A Registered Investment Advisory Firm
Where Are We Now? Global Interdependence Center & Denver Association for Business Economics
July 18, 2016
John R. Mousseau, CFA Executive Vice President & Director of Fixed Income john.mousseau@cumber.com
ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Adventures in Muniland!
Adventures in Muniland: A Guide to Municipal Bond Investing in the Post-Crisis Era Co-Authors: Michael Comes David Kotok John Mousseau Foreword by: Alexandra Lebenthal Available for purchase on Amazon.com
With a perspective that only decades of experience can bring, Adventures in Muniland captures the municipal bond market's transformation from stodgy to dynamic. This concise, yet comprehensive stroll offers an insider's view, brings the reader right up to today's discussions, and carries the added benefit of providing a clear understanding of what can at times appear to be an opaque marketplace. The Cumberland team has produced an insightful review for the seasoned professional and a must read for newcomers and investors. ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Munis & Treasuries: Jan. 2, 2007 7
Taxable Equivalent Yield Jan. 2007 6
Interest Rate
A Industrial
5
US Treasury
MMD Muni AAA
4
3 0
5
10
15
20
25
30
Years Source: Bloomberg ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
3
Munis & Treasuries: Dec. 29, 2009 US TSY
A Industrial
MMD Muni AAA
8
Taxable Equivalent Yield
TEY (39.6% Top Rate and 3.8% Surtax)
7
6
A Industrial Taxable Equivalent Yield: Jan. 2007
MMD Muni AAA
5
Interest Rate
Taxable Equivalent Yield January 2007
4
US Treasury
3
2
1
0 0
5
10
15
20
25
30
Years Source: Bloomberg ©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission.
4
Munis & Treasuries: Jan. 23, 2013 7
Taxable Equivalent Yield: Jan. 2007 6
5
Interest Rate
TEY (39.6% Top Rate and 3.8% Surtax 4
A Industrial
3
US Treasury MMD Muni AAA
2
1
0 0
5
10
15
20
25
30
Years Source: Bloomberg ©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission.
5
Munis & Treasuries: July 13, 2016 US Treasury
A Industrial
MMD Muni AAA
TEY (35% Top Rate)
Taxable Equivalent Yield Jan. 2007
7
Taxable Equivalent Yield January 2007
6
I n t e r e s t
5
TEY (39.6% Top Rate and 3.8% Surtax
4
3 R a t e
2
A Industrial US Treasury
1
MMD Muni AAA
0 0.25
0.5
1
2
3
4
Source: Bloomberg ©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission.
5
7
8
9
10
15
20
25
30
Years 6
Bond Buyer 40 vs. 30-yr Treasury
Source: Bloomberg and Cumberland Advisors ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Muni Market Feast & Famine This graph illustrates the performance of the municipal bond market since 2006. Since then, the market has experienced 3 major sell-offs: 1) Flight into Treasurys out of risk, 2) Panic selling because of Meredith Whitney, 3) Fears of Fed tapering.
2008 Financial Crisis
Meredith Whitney Moment Tapering & Fund Outflows
Source: Bloomberg and Cumberland Advisors ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Muni Bond Fund Flows Municipal Bond Fund Flows (All Municipal) Municipal Bond Fund Flows (All Municipal)
2 per. Mov. Avg. (Municipal Bond Fund Flows (All Municipal))
$13,000
Muni Bond market has repaired without Bond Fund Flows
$8,000
$ Millions
$3,000
-$2,000
-$7,000
-$12,000
-$17,000 2009 Source: Lipper
2010
2011
ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
2012
2013
2014
2015
2016
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Municipal Bond Issuance 385.37
325.22
321.70
372.78
287.73
433.31
409.69
389.63
429.89
388.84
408.28
359.75
215.84
50
358.40
150
200.85
250
287.73
350
383.34
450
-50
Selected Categories 2000 - 2016 Year-to-Date ($ Billions) YEAR
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
TOTAL
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD2016
9.98 12.58 21.77 27.10 20.71 22.12 18.78 31.21 19.78 23.15 32.66 12.44 17.20 26.77 18.87 29.23 25.41
13.32 21.14 20.98 30.23 26.85 31.20 23.87 32.03 21.40 23.40 27.05 16.54 26.76 24.34 15.44 33.06 31.42
18.11 25.11 25.42 28.14 38.69 45.01 27.07 44.35 43.83 38.83 44.69 18.91 34.72 32.21 28.29 44.96 42.00
15.70 18.86 25.86 36.31 31.09 31.31 29.35 33.54 51.72 36.84 27.50 15.76 34.25 36.63 25.79 40.25 32.48
15.96 28.91 34.00 35.70 37.61 35.94 35.04 42.92 43.75 30.41 38.32 21.39 37.36 29.02 25.75 35.26 40.61
23.44 30.87 38.46 48.25 35.07 44.25 45.33 47.18 50.79 43.86 34.68 31.97 42.71 25.36 34.78 34.39 43.92
15.05 21.01 28.02 33.20 25.30 34.49 27.86 31.86 37.09 26.11 29.15 24.91 28.18 28.62 25.61 35.21
16.88 24.14 31.58 25.86 27.94 34.02 31.59 29.21 32.50 36.36 29.71 23.83 32.71 22.51 24.60 32.22
16.59 14.32 27.57 26.26 25.20 31.67 28.03 32.82 20.19 29.95 35.70 27.46 25.90 19.84 24.07 23.43
19.77 32.08 42.41 34.87 32.22 27.31 31.57 45.18 21.93 46.37 45.73 32.86 33.78 27.12 35.26 31.97
20.29 30.48 35.60 26.27 25.77 39.42 42.77 30.12 25.73 38.29 46.07 37.29 33.09 23.34 28.93 23.19
15.76 28.24 26.73 31.15 33.30 31.56 47.58 29.47 20.91 36.11 42.05 24.37 26.12 25.94 37.83 22.20
200.85 287.73 358.40 383.34 359.75 408.28 388.84 429.89 389.63 409.69 433.31 287.73 372.78 321.70 325.22 363.17 215.84
Source: Bond Buyer ©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Fed Funds vs. Treasury 6
30-Year Treasury 5
4
10-Year Treasury Fed Funds Target 3
Why a Fed rate hike will not be terrible for long-term rates:
2
2004-2006 10-year Treasury yields increased 85 basis points while Fed funds increased 400 basis points
1
0
Fed Funds Target
30-yr. Treasury
10-yr. Treasury
Source: Bloomberg and Cumberland Advisors ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Muni/Treasury Ratio: Last Fed Hike 30-year Muni/Treasury Ration vs. Fed Funds
Muni yield ratios dropped last rate hike
Source: Bloomberg and Cumberland Advisors ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Total Assets: Central Banks 25
2015 20
15
10
5
1995 0
Source: David Stockman ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
13
Total Assets: Fed January 1975 - June 2016 5
Trillions
4
3
2
1
Pre-Tarp Average $678 billion
0
Source: Haver Analytics ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
14
Fed Maturity Structure: Assets Less than one year
One to 10 Yr
Over ten yr
$5.0
QE-3 $4.5
$4.0
QE-2
$3.5
$ Trillions
$3.0
QE-1
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Haver Analytics ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
15
US Tsy vs. German Yield Curves 5
US Treasury Actives Curve on July 8, 2016 US Treasury Actives Curve on December 31, 2013 4
Euro German Sovereign Curve on July 8, 2016 Euro German Sovereign Curve on December 31, 2013
3
2
1
-1
-2 1M
3M
6M
1Y
2Y
3Y
4Y
5Y
6Y
7Y
8Y
9Y
10Y
15Y
20Y
25Y
30Y
Source: Bloomberg ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
16
10-yr Treasury vs. 10-yr Bund
Source: Bloomberg ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
17
Federal Deficit
Source: Haver Analytics and Ned Davis Research ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Interest Expense: Debt Outstanding Interest Expense on Debt Outstanding US Treasury (Fiscal Year End) through June 2016 500 450
2006 $405.87
2015 $402.44
400
Billions
350 300 250 200 150 100 50 0
Source: Department of the Treasury, Bureau of the Fiscal Service. Treasurydirect.gov. ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Historical Debt Outstanding US Government 25
2020 $22.41 2015 $18.63
20
Trillions
15
10
2006 $8.51
5
0
Source: www.whitehouse.gov ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
20
Monthly Central Bank Assets Monthly Central Bank Assets for US, Japan, and Euro Area Jun-06 to Jun-16 $16,000
$14,000
Cumberland Advisors' YE2016 Estimate $15,207
Estimate includes ECB
$12,000
$ Billions
$10,000
$8,000
$6,000
$4,000
$2,000
$0
Source: Haver Analytics
Federal Reserve
ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
ECB
Bank of Japan
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Muni Credit Quality: Very High
ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Default Probabilities Even Smaller Cumulative Default Rates, Average over the Period 1970-2014, Municipal vs. Corporate Issuers Rating
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Municipal Issuers
%
%
%
%
%
%
%
%
%
%
Aaa
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Aa
0.00
0.00
0.00
0.00
0.01
0.01
0.01
0.01
0.01
0.01
A
0.00
0.01
0.02
0.02
0.03
0.03
0.04
0.05
0.06
0.06
Baa
0.01
0.04
0.08
0.11
0.15
0.19
0.24
0.29
0.33
0.37
Ba
0.28
0.81
1.27
1.85
2.39
2.80
3.24
3.59
3.88
4.11
B
2.92
5.57
8.03
10.26
12.38
13.82
14.66
15.44
16.30
17.48
Caa-C
7.83
11.01
12.99
14.12
14.71
15.21
15.76
16.37
16.88
16.88
Investment-Grade
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.08
Speculative-Grade
1.31
2.42
3.36
4.29
5.13
5.74
6.26
6.72
7.13
7.52
All Rated
0.02
0.03
0.05
0.06
0.08
0.09
0.11
0.12
0.13
0.14
Source: Moody’s ©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Higher Corp. Default Experience Cumulative Default Rates, Average over the Period 1970-2014, Municipal vs. Corporate Issuers Rating
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Corporate Issuers
%
%
%
%
%
%
%
%
%
%
Aaa
0.00
0.01
0.01
0.04
0.10
0.17
0.24
0.31
0.39
0.48
Aa
0.02
0.07
0.14
0.26
0.40
0.54
0.67
0.78
0.88
0.99
A
0.06
0.20
0.43
0.67
0.95
1.26
1.60
1.97
2.36
2.72
Baa
0.17
0.48
0.86
1.32
1.78
2.27
2.75
3.23
3.78
4.41
Ba
1.07
2.96
5.18
7.55
9.70
11.70
13.44
15.18
16.90
18.69
B
3.71
8.86
14.14
18.82
23.11
27.11
30.82
33.94
36.72
39.16
Caa-C
14.96
25.68
34.29
41.18
46.97
51.21
54.73
58.01
61.26
63.77
Investment-Grade
0.09
0.27
0.51
0.78
1.09
1.41
1.73
2.07
2.43
2.81
Speculative-Grade
4.34
8.92
13.29
17.15
20.52
23.48
26.08
28.36
30.47
32.41
All Rated
1.66
3.37
4.95
6.32
7.49
8.51
9.39
10.17
10.90
11.58
Source: Moody’s ©Copyright 2016 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Uninsured vs. Insured Puerto Rico Uninsured vs. Insured 11
5.00% Due 7/1/41 Call: 7/1/22 Dated: 4/3/2012 10
9
5.00% Due 7/1/35 Call: 7/1/22 Dated: 4/3/2012
8
7
6
5
4
3
Uninsured Puerto Rico
Insured Puerto Rico
Source : Bloomberg ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
25
Bellwether The Bellwether 14
13
February 16, 2016: Governor signs the Puerto Rico Electric Power Authority (PREPA) Revitalization Act
July 1, 2016: The Commonwealth defaults on $800 million of constitutionally guaranteed general obligation debt
12
March 11, 2014: Puerto Rico issues $3.5 bn of general obligation debt, 11 drawing hedge funds interest June 30, 2016: President Obama signs the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)
10
9
8
August 1, 2015: Partial default of debt owed by the Public Finance Corp. (PFC)
Source : Bloomberg ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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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. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.
ŠCopyright 2016 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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