Taxable US Municipal Bonds vs. Sovereign Debt Global Interdependence Center May 17, 2013
John R. Mousseau, CFA Executive Vice President & Director of Fixed Income (800) 257-7013 ext. 307 John.Mousseau@Cumber.com Twitter: @CumberlandADV
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013 ©Copyright 2013 Cumberland Advisors®. Further distribution prohibited without prior permission.
Source: The PEW Charitable Trusts
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
2 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
3 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
4 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
5 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
6 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
7 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Source: S&P
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
8 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Sovereigns vs. Munis Five countries are now rated below A in peripheral Europe.
GERMANY FRANCE UK ITALY SPAIN GREECE IRELAND PORTUGAL
5/1/2013 12/31/2007 Moody's S&P Moody's S&P Aaa AAA Aaa AAA Aa1 AA+ Aa1 NR Aa1 AAA Aaa AAA Baa2 BBB+ Aa2 A+ Baa3 BBBAaa AAA C BA1 A Ba1 BBB+ Aa1 AA Ba3 BB Aa2 AA-
Source: Moody’s and S&P
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
9 ©Copyright 2013 Cumberland Advisors®. Further distribution prohibited without prior permission.
Sovereigns vs. Munis
– Continued –
The credit quality of US states has remained intact. 5/1/2013 12/31/2007 Moody's S&P Moody's S&P MARYLAND Aaa AAA Aaa AAA VIRGINIA Aaa AAA Aaa AAA UTAH Aaa AAA Aaa AAA NORTH CAROLINA Aaa AAA Aaa AAA CONNECTICUT Aa3 AA Aa3 AA PENNSYLVANIA Aa2 AA Aa2 AA OHIO Aa1 AA+ Aa1 AA+ RHODE ISLAND Aa2 AA Aa3 AA ILLINOIS A2 AAa3 AA NEVADA Aa2 AA Aa1 AA+ NEW JERSEY Aa3 AAAa3 AA CALIFORNIA A1 A A1 A+ Source: Moody’s and S&P
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
10 ©Copyright 2013 Cumberland Advisors®. Further distribution prohibited without prior permission.
Source: S&P
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
11 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Source: S&P
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
12 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Characteristics of BABs
Taxable municipal issuers tend to have a high credit quality profile with qualities that make them inherently safer than non-governmental debt.
With a broad range of issuers, broad-based and meaningful diversification is possible, a key differentiator from other fixed income sectors.
Given the unique characteristics of the taxable municipal bond market, executing an allocation to this sector requires a distinctive set of skills, including specialized credit research, and a broad network of dealer relationships.
Specialists in the area, such as Cumberland Advisors are best-equipped to help investors realize advantages of a hedged, taxable bond portfolio.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
13 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Characteristics of BABs
– Continued –
Default rates significantly lower than corporate default rates due to monopolistic nature of municipalities and strong legal protections afforded to bondholders.
Restraint on state and local government borrowing have kept overall debt levels stable since peeking in the 1980s.
Municipal entities place priority on debt service as they do not wish to jeopardize access to bond markets they depend on for financing.
Voter authorization required for many types of municipal borrowing.
Municipal bonds offer transparency of municipal budget processes and lack event risk of corporate bonds.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
14 ©Copyright 2013 Cumberland Advisors®. Further distribution prohibited without prior permission.
BABs vs. US Corporates BABs created an attractive new fixed income asset class for investors.
Source: Raymond James
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
15 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
BABs vs. Tax-Exempts BABs Spread To Worst
BABs Semi Yld To Worst
30-yr. Treasury
MMA 30-yr. 8
350
300
7
250 6 200 5 150 4 100
3
50
2 4/30/2013
2/28/2013
12/31/2012
10/31/2012
8/31/2012
6/30/2012
4/30/2012
2/29/2012
12/31/2011
10/31/2011
8/31/2011
6/30/2011
4/30/2011
2/28/2011
12/31/2010
10/31/2010
8/31/2010
6/30/2010
4/30/2010
2/28/2010
12/31/2009
10/31/2009
8/31/2009
6/30/2009
4/30/2009
0
Source: Bloomberg and Merrill Lynch
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
16 ©Copyright 2013 Cumberland Advisors®. Further distribution prohibited without prior permission.
BABs vs. European Sovereigns Build America Bonds
German 30y
UK 30y
Italy 30y
Spain 30y
9 8
BABs
7 6 5 4 3 2 1
3/26/2013
11/23/2012
7/27/2012
3/31/2012
12/2/2011
8/5/2011
4/11/2011
12/13/2010
8/17/2010
4/21/2010
12/22/2009
8/26/2009
4/30/2009
0
Source: Bloomberg and Merrill Lynch
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
17 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results.
Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236
New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360
(800) 257-7013
18 ŠCopyright 2013 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.