Chapter 15 - Government Bonds

8/11/2019 Chapter 15 - Government Bonds

1/29

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

Florida Office New Jersey Office (800) 257-7013One Sarasota Tower 614 E. Landis Avenue

2 N. Tamiami Trail, Suite 303 Vineland, NJ 08360

Sarasota FL 34236
mailto:[email protected]:[email protected]


2/29


3/29




Sarasota FL 34236

3

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)


4/29


5/29


6/29




Sarasota FL 34236

6

Asset-Backed Securities

Security whose income payments arecollateralized by a pool of assets

Types

Home Equity

Auto Loans

Credit Cards

Student Loans


7/29Copyright 2012 Cumberland Advisors. Further distribution prohibited without prior permission.



Sarasota FL 34236

7

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





Sarasota FL 34236

8

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





Sarasota FL 34236

9

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





Sarasota FL 34236

10

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





Sarasota FL 34236

11

Bond Buyer 40 vs. 30-yr Treasury

Source: Bloomberg and Cumberland Advisors.

Internal Advisor Use Only SMRU 523868





Sarasota FL 34236

12

10-yr Moodys Muni AA vs. 10-yr



13/29





Sarasota FL 34236

14

Munis & Treasuries: December 29, 2008

0

1

2

3

4

5

6

7

8

9

0 5 10 15 20 25 30

InterestRate

Years

US TSY A Industrial MMD Muni AAA Taxable Equivalent Yield




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



Sarasota FL 34236

15

Munis & Treasuries: February 28, 2014



16/29


17/29


18/29


Florida Office New Jersey Office (800) 257-7013

One Sarasota Tower 614 E. Landis Avenue


Sarasota FL 34236

18

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


19/29





Sarasota FL 34236

19

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 -



20/29





Sarasota FL 34236

20

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 -



21/29





Sarasota FL 34236

21


22/29





Sarasota FL 34236

22

B ild America Bond Plan Gains Obama


23/29





Sarasota FL 34236

23

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.


24/29


25/29





Sarasota FL 34236

25

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)


26/29





Sarasota FL 34236

26

Reduced Muni Calendar



27/29





Sarasota FL 34236

27

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


28/29





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))


29/29


One Sarasota Tower 614 E. Landis Avenue 29

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

Chapter 15 - Government Bonds

Documents

Transcript of Chapter 15 - Government Bonds