Fixed Income Solutions Municipal Bond Investor Weekly September 20, 2021 Noreen McClure –Director, High Net Worth Drew O’Neil - VP, Fixed Income Strategist What To Do With MY Cash! Many investors are sitting on cash… a tremendous amount of cash. I recently read an article written by Ben Carlson, from his blog “A wealth of common sense” titled, “Why is There Nearly $10 Trillion Earning Nothing in Saving Accounts”? He mentioned that according to Bankrate the average interest rate for a savings account rate now is .06% or lower. So how much cash is sitting on the sidelines in your account? Don’t be paralyzed at these low rates, be proactive within the municipal market! Are you waiting for rates to rise? For over a decade we’ve talking about rising rates… but it hasn’t happened yet. In fact, the Fed has said they will not raise rates in the foreseeable future. Yet, many investors follow media pundits’ expectations, instead of doing what is right for their individual financial needs. Let’s review the fundamental principles of why we include individual municipal fixed income into our investment portfolios: wealth preservation, reliable tax efficient income, and a defined maturity date. These three attributes of an individual municipal bond are what highlights the overall attractiveness of the investment. I can understand your concerns about the future expectations of a rise in rates, however there are multiple strategies we can visit that could enhance your investment opportunities. I must note that none of these strategies provide guaranteed principal protected liquidity if an investor needs to liquidate prior to maturity; like a savings account would. Three strategies that we are currently deploying (but not limited to) are 1) purchasing kicker (cushion) bonds 2) buying short term maturities at rates above bank deposit rates and 3) buying the steepest part of the municipal curve. I will review each strategy briefly in this commentary. 1) Kicker bonds. This is a bond structure that may appear complex to some investors because the bond trades at a premium to par, however, there is an innate opportunity investing in kickers that many do not fully understand. A kicker bond is a security that pays an above market coupon and is callable in the near future. The bond is priced with the assumption the bond will be called on its call date. If the bond is not called, the investor is further rewarded with higher returns each year the bond remains outstanding, hence the term kicker! Each year the bond remains outstanding past the first call date-- the investor receives a kick-up in return and the yield will increase incrementally until it is called or reaches the maturity date. In summary, if an investor purchases a 5% coupon bond with a long maturity with a 3 year call (YTC 0.31%) the investor could possibly pick up an additional 116 bp of yield if the bond was called in the 4th year (YTC 1.46%) instead of year 3. That is a 79% pick up in yield while maintaining a low duration security. 2) Short term municipals. Depending on your federal marginal tax bracket and your state of residence, short term maturities may present an opportunity over bank deposit rates. For example, there was a Clay County Minnesota deal priced last week where an investor could have purchased a 2022 maturity with a yield at a 0.13%, or a 2023 maturity yielding 0.16%. If the investor was a Minnesota resident, their taxable equivalent yield (TEY) would have been much higher. Clay CO MN GO AAA MN Credit Program AA underlying rating State of Residence Maturity Coupon Yield TEY @ 37% MN Resident 8-1-2022 4.00% .13% .24% 8-1-2023 4.00% .16% .30% Texas Resident 8-1-2022 4.00% .13% .20% 8-1-2023 4.00% .16% .25% © 2021 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 Raymond James Fixed Income Solutions As you can see from the above chart a Minnesota resident purchasing a bond in their state can receive a taxable equivalent yield (TEY) in excess of 0.20%, and far above money market and bank deposit rates. If you are an investor that does not reside in Minnesota, perhaps in you live in a state with no income tax, such as Texas, you can receive a TEY of +0.20%. Your advisor can assist you in following the short term alternatives in the new issue market and possibly even in your state of residence to ensure double tax exemption. % of Total 3) Identifying the steepest segment of the yield curve. Year Yield Segment Slope (bp) Yield Available Deploying bonds within those years on the curve allows you to 2022 0.07 5% capture a large percentage of attainable yield without necessarily 2023 0.11 7% assuming too much duration risk. Taking a historic look over the 2024 0.17 11% past three years, the slope of the AAA municipal yield curve at 2025 0.28 18% 147 bp is the steepest it has been since March 2021 (the flattest 2026 0.41 1 to 5 Yr 34 bp 27% curve was back in September 2019 coming in at just 72 bp). So 2027 0.54 35% what is this telling an investor? If you could pick up over 60% of 2028 0.67 44% the achievable yield of the entire curve while maintaining an average maturity of five years would you consider that? How 2029 0.78 51% about 75% of the curve with an average maturity of 10 years? The 2030 0.86 56% chart to the left illustrates the current AAA municipal yield curve 2031 0.94 5 to 10 Yr 51 bp 61% and highlights the steepness between the 5 to 15 year maturities. 2032 1.00 65% 2033 1.05 68% All of the strategies, along with many other ideas, can be attained 2034 1.09 71% by working with your Fixed Income Solutions team to assure that 2035 1.13 73% a custom portfolio compliments your current financial goals. 2036 1.16 10 - 15 yr 22 bp 75% 2037 1.19 77% The Week Ahead… Just under $10 million in new issues are 2038 1.23 80% expected this week according to The Bond Buyer. Some of the 2039 1.27 82% larger deal expected to come to market include: the Triborough 2040 1.31 85% Bridge and Tunnel Authority (-/AA+/AA+) is selling $880 million of 2041 1.34 15 - 20 yr 18 bp 87% payroll mobility tax senior lien bonds; the Department of Airports 2042 1.37 89% of Los Angeles, CA (Aa3/A+/AA-) is issuing $750 million of 2043 1.40 91% subordinate revenue bonds; the New Jersey Health Care Facilities Financing Authority (Aa3/AA-) is selling $746 million of revenue 2044 1.43 93% bonds for RWL Barnabas Health Obligated Group; Ohio State 2045 1.46 95% University (Aa1/AA/AA) is bringing a $600 million deal of general 2046 1.49 20 - 25 yr 15 bp 97% receipts bonds to market; and the Turnpike Authority of Kentucky 2047 1.50 97% (Aa3/-) is selling $157 million of economic development road 2048 1.51 98% revenue refunding bonds. See table below for additional new 2049 1.52 99% issuance. 2050 1.53 99% 2051 1.54 25 - 30 yr 5 bp 100% For the Numbers… The muni market saw little change over the Sources: MMD, Raymond James past week. Yields declined by 1 bp at 1 year with demand pressure for short term supply. Yields also declined 3 bp in 15 years and were unchanged at 30 years. The muni/Treasury ratio declined slightly with the 10 year at a 68% and the 30 year at 80%. Although the market continued its 28 consecutive weeks of positive muni flows into mutual funds, the size of the inflows has been decreasing. © 2021 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 Raymond James Fixed Income Solutions This Week Last Week Change 10 Y 30 Y 10 Y 30 Y 10 Y 30 Y Municipal (AAA) 0.94% 1.53% 0.93% 1.53% 0.00% 0.00% Treasury 1.37% 1.91% 1.35% 1.94% 0.02% -0.03% Ratio 68.3 80.2 69.1 78.8 -0.7 1.4 Tax Equivalent Ratio (Fed 37%) 108.5 127.3 109.7 125.1 -1.2 2.2 Bond Yields (%) as of 09/17/21 1 2 3 4 5 7 10 15 20 25 30 Muni AAA¹ 0.07 0.07 0.14 0.26 0.39 0.64 0.94 1.17 1.32 1.47 1.53 Weekly Change * 0 0 0 0 0 1 0 0 0 0 0 Tax Equiv Munis² 0.11 0.11 0.22 0.42 0.63 1.01 1.49 1.85 2.10 2.34 2.43 Taxable A Muni³ 0.33 0.51 0.79 1.07 1.27 1.60 1.78 1.97 2.39 2.43 2.43 Weekly Change * 0 0 1 4 5 6 4 2 1 0 -1 Treasuries³ 0.07 0.23 0.47 0.68 0.88 1.17 1.37 1.61 1.85 n/a 1.91 Weekly Change * -1 0 2 4 6 5 2 1 -1 n/a -3 Corporates A³ 0.24 0.40 0.69 0.98 1.23 1.65 2.09 2.60 2.76 2.83 2.80 Weekly Change * 1 2 3 4 4 3 2 1 -1 -3 -3 This 1-Week 1-Year This Last Last Week Change Change Week Week Year Dow Jones Industrial 34,585 -0.1% 25.0% Prime Rate 3.250 3.250 3.250 NASDAQ Composite 15,044 -0.5% 39.4% 3-Month LIBOR 0.124 0.116 0.227 Crude Oil 71.97 3.2% 64.3% Fed Funds 0.250 0.250 0.250 U.S.