150

200

250

300

350

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-

15

Sep

-15

100125150175200225250275300

Sep

-10

Sep

-11

Sep

-12

Sep

-13

Sep

-14

Sep

-15

3Q15 YTDBC Muni Index 1.65% 1.77%

1 Year 0.43% 0.65%3 Year 0.80% 1.19%5 Year 1.16% 1.76%7 Year 1.65% 1.97%10 Year 2.01% 2.12%20 Year 1.75% 1.77%1-10 Year 1.32% 1.64%AAA 1.60% 1.65%AA 1.70% 1.85%A 1.68% 1.68%BBB 1.13% 1.85%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1 3 5 7 9 11 13 15

3rd Quarter 2015

The 3rd quarter of 2015 was quite a hectic one and multiple factorscombined to pressure interest rates significantly lower. In August, Chinasurprised the markets by devaluing its currency with no advance notice,increasing speculation on the health of its economy. That, in turn, led toturmoil in China’s equity markets which had a broad spillover onto globalequity, commodity, and corporate bond markets. Most vulnerable tocontagion were the economies and currencies of other emerging countries.That vulnerability helped drive the price of oil and other commodities downsharply on fears that the economic slowdown could be going global. Then, inSeptember, global markets which had spent most of the quarter anticipatingthe first rate hike by the Federal Reserve in 6 years, learned that it was onceagain being postponed. As the quarter closed, a clear understanding ofwhether the global economy was truly slowing, or just hitting a bump on itspositive, but one-speed trajectory remained elusive.

The US Economy

For much of 2015, job creation has been the bright spot of the US economy.Non-farm payrolls had been showing regular monthly increases of over200,000 jobs. But August saw only 173,000 jobs created, while the Septembernumber turned out to be even weaker at 142,000. It is too early to determinewhether this drop is a change in trend, or merely an aberration in what tendsto be a volatile indicator. The unemployment rate, which is calculated from aless volatile data source, opened the year at 5.6% and edged down to 5.1%by mid-year, where it has remained.

US GDP for the second quarter of 2015 was revised upward modestly to3.9%, and seemed to make up for the poor first quarter showing of 0.6%,much of which was weather related. Consensus expectations are for 2%annualized growth in the 3rd quarter, or a bit above.

US economic data is not pointing clearly toward an acceleration of growth ora decline. It is likely that we are seeing minor fluctuations around theeconomy’s current steady trajectory. Certainly, there is no indication ofrecession and any slowing still seems likely to be a temporary phenomenon.

The Fed and Interest Rates

In the 3rd quarter, the dollar held its strength from previous quarters andmodestly appreciated. Commodity prices –especially oil prices- fell sharply.These two occurrences were the main drivers of the market’s sharply lowerinflation expectations. We are at a point where the markets seem to questionthe Fed’s ability to achieve its 2% inflation target in the next 6 to 12 months.Weak inflation prospects allowed the Federal Reserve to put off its interestrate hike, even as the Fed continued to say that it believed the US economy

Market Commentary

Exhibit 1: Market Returns

Sources: Barclays (BC) 9/30/15

Exhibit 4: Inflation Expectations

Exhibit 3: Flattening AAA Municipal Yield Curve

9/30/15

6/30/15

Source: Bloomberg

5 Year TIPS Breakevens

Maturity (Years)

Source: Bloomberg

Exhibit 2: Job Growth

Source: Bloomberg

Non-farm Payrolls

0

0.01

0.02

0.03

1 2 3 4 5 6

0

0.01

0.02

0.03

1 2 3 4 5 6

Jan-Sep 2014

Jan-Sep 2015

Total $233 B $308 B

New Money 45% 36%

Refunding 36% 43%

Combined 19% 21%

to be on track. Throughout the quarter, US interest rates moved steadilydownward, reversing the increase that occurred in the 2nd quarter, whichwas the result of anticipating the elusive Fed hike.

The Municipal Market

For the municipal market as a whole, credit quality continues to improve.S&P reported that, for the 11th month in a row, there have been moremunicipal bond upgrades than downgrades. Revenues and tax receipts are upwhile general fund balances continued to be replenished after having beendrained in the recession. Even Chicago proposed a substantial increase in itsproperty taxes along with other efforts to enhance revenue which, while notentirely sufficient to address all of its financial concerns, is still a seriouseffort in the right direction.

Nevertheless, there are always a few situations which go against trend. Thisturned out to be the quarter when Puerto Rico finally buckled under theweight of its enormous debt burden. In July, the Commonwealth’s PuertoRico Electric Power Authority (PREPA) barely avoided default by tappingreserves and its general fund. The Commonwealth then defaulted on some ofits appropriation debt payments due August 1st. Subsequently, PREPAreached a preliminary agreement with its creditor group on a debt exchange.It is likely that Puerto Rico’s troubles will continue to draw headlines as theissues are complex and any resolution will involve trade-offs.

New municipal bond issuance for the first 9 months of 2015 is higher thanfor the same period in 2014, but for the 3rd quarter it was modestly down,year over year. Outflows from municipal bond mutual funds occurred in all 3months of the quarter. Nevertheless, tremendous demand for municipalbonds remains, with quality new deals continuing to see demand that is manymultiples of what is available.

Looking Forward

Samson Capital has always looked at a broad spectrum of high-grade bondsectors to determine the best net after-tax return potential for our clients.Historically, this has meant portfolios consisting almost entirely of tax-exempt municipal bonds. Occasionally, high-grade taxable bond classes suchas corporates, mortgages, and US government securities offer better after-taxreturns at certain points along the yield curve. We may be approaching oneof those points presently, and are monitoring it closely.

When the Fed announced in September that it was still not ready to raiserates, the markets (and most likely the Fed) assumed that the hike still wouldoccur by December. However, the markets now seem convinced that a hikewill not occur until 2016. Whenever the hike occurs, the likelihood is thatrates all along the yield curve will remain near their historic lows, because themarket has already anticipated a 25 basis point increase while growth ratesand inflation levels are likely to remain subdued. Although oil prices

2Samson Capital Advisors 3rd Quarter 2015 Market Commentary

Exhibit 6: Municipal Issuance

Exhibit 7: After-tax Yield Curves

Source: Bond Buyer

Source: Bloomberg, Thompson, Merrill Lynch

Exhibit 5: State Tax Revenue

Source: Bloomberg

*Federal tax rate plus 3.8% health care surtax

Max Federal Tax Rate (43.4*)

AMT Federal Tax Rate (31.8*)

AA Municipals

AA Municipals

AA Corporates

AA Corporates

Treasuries

Treasuries

600

700

800

900

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$Bill

ions

Maturity (Years)

Maturity (Years)

conceivably have seen their lows, there are no meaningful harbingers of price pressures from commodities or wages.Clearer indications of how the US and global economy fared in the 3rd quarter will come from corporations’ thirdquarter earnings announcements, which are anxiously awaited and will probably be examined more closely thanusual.

The opinions expressed herein are solely attributable to Samson and should not be construed as an offer to buy or asolicitation to sell any securities. Inherent in any investment is the risk of loss. All factual information and statistical datain this document were obtained or derived from public sources. Samson makes no representations that such informationor statistical data is accurate or complete. No person to whom a copy of this document has been delivered should rely onany such factual information or statistical data as being accurate or complete and should not undertake any investmentprogram based on such information contained in this document. Any statements regarding future events constitute onlysubjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject tochange due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties,both general and specific, many of which cannot be predicted or quantified and are beyond our control. Past performanceis not indicative of future results. All estimates, opinions and analysis in this document constitute judgments made bySamson as of the date of this document and are subject to change without notice. Samson has no obligation or duty toinform any person to whom a copy of this document has been delivered of any change in any estimate, opinion oranalysis in this document or to update the document on a going forward basis.

3Samson Capital Advisors 3rd Quarter 2015 Market Commentary