22-46
2/9 $44MM City of Meriden, Connecticut CT General Obligation Refunding Bonds, NR /AA /NR 3/15/22-34
2/10 $24MM Gordon County School District GA General Obligation Sales Tax Bonds, Aa1 / / (A1 / / ) 09/01/23-27
2/10 $6MM Blue Mountain School District PA (Schuylkill County, Pennsylvania) General NR /AA /NR ( /A+ / ) AGM 8/1/22-35
MUNICIPAL BOND INVESTOR WEEKLY
5
There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and investors may incur a profit or a loss. Past performance may not be indicative of future results. Prior to transacting in any security, please discuss the suitability, potential returns, and associated risks of the transaction(s) with your Raymond James Financial Advisor.
This communication is not an offer to sell or a solicitation to buy any securities mentioned herein. High grade and High yield securities mentioned herein may not be suitable for all investors. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. All expressions of opinion reflect the judgment of the Fixed Income Municipal Department of Raymond James & Associates (RJA) at the time of publication and may be subject to change without notice.
Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. Other departments of RJA or its affiliates may have information that is not available to the Fixed Income Municipal Department about companies or Issuers mentioned in this report. Further information on the securities mentioned herein is available upon request. Interest on Municipal Bonds is generally exempt from federal taxation and may also be free of state and local taxes for investors residing in the state and/or locality where the bonds were issued. However, bonds may be subject to federal alternative minimum tax (AMT), and profits and losses on tax-exempt bonds may be subject to capital gains tax treatment. Bonds are subject to risk factors including: 1) Default Risk - the risk that the issuer of the bond might default on its obligation 2) Rating Downgrade - the risk that a rating agency lowers a debt issuer's bond rating 3) Reinvestment Risk - the risk that a bond might mature when interest rates fall, forcing the investor to accept lower rates of interest (this includes the risk of early redemption when a company calls its bonds before maturity) 4) Interest Rate Risk - this is the risk that bond prices tend to fall as interest rates rise. 5) Liquidity Risk - the risk that a creditor may not be able to liquidate the bond before maturity. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Sourced from Bloomberg: Treasuries: US Fed H15 CMT Curve - The H15 curve is comprised of the constant maturity treasury rates as published daily by the Federal Reserve in the H15 report. Municipal (AAA): BVAL Municipal AAA Yield Curve (Callable) - The curve is populated with high quality US municipal bonds with an average rating of AAA from Moody's and S&P. The yield curve is built using non-parametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues, and other proprietary contributed prices. The curve represents 5% couponing. The 3 month to 10 year points are bullet yields, and the 11 year to 30 year points are yields to worst for a 10-year call. Municipal (AA): US General Obligation AA Muni BVAL Yield Curve - The BVAL curve is populated with pricing from uninsured AA General Obligation bonds. Municipal (A): US General Obligation A+ A A- Muni BVAL Yield Curve - The BVAL curve is populated with pricing from uninsured A+, A, and A- rated General Obligation bonds. Fed Funds (Upper Bound): The federal funds rate is the short-term interest rate targeted by the Federal Reserve's Federal Open Market Committee as part of its monetary policy. US Treasury securities are guaranteed by the US government and, if held to maturity, generally offer a fixed rate of return and guaranteed principal value. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.
US Treasury securities are guaranteed by the US government and, if held to maturity, generally offer a fixed rate of return and guaranteed principal value. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER
880 CARILLON PARKWAY // ST. PETERSBURG, FL 33716 // 800.248.8863 // RAYMONDJAMES.COM
© 2022 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
© 2022 Raymond James Financial Services, Inc., member FINRA/SIPC. All rights reserved.
Raymond James® is a registered trademark of Raymond James Financial, Inc.
M21-3985225 through 12/15/2023
.