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Navigating the Municipal Bond Market September 2019

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Navigating the Municipal Bond Market September 2019 Navigating the Municipal Bond Market September 2019 Craig Brandon, CFA Co-Director of Municipal Investments AN EATON VANCE COMPANY FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 2 Fixed Income Asset Class Return Analysis Higher 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD EM (Local EM (Local EM (Local Investment Treasury High Yield Municipal High Yield Municipal Municipal High Yield Municipal Currency) Currency) Currency) Grade 13.74 57.51 10.70 7.42 9.05 3.30 17.49 1.28 15.68 16.76 15.21 13.94 Investment Global Agg MBS Bank Loan High Yield Treasury High Yield Bank Loan MBS Bank Loan MBS High Yield Grade Ex-U.S. 8.34 51.62 15.19 9.81 15.58 5.29 1.51 10.16 0.99 11.15 7.46 10.51 Global Agg EM (Local Investment Investment EM (Local Bank Loan MBS MBS Treasury High Yield Treasury Treasury Ex-U.S. Currency) Grade Grade Currency) 10.13 -1.41 6.08 0.84 7.48 0.86 8.63 4.40 21.98 8.15 9.82 9.94 Investment Investment Investment Investment Investment Investment Municipal MBS Bank Loan Treasury Bank Loan Municipal Grade Grade Grade Grade Grade Grade -2.47 6.23 9.66 5.05 0.44 7.61 18.68 9.00 -1.53 -0.68 6.11 6.42 Investment Global Agg EM (Local Municipal Treasury High Yield Municipal Municipal High Yield Bank Loan MBS Municipal Grade Ex-US Currency) 12.91 5.87 4.38 6.78 -2.55 2.50 -0.69 1.67 5.45 -4.94 -2.15 6.83 EM (Local Global Agg Global Agg Global Agg Global Agg MBS Treasury Bank Loan High Yield Bank Loan High Yield Bank Loan Currency) Ex-U.S. Ex-U.S. Ex-U.S. Ex-U.S. 5.37 -2.75 1.60 -4.64 4.12 -2.26 6.30 -5.22 7.53 4.36 4.09 1.49 Global Agg Global Agg Global Agg Global Agg Investment Global Agg High Yield MBS Bank Loan MBS Treasury MBS Ex-U.S. Ex-U.S. Ex-U.S. Ex-U.S. Grade Ex-U.S. -26.39 5.89 1.52 2.59 1.04 2.47 4.95 -3.08 -3.08 -6.02 -2.51 5.89 EM (Local EM (Local EM (Local EM (Local EM (Local Bank Loan Treasury Municipal Treasury Municipal Treasury MBS Currency) Currency) Currency) Currency) Currency) -29.10 -3.57 2.38 1.99 0.25 2.31 5.53 -1.75 -8.98 -5.72 -14.92 -6.21 Lower Source: Morningstar as of 8/31/2019 Past performance is no guarantee of future results Data provided is for informational use only. Past performance is no guarantee of future results. See end of report for important additional information. Investment Grade represented by Barclays U.S. Corporate Index. MBS represented by Barclays U.S. Mortgage Backed Securities (MBS) Index. Treasury represented by Barclays U.S. Treasury Index. High Yield represented by Barclays U.S. Corporate High Yield Index. Municipal represented by Barclays Municipal Bond Index. Bank Loan represented by S&P/LSTA Leveraged Loan Index. Global Agg Ex-U.S. represented by Barclays Global Aggregate Ex-USD Index. EM(Local Currency) represented by JPMorgan Government Bond Index- Emerging Markets (GBI-EM) Global Diversified. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 3 Opportunities across the municipal fixed income franchise 1. Municipal market technicals and Fed outlook 2. Targeting maturities between 9-14 years 3. AMT Bonds 4. Municipal floating-rate Notes 5. Illinois GOs 6. Healthcare consolidation driven by ACA FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 4 Global 10-Year Sovereign Yields UK: 0.40% France: -0.40% Canada: 1.12% Germany: -0.71% South Korea: 1.31% Greece: 1.59% US: 1.46% Spain: 0.10% Japan: -0.30% Italy: 0.87% Australia: 0.94% Source: Bloomberg as of 9/3/2019 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 5 Global 10-Year Sovereign Yield Changes Year to Date UK: -0.87% France: -1.10% Canada: -0.84% Germany: -0.95% Greece: -2.71% South Korea: -1.41% US: -1.23% Spain: -1.31% Japan: -0.29% Italy: -1.87% Australia: -1.38% Source: Bloomberg as of 9/3/2019 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 6 Opportunities across the municipal fixed income franchise 1. Municipal market technicals and Fed outlook 2. Targeting maturities between 9-14 years 3. AMT Bonds 4. Municipal floating-rate Notes 5. Illinois GOs 6. Healthcare consolidation driven by ACA FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 7 Municipal Mutual Fund Flows 6% 4 Total Flows AAA GO 30 yr 3 5% 2 1 4% (Billions) Flows 0 3% -1 Yield -2 2% -3 96 Weeks 33 Weeks $111 billion $62 billion -4 1% 31 Weeks 45 Weeks 10 Weeks -5 $49 billion $73 billion $28 billion 0% -6 Yield information and flow data as of 8/31/2019. Yields from Thomson Reuters and flow data from investment company institute (ICI) FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 8 Municipal Supply Percentage Change YoY by State -11% -66% -15% -19% -47% -44% -14% -54% -15% -32% -22% -5% -45% +3% -6% -39% -27% -7% -8% -42% +/-0% -34% -7% -30% -22% -39% -43% +40% -48% -11% -9% +8% -36% -2% -4% -4% -24% -45% -14% Source: Bond Buyer as of 12/31/2018. Percentage change in issuance compares 2017 totals with 2018 issuance data FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 9 Municipal Bond Market Update Municipal Bond Issuance: New vs. Refunding 500 Refunding New 446 450 433 439 405 400 380 350 334 339 338 300 287 250 279 204 199 200 174 174 150 162 Total Issuance Billions Issuance Total 154 146 146 145 100 135 50 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: SIFMA Research as of 7/31/2019 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 10 Municipal Market Update Muni-to-Treasury Ratios 150% 2Y 10Y 30Y 100% 94% 81% 67% 50% Source: Morgan Stanley Matrix as of 8/31/2019. Muni-to-treasury ratio compares the MMD AAA Municipal Index yield curve with U.S. Treasury yields at various points of the maturity spectrum. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 11 10-Year BBB Spreads over time 10Year Generic BBB Spread 400 350 300 250 200 150 100 50 0 Source: Generic 10-Year BBB Index yield compared to AAA index yield. Municipal Market Demand (MMD) as of 8/31/2019 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 12 Opportunities across the municipal fixed income franchise 1. Municipal market technicals and Fed outlook 2. Targeting maturities between 9-14 years 3. AMT Bonds 4. Municipal floating-rate Notes 5. Illinois GOs 6. Healthcare consolidation driven by ACA FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 13 Municipal vs Treasury Yield Curve 2.50 Treasury Curve 2.00 Municipal Curve 1.50 Yield (%)Yield 1.00 Maturity Years: 9-14 Maturity Years: 0-8 Average value of Maturity Years: 15-30 Average value of extending: Average value of 0.50 extending::2 bps per year 5 bps per year extending:: 3 bps per year - 1 Year 1 2 Years 2 3 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 17 Years 17 Years 24 10 Years 10 Years 11 Years 12 Years 13 Years 14 Years 15 Years 16 Years 18 Years 19 Years 20 Years 21 Years 22 Years 23 Years 25 Years 26 Years 27 Years 28 Years 29 Years 30 Source: Thompson Reuters MMD as of 8/31/2019 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 14 Municipal vs Treasury Yield Curve starting the year 3.50 Treasury Curve 3.00 2.50 Municipal Curve 2.00 Yield (%)Yield 1.50 1.00 Maturity Years: 9-14 Maturity Years: 0-8 Average value of Maturity Years: 15-30 Average value of extending: Average value of extending::6 bps per year 6 bps per year extending:: 3 bps per year 0.50 - 1 Year 1 2 Years 2 3 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 17 Years 17 Years 24 10 Years 10 Years 11 Years 12 Years 13 Years 14 Years 15 Years 16 Years 18 Years 19 Years 20 Years 21 Years 22 Years 23 Years 25 Years 26 Years 27 Years 28 Years 29 Years 30 Source: Thompson Reuters MMD as of 1/1/2019 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 15 Opportunities across the municipal fixed income franchise 1. Municipal market technicals and Fed outlook 2. Targeting maturities between 9- 14 years 3. AMT Bonds 4. Municipal floating-rate Notes 5. Illinois GOs 6. Healthcare consolidation driven by ACA FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 16 Tax Cut and Jobs Act and the Alternative Minimum Tax Changes to the AMT significantly limit the amount of tax payers subject to the tax: “Based on the Tax Cut and Jobs Act of 2017, exemptions and phase-out levels will rise from 2018 through 2025, which should curb the number of Americans exposed to the alternative minimum tax.
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