chapter 15 - government bonds
TRANSCRIPT
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Copyright 2012 Cumberland Advisors. Further distribution prohibited without prior permission.
Bond Market OverviewFlorida International University
Dr. Helen SimonApril 2014
John R. Mousseau, CFA
Executive Vice President & Director of Fixed Income
(800) 257-7013 ext. [email protected]
Twitter: @CumberlandADV
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US Treasury Bonds
Government debt issued by The UnitedStates Department of Treasury. They aredebt instruments of The United StatesGovernment.
Usually referred to as Treasurys
Coupons
Strips (Zeros) Inflation Index (TIPS)
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Asset-Backed Securities
Security whose income payments arecollateralized by a pool of assets
Types
Home Equity
Auto Loans
Credit Cards
Student Loans
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General Obligation
Full Faith and Credit-Unlimited (School Districts)
Limited Obligation
Revenue Bonds
Water
Sewer Transportation
Highway
Transit
Airport
Port
University
Hospital/Health
Housing
Overview of Municipal Bond Sector
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Taxable Equivalent Yield = Muni Yield (1- Marginal Tax Rate)
Tax-Exempt Yield = 4%
At 15% Tax Rate 4%/(10.15) = 4%/0.85 = 4.70%
At 28% Tax Rate 4% (10.28) = 4%/0.72 = 5.55%
At 35% Tax Rate 4% (10.35) = 4%/0.65 = 6.15%
At 39.6% Tax Rate
4% (10.396) = 4%/0.604 = 6.63%
At 43.4% Tax Rate 4% (10.434) = 4%/0.566 = 7.07%
** Includes ObamaCare 3.8% tax on investment income
Municipal Bond Taxable-Equivalent Yields
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March 26, 2014
Its not always this cheap-relatively
April 1, 2010
Why Tax-Free Bonds are a Terrific Buy-Relatively
Maturity Treasury Muni-AAA Muni/Treasury Ratio Muni-28 Muni-35
2 year 0.46 0.52 1.13 0.72 1.10
5 year 1.72 1.39 0.81 1.93 2.14
10 year 2.74 2.77 1.01 3.84 4.26
30 year 3.60 4.25 1.18 5.90 6.53
Maturity Treasury Muni-AAA Muni/Treasury Ratio Muni-28 Muni-35
2 year 1.05 0.74 0.70 1.02 1.14
5 year 2.59 1.85 0.71 2.56 2.84
10 year 3.98 3.28 0.84 4.56 5.04
30 year 4.73 4.46 0.94 6.19 6.86
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Typical pricing conversation included: Type of issueGO vs. Other
Insurer and Rating
Maturity
Call Features
Refunding Characteristics (if applicable) Yield
Typical Munis traded below Treasuries because of the
tax issues.
Muni Bond Pricing Before the Crisis
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Bond Buyer 40 vs. 30-yr Treasury
Source: Bloomberg and Cumberland Advisors.
Internal Advisor Use Only SMRU 523868
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10-yr Moodys Muni AA vs. 10-yr
Source: Bloomberg and Cumberland Advisors.
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Munis & Treasuries: December 29, 2008
0
1
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0 5 10 15 20 25 30
InterestRate
Years
US TSY A Industrial MMD Muni AAA Taxable Equivalent Yield
Source: Bloomberg and Cumberland Advisors.
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0
1
2
3
4
5
6
7
0 5 10 15 20 25 30
InterestRate
Years
US Treasury A Industrial MMD Muni AAA TEY (39.6% Top Rate and 3.8% Surtax)
On January 1, 2007, Taxable Equivalent Yield was
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Munis & Treasuries: February 28, 2014
Source: Bloomberg and Cumberland Advisors.
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Copyright 2012 Cumberland Advisors. Further distribution prohibited without prior permission.
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Build America Bonds (BABs) were created by the America RecoveryReinvestment Act of 2009 (ARRA or Stimulus Act) in February
Permits state and local governments to sell taxable bonds instead of
tax-exempt bonds and receive periodic payments from the USTreasury equal to 35% of the interest on the bonds for the life of thedebt
Congress created BABs to broaden the market for municipal debt
and to provide a more efficient subsidy than tax exemption
Build America Bonds
Federally Subsidized Taxable Municipal Bonds
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BABs program expired December 31, 2010
There were no limits on the amount of debt that may be sold asBABs and no restrictions on their structure or maturity beyond the
rules applicable to tax-exempt bonds
From an investors perspective, BABs are simply taxable municipal
bonds. The Federal interest subsidies are paid directly to theissuers, not to investors, and are generally not material in the
analysis of the creditworthiness of BABs.
Build America Bonds - Continued -
Federally Subsidized Taxable Municipal Bonds
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On April 15th, triple-A rated University of Virginia sold $250 million of30-year BABs at a yield of 6.22%, 250 basis points above 30-yearUS Treasury yields. UVA has an after subsidy interest cost of 4.04%(65% of 6.22%) and is saving approximately $2 million per year ininterest cost (80 basis points) versus issuing tax-exempt bonds
At the end of December 2010, states and local governments acrossthe country sold over 3500 bond issues of BABs aggregating tomore than $187 billion in par in a large range of sizes and structures
Build America Bonds - Continued -
Federally Subsidized Taxable Municipal Bonds
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Copyright 2012 Cumberland Advisors. Further distribution prohibited without prior permission.
Florida Office New Jersey Office (800) 257-7013
One Sarasota Tower 614 E. Landis Avenue
2 N. Tamiami Trail, Suite 303 Vineland, NJ 08360
Sarasota FL 34236
21
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Copyright 2012 Cumberland Advisors. Further distribution prohibited without prior permission.
Florida Office New Jersey Office (800) 257-7013
One Sarasota Tower 614 E. Landis Avenue
2 N. Tamiami Trail, Suite 303 Vineland, NJ 08360
Sarasota FL 34236
22
B ild America Bond Plan Gains Obama
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Florida Office New Jersey Office (800) 257-7013
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Sarasota FL 34236
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Build America Bond Plan Gains ObamaBacking with Lower Subsidy
Repairing Market
Build America Bonds were successful in helping to repair a severely damagedmunicipal finance market, making much needed credit available at lower borrowingcosts for infrastructure projects that create jobs, Treasury Secretary TimothyGeithner said in an e-mailed statement last week. Bymaking Build America Bonds
a permanent and expanded financing tool for state and local governments, wereinvesting in our countryslong- term economic growth in a cost-effective way.
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Municipal Bond Issuance
Source: The Bond Buyer
YEAR JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
2000 9.98 13.32 18.11 15.70 15.96 23.44 15.05 16.88 16.59 19.77 20.29 15.76 200.85
2001 12.58 21.14 25.11 18.86 28.91 30.87 21.01 24.14 14.32 32.08 30.48 28.24 287.73
2002 21.77 20.98 25.42 25.86 34.00 38.46 28.02 31.58 27.57 42.41 35.60 26.73 358.40
2003 27.10 30.23 28.14 36.31 35.70 48.25 33.20 25.86 26.26 34.87 26.27 31.15 383.342004 20.71 26.85 38.69 31.09 37.61 35.07 25.30 27.94 25.20 32.22 25.77 33.30 359.75
2005 22.12 31.20 45.01 31.31 35.94 44.25 34.49 34.02 31.67 27.31 39.42 31.56 408.28
2006 18.78 23.87 27.07 29.35 35.04 45.33 27.86 31.59 28.03 31.57 42.77 47.58 388.84
2007 31.21 32.03 44.35 33.54 42.92 47.18 31.86 29.21 32.82 45.18 30.12 29.47 429.89
2008 19.78 21.40 43.83 51.72 43.75 50.79 37.09 32.50 20.19 21.93 25.73 20.91 389.63
2009 23.15 23.40 38.83 36.84 30.41 43.86 26.11 36.36 29.95 46.37 38.29 36.11 409.69
2010 32.66 27.05 44.69 27.50 38.32 34.68 29.15 29.71 35.70 45.73 46.07 42.05 433.31
2011 12.44 16.54 18.91 15.76 21.39 31.97 24.91 23.83 27.46 32.86 37.29 24.37 287.73
2012 17.20 26.76 34.72 34.25 37.36 42.71 28.18 32.71 25.90 33.78 33.09 26.12 372.782013 26.77 24.34 32.21 36.63 29.02 25.36 28.62 22.51 19.84 27.12 23.34 25.94 321.70
2014 18.87 15.44 34.31
2000 - 2014 Year to Date($ Billions)
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Reduced Muni Calendar
Source: Bloomberg and Cumberland Advisors.
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Sarasota FL 34236
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Absurd Ratios Attract Crossover Buyers
Source: Bloomberg and MMA
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
MMA 30-yr./30-yr. U.S. Treasury
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Florida Office New Jersey Office (800) 257-7013
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Sarasota FL 34236
28
Muni Bond Fund Flows
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
Municipal Bond Fund Flows (All Municipal)
Municipal Bond Fund Flows (All Municipal) 2 per. Mov. Avg. (Municipal Bond Fund Flows (All Municipal))
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All material presented is compiled from sources believed to be reliable.
However, accuracy cannot be guaranteed. Past performance is no
guarantee of future results. All investments involve risk including loss of
principal. Fixed income investments are subject to interest rate and credit
risk.
Disclosure
Internal Advisor Use Only SMRU 523868