Presentation on theme: "The Municipal Bond Market in the Aftermath Municipal Bond Club of Baltimore September 25, 2008 Presented by: Anirban Basu, CEO Sage Policy Group, Inc."— Presentation transcript:
The Municipal Bond Market in the Aftermath Municipal Bond Club of Baltimore September 25, 2008 Presented by: Anirban Basu, CEO Sage Policy Group, Inc. Morris Segall, President SPG Trend Advisors
Historic and Projected World Output Growth, 2004 through 2009* Source: International Monetary Fund *2008-2009 data are projections
Estimated Growth in Output by Select Global Areas, 2008 Source: International Monetary Fund
University of Michigan Consumer Sentiment Survey September 2001 through August 2008 Source: University of Michigan; Dismal.com Between Aug. 2005 and Sept. 2005, the consumer sentiment index dropped 12.2 points, the largest one-month decline since December 1980.
Retail & Food Services Sales January 2001 through August 2008 Source: Dismal.com
CPI August 2008 Source: Bureau of Labor Statistics CPI : +5.4% Core CPI*: +2.5% *Core CPI: All items less food and energy
15-Year & 30-Year Fixed Mortgage Rates January 1995 through September 2008 Source: Freddie Mac
U.S. New Home Sales January 1999 through August 2008 Source: Economy.com, Census Bureau
Change in Unit Sales by Maryland Jurisdiction August 2007 vs. August 2008 CountyAug 08Aug 07% Chg Garrett40378.1% Talbot3940-2.5% Queen Anne’s4953-7.5% St. Mary’s102112-8.9% Frederick201222-9.5% Howard275304-9.5% Dorchester2023-13.0% Cecil7689-14.6% Washington89106-16.0% Montgomery787963-18.3% Wicomico6786-22.1% Harford226295-23.4% CountyAug 08Aug 07% Chg Worcester100134-25.4% Anne Arundel433594-27.1% Prince George’s430611-29.6% Baltimore County577842-31.5% Allegany4567-32.8% Caroline1827-33.3% Baltimore City430662-35.0% Carroll106171-38.0% Charles97175-44.6% Calvert51104-51.0% Kent1024-58.3% Somerset 115-93.3% Source: Maryland Association of Realtors MD: -25.8% in August 2008
Source: Economy.com, Bureau of Labor Statistics Net Change in U.S. Jobs January 2000 through August 2008 8/08: -84k Over the last 12 months (Aug. to Aug.) the U.S. lost 283k jobs
National Nonfarm Employment by Industry Sector Groups August 2007 v. August 2008 Absolute Change Source: Bureau of Labor Statistics -283k All Told Bush Scorecard Private Sector: +3,353,000 Public Sector: +1,651,000 Total: +5,004,000
Unemployment Rates, U.S. States (SA) August 2008 Source: Bureau of Labor Statistics RankStateRateRankStateRateRankStateRate 1South Dakota3.318Arkansas4.835Connecticut6.5 2Nebraska3.519Alabama4.935Florida6.5 3North Dakota3.619Delaware4.935Oregon6.5 4Utah3.719Vermont4.938Missouri6.6 5Wyoming3.922Texas5.038Tennessee6.6 6Oklahoma4.023Wisconsin5.140Kentucky6.8 7West Virginia4.124Massachusetts5.341Alaska6.9 8Hawaii4.225Colorado5.441District of Columbia6.9 8New Hampshire4.226Maine5.541North Carolina6.9 10Montana4.427Arizona5.644Nevada7.1 11Maryland4.528New York5.845Illinois7.3 12Idaho4.628Pennsylvania5.846Ohio7.4 12Iowa4.630New Jersey5.947South Carolina7.6 12New Mexico4.631Washington6.048 California 7.7 12Virginia4.632Minnesota6.248Mississippi7.7 16Kansas4.733Georgia6.350Rhode Island8.5 16Louisiana4.734Indiana6.451Michigan8.9 U.S. unemployment rate: August=6.1%
Total Municipal Bond Debt Outstanding Latest estimates place debt outstanding at $2.66 trillion. Source: S&P All Muni Index
G.O. Municipal Bonds Bloomberg Daily Generic OAS Yields, 9/23/2008 AAA (Sect. 49) AA (Sect. 104) A (Sect. 159) BAA1 (Sect. 631) AAA as % of Current US Gov’s 1 YR20091.952.052.422.9599.25 2 YR20102.332.422.823.16116.35 3 YR20112.622.763.133.39109.82 4 YR20122.842.993.333.62102.35 5 YR20133.043.173.543.86102.46 7 YR20153.413.543.874.32102.67 9 YR20173.793.904.254.75104.25 10 YR20183.964.074.424.95104.41 12 YR20204.284.424.805.31108.80 14 YR20224.554.674.995.60111.65 15 YR20234.644.775.095.72111.91 17 YR20254.754.885.235.91110.79 19 YR20274.855.005.346.03109.51 20 YR20284.875.035.386.07108.24 25 YR20335.055.205.566.07113.96 30 YR20385.075.205.566.07116.20 Source: Bloomberg
Market Update The municipal bond market was a casualty of the current credit crisis with yields uncharacteristically exceeding comparable Treasury issues. As the credit crisis wore on, investors increasingly shunned risk. Housing issues suffered from the mortgage market meltdown. Insured issues suffered from the credit downgrades and losses of municipal bond insurers.
Market Update (cont.) Long term bond issuance through August was virtually flat with 2007 at approximately $295 billion. New bond issuance was strongest in Development, Environment, Health Care, Transportation and Utilities. Not surprisingly new issue weakness was led by housing followed by general purpose and education sectors.
Market Update (cont.) In addition, variable rate (short put) issues saw the biggest increase (+220%) in year over year volume. Concurrently, issues backed by Letters of Credit increased by over 370% year to year from $10.9 billion to over $52 billion. While Long term bond issuance was virtually flat through August, municipal note issuance increased over 14% to over $36 billion at the end of August.
Market Update (cont.) Safety was also a principal objective as issues backed by letters of credit and with variable rates (short put) increased substantially from 2007 levels. Leading sectors in note finance this year have been General Purpose and Education sectors. New money financing represented the bulk of note issuance while refundings represented the bulk of long term bond issuance this year.
Outlook While the municipal bond market seems to have stabilized with the redemption of auction rate preferred issues by brokerage firms, the market will need the full government “bailout” to provide more stable liquidity. Investors continue to be risk averse and will stress safety of principal and liquidity. State and local government finances are facing increased budget deficits from revenue shortfalls and are also facing limits on new bond issuance.
Outlook (cont.) Increasingly programs will have to be cut. Many states have already raised taxes and property tax increases have peaked. We expect an increase in downgrades of state and local government credit ratings and in the credit ratings of agency and revenue bond issues. We expect interest rates to rise as a result of an increase in U.S. Treasury interest rates from increased deficit
Outlook (cont.) Conversely, we expect either a repeal or major adjustment in the AMT tax that would benefit municipal bond investment. Likewise a rise in Federal income taxes which we expect will also increase the attraction of municipal securities.
Conclusion In conclusion, the municipal bond market will face increasing supply from financially stressed issuers but increasing demand from investors seeking tax avoidance. However, investor selection of municipal debt will be more discriminating.