FMSbonds.com https://www.fmsbonds.com Tax-Free Municipal Bonds (Muni Bonds) Wed, 18 Oct 2017 20:22:10 +0000 en-US hourly 1 https://wordpress.org/?v=4.8.2 House Speaker Pledges Long-Term Aid for Puerto Rico https://www.fmsbonds.com/news-and-perspectives/house-speaker-pledges-long-term-aid-for-puerto-rico/ Tue, 17 Oct 2017 14:31:26 +0000 https://www.fmsbonds.com/?p=230846 Bondholders searching for signs Puerto Rico can rebuild and ultimately emerge from its fiscal challenges found a flicker of hope recently. In a visit to Puerto Rico on Friday, U.S. House Speaker Paul Ryan promised additional aid for the struggling commonwealth and said the United States was committed to helping for the “long haul.” “This isn’t the last aid package,” Ryan said in San Juan. “This is the second in more to come,” he said. “When we get that final analysis, the administration will submit yet again to Congress a request for another aid package to respond to these longer-term problems.” Addressing Puerto Rico’s “longer-term” problems The “longer-term problems” Ryan referred to is, presumably, a nod to Puerto Rico’s fiscal woes and efforts to rebuild its economy. Plagued by a decade-long recession, $74 billion in debt and other issues, a panel known as PROMESA (Next Move On Puerto Rico Muni Debt: Oversight Board) was established last year to oversee Puerto Rico’s spending and the restructuring of its debt. And then the hurricanes hit. The direct blow from hurricane Maria caused widespread devastation across Puerto Rico. Just days before, the commonwealth also contended with hurricane Irma, which severely damaged several Caribbean … Continue reading House Speaker Pledges Long-Term Aid for Puerto Rico »

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Bondholders searching for signs Puerto Rico can rebuild and ultimately emerge from its fiscal challenges found a flicker of hope recently.

In a visit to Puerto Rico on Friday, U.S. House Speaker Paul Ryan promised additional aid for the struggling commonwealth and said the United States was committed to helping for the “long haul.”

“This isn’t the last aid package,” Ryan said in San Juan.

“This is the second in more to come,” he said. “When we get that final analysis, the administration will submit yet again to Congress a request for another aid package to respond to these longer-term problems.”

House Speaker Pledges Long-Term Aid for Puerto Rico

Addressing Puerto Rico’s “longer-term” problems

The “longer-term problems” Ryan referred to is, presumably, a nod to Puerto Rico’s fiscal woes and efforts to rebuild its economy.

Plagued by a decade-long recession, $74 billion in debt and other issues, a panel known as PROMESA (Next Move On Puerto Rico Muni Debt: Oversight Board) was established last year to oversee Puerto Rico’s spending and the restructuring of its debt.

And then the hurricanes hit.

The direct blow from hurricane Maria caused widespread devastation across Puerto Rico. Just days before, the commonwealth also contended with hurricane Irma, which severely damaged several Caribbean islands and knocked out power to 1 million people in Puerto Rico, about 60,000 of whom were still without power when Maria struck.

Currently, about 85% of residents remain without service.

A day before Ryan’s visit, the House approved a $36.5 billion disaster aid package for Puerto Rico, Texas, Florida and the U.S. Virgin Islands. The measure included $4.9 billion in loans to help Puerto Rico pay its immediate expenses.

In September, Congress approved $15.3 billion in aid to areas hit by hurricanes Harvey and Irma.

Future aid for Puerto Rico

Coming on the heels of President Trump’s mixed messages, the pledges of assistance by Ryan and others in Congress and the administration could be welcome news for bondholders. Indeed, through aid to rebuild its infrastructure, some analysts even see the seeds of a wider recovery.

Though it remains to be seen whether any of this federal aid will benefit beleaguered bondholders, the political will to help Puerto Rico get back on its feet in the aftermath of the storms could be an essential first step in ultimately addressing its financial issues.

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How Muni Bond Insurers Are Weathering Recent Storms https://www.fmsbonds.com/news-and-perspectives/how-muni-bond-insurers-are-weathering-recent-storms/ Fri, 22 Sep 2017 16:45:27 +0000 https://www.fmsbonds.com/?p=230617 Early signs indicate bond insurers can withstand the recent hurricanes Harvey and Irma with no change in credit ratings, while Maria’s impact may be moot. Although insurers are still tallying the costs, S&P Global Ratings said Assured Guaranty, Build America Mutual and National Public Finance Guarantee aren’t at risk for a ratings downgrade as a result of Harvey and Irma. In the parts of Florida and Texas designated by federal officials as “major disaster areas” from the two storms, insurers cover a total of $26.6 billion in bonds of public finance entities, S&P Global Ratings said. S&P said even with the additional exposure from Irma, the bonds are spread “among a variety of sectors ranging from general obligations and other tax-supported bonds to more-specific types, such as health care and transportation.” The insurers’ exposure includes: $9.4 billion of gross par exposure to declared FEMA counties from Irma and $7.9 billion from Harvey for Assured; $348 million and $3.6 billion for BAM, and $3.1 billion and $2.2 billion for National, the Bond Buyer reported. Earlier this month, S&P said bond insurers’ exposure to Hurricane Harvey is “easily manageable.” Muni bond insurers payments unrelated to ability to pay Insurers may be asked … Continue reading How Muni Bond Insurers Are Weathering Recent Storms »

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Early signs indicate bond insurers can withstand the recent hurricanes Harvey and Irma with no change in credit ratings, while Maria’s impact may be moot.

Although insurers are still tallying the costs, S&P Global Ratings said Assured Guaranty, Build America Mutual and National Public Finance Guarantee aren’t at risk for a ratings downgrade as a result of Harvey and Irma.

In the parts of Florida and Texas designated by federal officials as “major disaster areas” from the two storms, insurers cover a total of $26.6 billion in bonds of public finance entities, S&P Global Ratings said.

How Muni Bond Insurers Are Weathering Recent StormsS&P said even with the additional exposure from Irma, the bonds are spread “among a variety of sectors ranging from general obligations and other tax-supported bonds to more-specific types, such as health care and transportation.”

The insurers’ exposure includes: $9.4 billion of gross par exposure to declared FEMA counties from Irma and $7.9 billion from Harvey for Assured; $348 million and $3.6 billion for BAM, and $3.1 billion and $2.2 billion for National, the Bond Buyer reported.

Earlier this month, S&P said bond insurers’ exposure to Hurricane Harvey is “easily manageable.”

Muni bond insurers payments unrelated to ability to pay

Insurers may be asked to make scheduled debt-service payments in the immediate aftermath of the storms but only because of electronic transfer problems, not issuers’ inability to pay, a similar situation as with Katrina, S&P said.

“In the absence of electricity, phone service, and other basic business infrastructure, funds may not be transferred to investors in a timely manner. Issuers will likely reimburse bond insurers for these payments,” S&P said in a report Sept. 5.

As of last week, Assured Guaranty hadn’t received any hurricane-related claims, S&P said, according to the Bond Buyer.

“If we do receive claims, we expect those payments will be reimbursed, consistent with what we experienced after Hurricane Katrina,” said S&P’s Robert Tucker. “Issuer debt service liquidity needs sometimes arise in storm-related circumstances because, while the issuer has the resources to pay, funds may not be available to make debt service payments in a timely manner.”

As far as the insurers’ exposure to Maria, S&P said, the point may be moot.

“With regard to Hurricane Maria’s impact on Puerto Rico and the insured exposures of Assured Guaranty Ltd. and National Public Finance Guarantee Corp., we already rate these issues ‘CCC’ or lower,” S&P said. “Therefore, there is little question about issuer credit quality or rating migration. In one of our stress scenarios of bond insurers’ exposure to issuers in Puerto Rico, we assumed that all issuers defaulted on 100% of their debt service through 2020 and that the insurers were required to make claim payments equal to 100% of debt service.”

Absent other factors, S&P said, each company’s capital position could absorb losses in each scenario and there would be no change in the adequacy score or financial risk profile of either Assured or National.

“We find that each company has sufficient liquid resources to meet claim payments in this scenario – the incremental risk presented by Irma and Harvey does not change our assessment.”

Some analysts noted that with insurers already paying interest on defaulted Puerto Rico debt, an influx of federal aid to help rebuild the commonwealth’s infrastructure may ultimately improve the finances of major issuers.

It’s also worth noting that, according to Moody’s Investors Service, natural disasters haven’t caused a single default by a municipal borrower that was rated by Moody’s.

 

 

 

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What We Learned From Greenspan’s Take on Bond Rates https://www.fmsbonds.com/news-and-perspectives/what-we-learned-from-greenspans-take-bond-rates/ Fri, 15 Sep 2017 13:32:44 +0000 https://www.fmsbonds.com/?p=230508 Just as the pundits stopped screaming about the end of the bull market in bonds, Alan Greenspan weighed in. The former Fed chairman isn’t sure when bond prices will drop and rates will rise – “I have no time frame on the forecast,” he said – only that they will. “The current level of interest rates is abnormally low and there’s only one direction in which they can go,” the former Fed chairman told a television interviewer last month, “and when they start they will be rather rapid.” Sound familiar? For the past five years, a legion of pundits labeled the 30-year (and counting) bond bull market a bubble and predicted it would burst. Greenspan typifies that line of thinking: Interest rates will spike because they haven’t risen in awhile, and when that happens, investors will flee bonds, prices will collapse and yields will soar. Is it any wonder that municipal bond investors have ignored the soothsayers and piled into munis? The numbers behind muni bond rates Simply put, rates haven’t exploded because conditions don’t warrant it. Wages in the United States grew an anemic 2.5% in August, the same rate as in July. Job growth dipped last month to … Continue reading What We Learned From Greenspan’s Take on Bond Rates »

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Just as the pundits stopped screaming about the end of the bull market in bonds, Alan Greenspan weighed in.

The former Fed chairman isn’t sure when bond prices will drop and rates will rise – “I have no time frame on the forecast,” he said – only that they will.

“The current level of interest rates is abnormally low and there’s only one direction in which they can go,” the former Fed chairman told a television interviewer last month, “and when they start they will be rather rapid.”

Sound familiar?

For the past five years, a legion of pundits labeled the 30-year (and counting) bond bull market a bubble and predicted it would burst. Greenspan typifies that line of thinking: Interest rates will spike because they haven’t risen in awhile, and when that happens, investors will flee bonds, prices will collapse and yields will soar.

Is it any wonder that municipal bond investors have ignored the soothsayers and piled into munis?

What We Learned from Greenspan's Take on Bond Rates

The numbers behind muni bond rates

Simply put, rates haven’t exploded because conditions don’t warrant it.

Wages in the United States grew an anemic 2.5% in August, the same rate as in July. Job growth dipped last month to 156,000 from 189,000 in July.

While GDP grew 3% in the second quarter of 2017, the unemployment rate in August was 4.4%, about the same level as before the Great Recession. As one report noted, the number of jobs generated by employers in July restored national unemployment to where it stood before the recession began in 2007, even after accounting for population growth in the last decade.

While much was made of the new administration’s prospects for igniting the economy, concrete achievements so far have been elusive. In fact, the economy added 25,000 fewer jobs per month during the first seven months of the new presidential administration compared with the last seven months of the previous one.

The key factor economists cite for sluggish overall growth has been weak productivity growth. Last year productivity declined .1%, the first drop in 34 years. In 2015, productivity grew a woeful 1.3%.

This year doesn’t bode well, either. Despite a bump from initial estimates, U.S. productivity grew at an annual rate of just 1.5% in the second quarter, up from .1% in the first quarter.

Unit labor costs last quarter grew .2%, down significantly from 4.8% in the first quarter.

So is the Fed ready to corral the bull?

Although the Fed is eager to raise interest rates, inflation has regularly fallen short of its target rate of 2%. From July 2016 to July 2017, it was just 1.7%.

The Fed raised rates fractionally in March and June but declined to do so in July.

Clearly, policymakers are torn. According to minutes from its July meeting, some Fed members are reticent to raise rates in a low-inflation environment while others are anxious to “normalize” rates.

Hardly the environment for a rapid rise in rates.

Just-released figures for August show inflation at 1.9%, while the consumer price index rose .4% and the core CPI, excluding gasoline and food, rose .2%. Speculation abounds that these inflationary signs, such as they are, may persist as a result of the recent storms and the Fed may fulfill its vow to continue raising short-term rates. But, longer term rates should remain well in check.

The precise moves of the Fed and quarter-by-quarter economic indicators aren’t what drive municipal bond investors, even when an eminent economist weighs in.

They don’t worry about bulls, bears or bubbles. They focus on generating a steady stream of tax-free income, the reason they buy munis in the first place.

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With Premium Muni Bonds, Think Yield, Not Price https://www.fmsbonds.com/news-and-perspectives/with-premium-muni-bonds-think-yield-not-price/ Mon, 31 Jul 2017 16:08:40 +0000 https://www.fmsbonds.com/?p=229998 They provide superb value, but to some investors, premium bonds are a mystery. Typically, investors get tripped up over price. Why, they ask, would you pay above par? Such was the lament of an investor recently who was in a dither over new-issue bonds being sold at a premium. While it “used to be that a surer way of getting a fair price on a municipal bond meant buying a new issue at par value,” the investor said, new issues today being sold at a premium “seem like a free loan to the bond issuer.” A common misconception about premium bonds Unfortunately, she’s missing a fundamental aspect of municipal bond investing: Regardless of whether bonds are new issues or are in the secondary market, yield is and always has been the only factor that matters when pricing or evaluating bonds. When a new issue is priced by the underwriter, the first step is setting the scale of yields for all maturities. Then the coupon rate is established. Finally, the dollar price is calculated as a function of the coupon and yield. This is also true of pricing in the secondary market. In the secondary market, bond traders bid bonds in … Continue reading With Premium Muni Bonds, Think Yield, Not Price »

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They provide superb value, but to some investors, premium bonds are a mystery.

Typically, investors get tripped up over price. Why, they ask, would you pay above par?

Such was the lament of an investor recently who was in a dither over new-issue bonds being sold at a premium.

While it “used to be that a surer way of getting a fair price on a municipal bond meant buying a new issue at par value,” the investor said, new issues today being sold at a premium “seem like a free loan to the bond issuer.”

With Premium Bonds, Think Yield, Not Price

A common misconception about premium bonds

Unfortunately, she’s missing a fundamental aspect of municipal bond investing: Regardless of whether bonds are new issues or are in the secondary market, yield is and always has been the only factor that matters when pricing or evaluating bonds.

When a new issue is priced by the underwriter, the first step is setting the scale of yields for all maturities. Then the coupon rate is established. Finally, the dollar price is calculated as a function of the coupon and yield. This is also true of pricing in the secondary market.

In the secondary market, bond traders bid bonds in yield, not dollar price.

Once again, the dollar price is calculated as a function of the coupon and yield.

There is no reason to believe that you’ll get a better value on a new issue simply because it is priced at 100.00.

The key question you should always ask is, what is the fair yield for a bond in a certain maturity?

Value in premium bonds

In the secondary market, we have always found bonds trading above 100.00 to provide the best value for our clients.

Remember, every dollar invested, including the premium dollars, is working at the worst-case- yield or higher.

We look for premium bonds that yield more-to-the-call than a par bond would in that year and yields more-to-maturity than a par bond would in that year.

Premium bonds provide more yield because most people don’t understand them and are averse to paying above 100.00. So the simple law of supply and demand dictates that they have to be priced to yield more than bonds trading at 100.00.

Misconceptions about premium bonds are common, and it’s an issue we’ve addressed many times (e.g. “Hidden Gems in the Muni Market”).

An easy rule to keep in mind is, successful bond investors think yield, not dollar price.

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Illinois Maintains Investment-Grade Rating https://www.fmsbonds.com/news-and-perspectives/illinois-maintains-investment-grade-rating/ Mon, 24 Jul 2017 16:54:00 +0000 https://www.fmsbonds.com/?p=229942 After passing a budget for the first time in two years, Illinois maintained its investment grade rating with Moody’s. Moody’s was the last of the three major ratings agencies to complete a review of the state since its budget was enacted earlier this month. Moody’s said it confirmed the state’s Baa3 rating “following passage of budget legislation that alleviates immediate liquidity pressures, moves the state closer to fiscal balance and should keep pension and other fixed costs at manageable levels at least in the near term.” The rating affects about $32 billion in general obligation bonds and other debt. On July 6, the Illinois House voted to override Gov. Bruce Rauner’s vetoes on an income tax hike and budget, ending a two-year impasse, the longest in the nation since the Depression. Prior to the override, the state had paid its bills under court orders or consent decrees instead of standard appropriations. Illinois strengths The budget, Moody’s said, “highlighted two of Illinois’ intrinsic strengths: sovereign control over its taxing and spending policy and a diverse economy with the capacity to generate additional revenue.” The income tax increases are expected to generate about $5 billion in fiscal 2018, which, along with borrowing … Continue reading Illinois Maintains Investment-Grade Rating »

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After passing a budget for the first time in two years, Illinois maintained its investment grade rating with Moody’s.

Moody’s was the last of the three major ratings agencies to complete a review of the state since its budget was enacted earlier this month.

Moody’s said it confirmed the state’s Baa3 rating “following passage of budget legislation that alleviates immediate liquidity pressures, moves the state closer to fiscal balance and should keep pension and other fixed costs at manageable levels at least in the near term.”

The rating affects about $32 billion in general obligation bonds and other debt.

On July 6, the Illinois House voted to override Gov. Bruce Rauner’s vetoes on an income tax hike and budget, ending a two-year impasse, the longest in the nation since the Depression. Prior to the override, the state had paid its bills under court orders or consent decrees instead of standard appropriations.

Illinois Maintains Investment-Grade Rating

Illinois strengths

The budget, Moody’s said, “highlighted two of Illinois’ intrinsic strengths: sovereign control over its taxing and spending policy and a diverse economy with the capacity to generate additional revenue.”

The income tax increases are expected to generate about $5 billion in fiscal 2018, which, along with borrowing provisions in the budget, “will help contain a backlog of unpaid bills that has been hovering above $14 billion in recent weeks,” Moody’s said.

Under the new budget, the state is authorized to sell as much as $6 billion of long-term bonds to help pay down its bills. It also calls for increasing taxes, which should raise $5 billion more annually, and spending cuts of $2 billion.

The other major ratings agencies, S&P Global Ratings and Fitch, affirmed their investment-grade ratings earlier this month.

Although Moody’s said long-term challenges remain, the budget alleviates immediate threats to the state’s credit and gives bondholders a measure of comfort.

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No Clues for Muni Investors in Fed Bump https://www.fmsbonds.com/news-and-perspectives/no-clues-for-muni-investors-in-fed-bump/ Wed, 28 Jun 2017 20:58:50 +0000 https://www.fmsbonds.com/?p=229720 When the Fed raises rates, it’s usually a sign of rapidly rising inflation or torrid economic growth. After the Fed’s latest move, however, it looks like the bond market thinks otherwise. How else to explain the razor-thin gap in yields between five-year Treasury notes and 30-year bonds? Historically, investors anticipating rising inflation, demand more yield when committing their funds to longer-term bonds. Today, though, the gap between long- and short-term bonds is barely discernible: about 96 basis points, the narrowest since December 2007, according to Reuters. In other words, what we’re seeing is a flattening yield curve, a trend we’ve expected for some time (What the Yield Curve is Telling Muni Investors). You can’t dance to every Fed tune When looking for hints on where the economy – and inflation – are headed, investors often turn to the Fed. So when it raised rates on June 14th for the third consecutive time, many Fed watchers thought they received the signal they’ve been seeking for so long: the economy is finally heating up. But a closer analysis tells a different story. While the unemployment rate has inched lower, the economy remains less than robust. Inflation, excluding food and energy, slowed in … Continue reading No Clues for Muni Investors in Fed Bump »

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When the Fed raises rates, it’s usually a sign of rapidly rising inflation or torrid economic growth.

After the Fed’s latest move, however, it looks like the bond market thinks otherwise.

How else to explain the razor-thin gap in yields between five-year Treasury notes and 30-year bonds?

No Clues for Muni Investors in Fed Bump

Historically, investors anticipating rising inflation, demand more yield when committing their funds to longer-term bonds. Today, though, the gap between long- and short-term bonds is barely discernible: about 96 basis points, the narrowest since December 2007, according to Reuters.

In other words, what we’re seeing is a flattening yield curve, a trend we’ve expected for some time (What the Yield Curve is Telling Muni Investors).

You can’t dance to every Fed tune

When looking for hints on where the economy – and inflation – are headed, investors often turn to the Fed. So when it raised rates on June 14th for the third consecutive time, many Fed watchers thought they received the signal they’ve been seeking for so long: the economy is finally heating up.

But a closer analysis tells a different story.

While the unemployment rate has inched lower, the economy remains less than robust.

Inflation, excluding food and energy, slowed in June for the fourth straight month. At 1.7%, May’s inflation rate was still below the 2% targeted by the Fed. Further, the Fed’s median projection for inflation in 2017 fell to 1.6%, from 1.9% forecast in March.

Regardless, the Fed still expects to bump yields once more this year.

The Fed’s move comes at a time when individual investors are cooling on stocks. For the week ending June 21, investors withdrew $2.2 billion in U.S. equity mutual funds and exchange-traded funds, Reuters reported.

Demand for municipal bonds, meanwhile, continues to outstrip supply (Summer Forecast: A Muni Redemption Flood, Supply Drought).

Caution for muni bond investors when using the Fed as barometer

Successful muni investors don’t use the Fed as a guide for committing funds to the market.

We would avoid the subject of market timing entirely if we weren’t concerned for individual investors heeding the advice of financial pundits granted expert status simply by their presence on TV or their columns online.

These would-be soothsayers continue to advise investors to avoid bonds when they foresee a “rising interest rate environment” and to buy bonds when their crystal ball predicts rates will decline.

Bond investing should not be a guessing game or a quest for capital gains. For those who choose this approach, we wish them well. We admit to having no such expertise.

Our goal is to deploy investable dollars when available to generate a steady, dependable stream of tax-free income.

Committing time, and forfeiting the opportunity to generate tax-free income, while trying to guess where interest rates are heading is a futile and costly exercise.

Don’t play that game.

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Profiting from Muni Bond Redemptions https://www.fmsbonds.com/news-and-perspectives/profiting-from-muni-bond-redemptions/ Mon, 12 Jun 2017 19:57:49 +0000 https://www.fmsbonds.com/?p=229486 You’re using a laddering strategy for investing in municipal bonds and it’s time to reinvest proceeds from your maturing bonds. What now? That’s the gist of a question posed by an investor who read our recent article (“Summer Forecast: A Muni Redemption Flood, Supply Drought”), where we discussed the deluge of bond redemptions expected this spring and summer and the opportunity for muni bond buyers to continue and perhaps enhance their flow of tax-free income. How, this investor wondered, could he enhance his tax-free income when today’s yields are more modest than they were a decade ago? That’s easy: Ditch the laddering strategy. As many clients and friends know, we have never been proponents of laddering municipal bond portfolios (“Bond Laddering: An Idea Whose Time Still Hasn’t Come”). Though popular for years among stock brokers and financial planners, it’s never paid off for investors. The longest maturity in a typical ladder is 10 years. Bonds mature every two years, which means for more than two decades, the investor in question would have been forced to reinvest funds at lower yields in every instance. When munis are redeemed, go long Our clients buy longer-term bonds to maximize their tax-free income. For … Continue reading Profiting from Muni Bond Redemptions »

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You’re using a laddering strategy for investing in municipal bonds and it’s time to reinvest proceeds from your maturing bonds.

What now?

That’s the gist of a question posed by an investor who read our recent article (“Summer Forecast: A Muni Redemption Flood, Supply Drought”), where we discussed the deluge of bond redemptions expected this spring and summer and the opportunity for muni bond buyers to continue and perhaps enhance their flow of tax-free income.

How, this investor wondered, could he enhance his tax-free income when today’s yields are more modest than they were a decade ago?

Profiting From Muni Bond RedemptionsThat’s easy: Ditch the laddering strategy.

As many clients and friends know, we have never been proponents of laddering municipal bond portfolios (“Bond Laddering: An Idea Whose Time Still Hasn’t Come”). Though popular for years among stock brokers and financial planners, it’s never paid off for investors.

The longest maturity in a typical ladder is 10 years.

Bonds mature every two years, which means for more than two decades, the investor in question would have been forced to reinvest funds at lower yields in every instance.

When munis are redeemed, go long

Our clients buy longer-term bonds to maximize their tax-free income. For the most part, they are buy-and-hold investors, and purchase longer maturities, which significantly enhances their tax-free income.

Consider, for example, that according to Thomson Reuters’ “Municipal Market Monitor,” a 10-year, AA-rated bond yields approximately 2.01% in today’s market. A similarly rated 30-year muni will yield 2.89%.

On a $100,000 investment, the 30-year bond will produce $880.00 more tax-free income annually, which is 30% more than the 10-year security. This can be extremely significant when applied throughout an investor’s portfolio.

When munis are redeemed, focus on what’s important

Ladders are usually recommended by brokers who inordinately focus on maintaining level market values.

Our investors understand that the market value of a long-term bond will sometimes be less than they paid and sometimes more. Neither situation in itself should trigger a sale.

Certainly, redemptions are an issue in a market that is sensitive to supply and demand factors, but investors should never lose sight of their primary objective: keeping their interest clock ticking. And remember, the greatest value is invariably in longer-term bonds.

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Summer Forecast: A Muni Redemption Flood, Supply Drought https://www.fmsbonds.com/news-and-perspectives/summer-forecast-a-muni-redemptions-flood-supply-drought/ Tue, 06 Jun 2017 19:07:23 +0000 https://www.fmsbonds.com/?p=229423 A record-setting flood of municipal bond redemptions is expected to meet head-on with parched inventory this summer. For veteran municipal bond investors, there’s no concern. Market timers, however, are about to see their lingering headache get worse. More than $125 billion in redemptions are expected during June, July and August, beating the previous record of $117 billion in 2015, according to The Bond Buyer. At the same time, issuance is expected to weaken. In 2016, more than $108 billion in municipal bonds were issued from June through August, while this year’s three-month total should drop to $92 billion. Roots of muni redemptions go back to 2007 Analysts trace the substantial number of redemptions this year to the 10-year call provisions on a deluge of bonds issued back in 2007, when issuance totaled almost $430 billion, just shy of a record. June is expected to see about $44.5 billion in redemptions, with at least $40 billion in both July and August. Normally, issuance picks up in June, though that’s not expected this year. In fact, issuance is down for the entire year. Some analysts attribute the dearth of inventory to issuer uncertainty over tax reform legislation; concern over what, if anything, … Continue reading Summer Forecast: A Muni Redemption Flood, Supply Drought »

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A record-setting flood of municipal bond redemptions is expected to meet head-on with parched inventory this summer.

For veteran municipal bond investors, there’s no concern. Market timers, however, are about to see their lingering headache get worse.

More than $125 billion in redemptions are expected during June, July and August, beating the previous record of $117 billion in 2015, according to The Bond Buyer.

At the same time, issuance is expected to weaken. In 2016, more than $108 billion in municipal bonds were issued from June through August, while this year’s three-month total should drop to $92 billion.

Summer Forecast A Muni Redemption Flood, Supply Drought

Roots of muni redemptions go back to 2007

Analysts trace the substantial number of redemptions this year to the 10-year call provisions on a deluge of bonds issued back in 2007, when issuance totaled almost $430 billion, just shy of a record.

June is expected to see about $44.5 billion in redemptions, with at least $40 billion in both July and August.

Normally, issuance picks up in June, though that’s not expected this year. In fact, issuance is down for the entire year. Some analysts attribute the dearth of inventory to issuer uncertainty over tax reform legislation; concern over what, if anything, the Federal Reserve might do; and political concerns engulfing the White House.

Given the net market supply in June, the muni market should shrink by $21.56 billion, with redemptions from issuers in New York, California, Florida, New Jersey and Georgia leading the way, analysts told The Bond Buyer.

California will account for about $33 billion in called and maturing bonds over its redemption season, from May to September, up from its previous five-month record in 2013 of $30.27 billion.

New York will also set a record for redemptions, with about $10 billion in called and maturing bonds due in June alone, a bump of $2.5 billion from its previous record set in 2015.

Healthy demand to continue for munis despite redemptions

Investor appetite for munis is strong. As we discussed (“Would Trump Tax Plan Sink Municipal Bonds?”), there’s no evidence that talk of tax reform is diluting their appeal. On the contrary: with upcoming bond calls, coupon payments and maturing securities, we expect to demand to accelerate.

For veteran muni investors, redemptions aren’t an issue. They regularly research options on where to deploy their cash, making sure they seamlessly continue (and often enhance) their steady stream of tax-free income.

Market timers, on the other hand, will continue to be disappointed. These investors, who’ve parked their cash for years in money-market funds waiting for yields to spike, not only turned off the tax-free income spigot, but they also face a particularly stark reminder of the folly of trying to outguess the market.

After all, with an impending collision between tight supply and rising demand, where can yields possibly go?

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Would Trump Tax Plan Sink Municipal Bonds? https://www.fmsbonds.com/news-and-perspectives/trump-tax-plan-sink-municipal-bonds/ Mon, 22 May 2017 15:33:36 +0000 https://www.fmsbonds.com/?p=229341 It’s hard to imagine now, but at some point Congress and the administration will likely devote serious consideration to overhauling the tax code, including cutting rates. Conventional wisdom posits, that may be a problem for the municipal bond market. After all, if the tax burden is eased, the thinking goes, tax-free bonds become less attractive. But as with much analysis of the muni market, a closer look reveals a much different story. For example, President Trump so far hasn’t released a detailed tax plan, but an overview disclosed last month calls for reducing the current seven tax brackets to three, with the highest rate cut from 39.6% to 35%. Can we expect a 4 1/2-point reduction to be a game-changer? We doubt it. As one analyst told the Bond Buyer, that drop “only takes you back to where we were under George W. Bush and before marginal rates were raised at the end of 2012.” Plus, investors will still seek relief from rising state income taxes. It’s important to note that an explicit goal of the administration’s tax efforts is to “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.” How will the plan pay for itself? With growth, … Continue reading Would Trump Tax Plan Sink Municipal Bonds? »

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It’s hard to imagine now, but at some point Congress and the administration will likely devote serious consideration to overhauling the tax code, including cutting rates.

Conventional wisdom posits, that may be a problem for the municipal bond market. After all, if the tax burden is eased, the thinking goes, tax-free bonds become less attractive.

But as with much analysis of the muni market, a closer look reveals a much different story.

Would Trump Tax Plan Sink Municipal Bonds?

For example, President Trump so far hasn’t released a detailed tax plan, but an overview disclosed last month calls for reducing the current seven tax brackets to three, with the highest rate cut from 39.6% to 35%.

Can we expect a 4 1/2-point reduction to be a game-changer? We doubt it.

As one analyst told the Bond Buyer, that drop “only takes you back to where we were under George W. Bush and before marginal rates were raised at the end of 2012.”

Plus, investors will still seek relief from rising state income taxes.

It’s important to note that an explicit goal of the administration’s tax efforts is to “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.”

How will the plan pay for itself? With growth, administration officials said – along with reducing deductions and loopholes.

Again, we fail to see in this the death knell for municipal bonds, a highly popular tax-saving security.

Possible AMT repeal and muni bonds

Another aspect of the administration’s broad tax outline is repeal of the Alternative Minimum Tax. On that, an analyst told the Bond Buyer, it probably makes no difference to the market within the context of an overall plan: If deductions were cut or eliminated, the AMT wouldn’t be triggered, so repeal would be “a wash versus being an absolute negative for the municipal market.”

In fact, if deductions for state and local taxes were eliminated, that too would blunt the effect of AMT repeal, though it could increase the demand for munis from high-tax states, which might even trade at a larger premium, and it would narrow the yield gap between munis subject to the AMT and those that aren’t.

Of course, looming behind a tax overhaul is the threat of curtailing or eliminating the tax exemption on municipal bond interest. However, there’s no mention of it in the president’s tax outline, and he indicated support for it after last fall’s election (“Trump Surprises Mayors, Supports Muni Tax Exemption”).

As we have previously reported (“Voices Growing Louder on Muni Tax Exemption”), any attempt at such a move would be met with an outcry by state and local officials, who regard munis as a key tool to help finance infrastructure needs.

The muni market yawned

A look at the market shows no fear of significant tax changes. Since the election last November, municipal bonds prices have barely budged.

Ultimately, we think changes to the tax code, far from weakening the appeal of munis, could even enhance their value.

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Bondholders After Puerto Rico’s Bankruptcy Filing https://www.fmsbonds.com/news-and-perspectives/bondholders-after-puerto-ricos-bankruptcy-filling/ Thu, 04 May 2017 16:54:33 +0000 https://www.fmsbonds.com/?p=229095 Amid the scrum over Puerto Rico’s debt and bankruptcy filing, might an orderly restructuring process benefit municipal bondholders? At least some analysts think so. After protracted negotiations and a flurry of lawsuits, Puerto Rico’s financial oversight board filed a bankruptcy petition yesterday with U.S. District Court in Puerto Rico. “From current revenues, the commonwealth and its instrumentalities cannot satisfy their collective $74 billion debt burden and $49 billion pension burden and pay their operating expenses,” the board said in a statement accompanying the filing. The statement also cited the anticipated loss of $850 million in Affordable Care Act funds next year, the exhaustion of all public pension funding, a contracting economy and other factors it described as “staggeringly grim.” The petition was filed under Title III of PROMESA, the law created by Congress last year establishing the oversight board and a process for restructuring Puerto Rico’s debt. Prior to the law, Puerto Rico and its public utilities weren’t permitted to file for bankruptcy. Stay on Puerto Rico creditor litigation Among PROMESA’s provisions was a stay on creditor litigation. The stay expired Monday and was followed Tuesday by the filing of several lawsuits against the government. The board said the government’s … Continue reading Bondholders After Puerto Rico’s Bankruptcy Filing »

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Amid the scrum over Puerto Rico’s debt and bankruptcy filing, might an orderly restructuring process benefit municipal bondholders?

At least some analysts think so.

After protracted negotiations and a flurry of lawsuits, Puerto Rico’s financial oversight board filed a bankruptcy petition yesterday with U.S. District Court in Puerto Rico.

“From current revenues, the commonwealth and its instrumentalities cannot satisfy their collective $74 billion debt burden and $49 billion pension burden and pay their operating expenses,” the board said in a statement accompanying the filing.

The statement also cited the anticipated loss of $850 million in Affordable Care Act funds next year, the exhaustion of all public pension funding, a contracting economy and other factors it described as “staggeringly grim.”

The petition was filed under Title III of PROMESA, the law created by Congress last year establishing the oversight board and a process for restructuring Puerto Rico’s debt. Prior to the law, Puerto Rico and its public utilities weren’t permitted to file for bankruptcy.

Bondholders After Puerto Rico's Bankruptcy Filing

Stay on Puerto Rico creditor litigation

Among PROMESA’s provisions was a stay on creditor litigation. The stay expired Monday and was followed Tuesday by the filing of several lawsuits against the government. The board said the government’s vulnerability to such lawsuits spurred the filing, which extends the stay for 120 days.

As expected, analysis of the filing was varied.

An attorney for the general obligation bondholders, Andrew Rosenberg, said the filing derailed negotiations with the commonwealth.

“The Oversight Board has made every effort to sabotage consensual negotiations,” he said.

The oversight board denied it.

A light for Puerto Rico bondholders?

Others said the filing could bring order and some predictability to an otherwise messy process.

“Although a court proceeding will take considerable time and likely involve losses for all Puerto Rico bondholders, it will be an orderly process that should be better for creditors in the aggregate than a chaotic and uncertain period involving proliferating lawsuits among holders of the commonwealth’s numerous debt types,” said Ted Hampton, an analyst with Moody’s Investor Services.

Susheel Kirpalani, a lawyer for COFINA bondholders, whose bonds are backed by sales tax revenue, said the move “represents sound public policy and is a much-needed step forward on the island’s path to restructuring its debts in an orderly manner.”

The chairman of the oversight board, Jose Carrion, said the filing wouldn’t preclude negotiations.

“The Oversight Board continues to believe that consensual negotiations are preferable to the extent possible and will pursue them with all creditor groups willing to do so,” he said.

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