Presentation on theme: "Prepared for: Bill Kielczewski SVP - Managing Director"— Presentation transcript:
1 Updates on the U.S. Economy, Investment Markets, and Financing Strategies Prepared for:Bill KielczewskiSVP - Managing DirectorInstitutional InvestmentsHuntington Capital MarketsDan VandenBoschVP - DirectorPublic FinanceHuntington Capital MarketsMarch 6, 2014
3 Global Economic Growth – slow recovery continues The IMF projects World Output to grow at 3.7% for 2014, up from 3.0% in 2013.“The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened,” said Olivier Blanchard, the IMF’s chief economist and director of its Research Department. “The drag from fiscal consolidation is diminishing. The financial system is slowly healing”.World OutputAdvanced Economies 1.4% 1.3% 2.2% 2.3%United States 2.8% 1.9% 2.8% 3.0%Euro Zone % -0.4% 1.0% 1.4%Japan % 1.7% 1.7% 1.0%United Kingdom 0.3% 1.7% 2.4% 2.2%Emerging and Developing Countries 4.9% 4.7% 5.1% 5.4%China % 7.7% 7.5% 7.3%India % 4.4% 5.4% 6.4%Latin America and Caribbean 3.0% 2.6% 3.0% 3.3%Middle East and North Africa 4.1% 2.4% 3.3% 4.8%Source: IMF website3
4 Global Economic Growth – Interest rates, FX, and global Q.E. All 4 of the worlds major central banks have implemented some form of quantitative easing in an attempt to increase their domestic growth rate.Globally, interest rates have increased year over year. With growth projected at 3.7% and inflation rates near or below growth rates, how much higher can they go?Source: IMF websiteCountryCredit RatingsDebt % GDP10 Year IR10 Year IR change YoYCPIYoYUnemployment RateCurrency % changeYoY (USD)United StatesAA Aaa70%2.68%0.73%1.50%6.60%0.00%United KingdomAAA Aa189%2.71%0.62%2.00%7.10%4.79%GermanyAAA Aaa81%1.66%0.05%1.30%6.80%1.59%ItalyBBB Baa2127%3.68%-0.86%0.70%12.70%JapanAA- Aa219%0.61%-0.15%1.60%3.70%8.64%Australia32%4.14%0.67%2.70%5.80%-12.78%ChinaAA- Aa35.50%0.88%2.50%--2.77%IndiaBBB- Baa52%7.50%0.89%9.13%15.00%Brazil59%4.75%1.91%5.59%20.90%
5 U.S. Economy – can we reach our projected 3.0% GDP growth The Federal Reserve projects U.S. GDP growth of 3.0% for 2014.Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said he expects the economy to expand 3 percent in 2014 as the jobless rate falls to 6.2 percent by year-end, warranting a quicker tapering to bond purchases by the central bank.Policy makers made the first two cuts to asset purchases in December and January, slowing to $65 billion a month from $85 billion.“My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy,” he said in a speech in Rochester, New York. “We must begin to back away from increasing the degree of policy accommodation in a manner commensurate with an improving economy,”Source: Bloomberg5
6 U.S. Economy – Is this the best we can do Leading Economic Indicators in February was 0.3% versus survey expectations of 0.3%. The 40 year average for the U.S. is 0.1%Source: Bloomberg6
7 U.S. Economy – Is this the best we can do LEI Leading Credit Indicators Index shows credit expansion slowing. Average rate of the LCI index over past 25 years is 0.1%. The current reading is -1.90%Source: Bloomberg7
8 U.S. Economy – Is this the best we can do Durable Goods Orders are negative for both readings thus far in The current reading is -1.0%; last months number was revised down to %. Both are well below our 0.8% historical averageSource: Bloomberg8
9 U.S. Economy – Is this the best we can do Construction Spending shows signs of stabilization. The bottom looks to have been formed in 2009 and we are trending back to our historical average. The current reading is 0.1% vs. historical average of 0.5%Source: Bloomberg9
10 U.S. Economy – Home Prices Rebound Home Prices in the U.S. have bounced back from their 15 year lows during the credit crisis. Will this trend continue without the Fed’s Q.E. support?S&P/Case-Shiller Home Price IndexSource: Bloomberg10
11 U.S. Economy – How are Homes Sales Home sales in the U.S. have slowed to -9.10%. Is there a correlation between buying a home and Government intervention in the market place? See below:Stimulus Package 1st Time Home Buyer Tax Credit / QE’s 1-3 / Fed TaperingU.S. Pending Home Sales Index YoYQE2Fed announced “Tapering”QE 1 starts in 11/081st Time Home Buyer Tax Credit added to Stimulus Package. 2/09QE2QE 2 11/10QE 3 9/12Source: Bloomberg11
12 U.S. Economy – Is Corporate America hiring U.S. job openings are picking up after the “great recession” and we have made our way back to hiring levels. Are there enough “qualified” employees in our underemployment bucket to fill these new positions?Source: Bloomberg12
13 U.S. Economy – Unemployment Rate at 6.60% We are very close to the Federal Reserves 6.50% desired rate which they state will allow them to slow their accommodative policy. Will they follow through with an end to QE and look to raise the overnight rate anytime soon, or, change their playbook with the recent weakening economic data?Source: Bloomberg13
14 U.S. Economy – Underemployment rate at 12.70%. Do we have a “structural” employment problem within the U.S.?We are well off the high rate of 17.20%, but, we are also 5 years out from the start of the “great recession”. Why can’t these folks in the underemployment index match up with all the new hiring opportunities presented in the JOLT Index?38% of business owners surveyed in the January 2014 NFIB say they can not find “qualified workers” in the U.S. work forceSource: Bloomberg14
16 Investing in the Current Market Quantitative Easing and Federal Funds Rate DiscussionThe Federal Reserve has held the U.S. overnight rate near zero for the last 4.5 years. In their most recent meetings they started to “taper” Government Bond purchases by $10 Billion dollars. Most economists expect the Fed to continue with tapering and end their bond purchasing program (Q.E.) by the end of 2014.The Federal Reserve has also said that they will hold the target interest rate for Federal Funds Rate at 0 to 0.25 at least as long as unemployment remains above 6.5% and inflation remains below their accepted level of 2.0 – 2.50%.The Unemployment rate fell to 6.6%, but, the participation rate within that survey fell to 63%, near the lowest level since Inflation data for the U.S. in March showed the Fed’s favorite gauge, PCE core YOY, was at 1.10%.The market has started to adjusted to “tapering”, economic data, and the Federal Reserves forward guidance on rates by extending the dates at which it anticipates the overnight rate to increase. Please see the Chicago Board of Trades Fed Funds Futures Contracts on the next slide for expected date and rate changes.
17 Investing in the Current Market Fed Funds Futures Contracts Source: Bloomberg
18 Ladder Strategy / Asset-Liability Match Bond Strategies; Portfolio Ladders and BarbellsLadder Strategy / Asset-Liability MatchStaggers maturities of bonds in a portfolio and sets a schedule for reinvestment of proceedsBarbell StrategyUtilizes only short-term investments and longer term bondsTotal PortfolioTotal PortfolioPortfolioMaturityPortfolioMaturityBenefits:Periodic maturities allow you to control liquidity based upon anticipated needsInterest rate volatility is reduced as portfolio is spread across different maturities and couponsProceeds from the maturing investment can be used for the scheduled draw, or reinvested in another investment if it is not needed.Benefits:Longer-term bonds provide higher interest rates, while shorter-term bonds provide liquidityCan help to mitigate risk of owning longer-term bonds in a rising (or anticipated to rise) interest rate environment by allocating just a portion of investments to longer-dated securitiesMaturities of shorter-term bonds can be reinvested in different types of bonds or other securities should market conditions change18
19 Investing in the Current Market – “Roll down” the yield curve and use it’s “steepness” to your advantage. Changes in the U.S. Yield Curve 2010 / 2012 / 2014Source: Bloomberg
20 Fixed Income Options for MI Government Entities: Overview Time HorizonShort-Term(12 months and < )Intermediate / Long Term(> 12 months)Relative RiskRisk-FreeTreasury BillsAgency Discount NotesGovernment MMKTTreasury Notes/BondsAgency Notes/BondsLowBank Deposit / MMKT AccountsBank Certificates of DepositCommercial Paper (IG A1/P1)Agency MBSCallable Agency BondsMI Municipal Notes/BondsModerate
22 Municipal Yields (Last 5 Years) 5 Years Ago3 Months Ago1 Month AgoToday1 Year Ago(%)(Years)The MMD "AAA" curve is written daily to represent a fair value offer-side of the highest-grade AAA rated state GO's, as determined by the MMD analyst team.10 year Michigan Municipal Bonds are currently trading at a 0.65% spread to “AAA” MMD 10 year Bonds. (Illinois Muni Bonds are trading at a 1.20% spread)Source: Thomson Reuters. As of March 3, 2014.
23 MUNICIPAL BOND FUND FLOWS – 2009 - PRESENT Municipal Bond Funds Suffered in 2013 but Investors are Starting to Come BackMUNICIPAL BOND FUND FLOWS – PRESENTSource: ICI Institute..
24 Emergence of the Taxable Market TAXABLE ISSUANCE VOLUME$38,364$32,832Source: Bond BuyerTaxable municipal issuance increased 17% in 2013Approximately 40% of taxable proceeds were used for the refunding of outstanding indebtednessThe receptiveness from “cross-over” buyers in municipal offerings shows the trend of an emerging market that started out of the Build America Bond ProgramThe added buyer universe continues to add depth and liquidity to the municipal marketSource: Bond Buyer, Offering Documents
25 MUNICIPAL MARKET ISSUANCE - 2004 – 2013 With a Sharp Decline in Refunding's, New Bond Issues Fell 12.5% in 2013MUNICIPAL MARKET ISSUANCE – 2013Source: Bond Buyer
26 Michigan Municipal Market Issuance Michigan Municipal IssuanceMichigan Community College Issuance$14,320,000 (1 Bond Issue)$92,065,000 (7)$44,465,000 (6)Source: Michigan Municipal Advisory Council
27 UNITED STATES FINANCIAL INSTITUTIONS – MUNICIPAL HOLDINGS But How Much Are We Missing As Borrowers Utilize Direct Bank Placements?UNITED STATES FINANCIAL INSTITUTIONS – MUNICIPAL HOLDINGS86% Increase since 2008Source: Bond Buyer
29 Rating ChangesOn 1/15/14 Moody’s Investor Services released a new rating methodology
30 Pension Adjustment Steps Allocates cost-sharing plan liabilitiesDiscounts accrued liabilities using a market discount rateDetermines the value of plan assetsCalculates adjusted net pension liabilityAmortizes adjusted net pension liabilityApplies to calculation versus full value and to revenue
32 Refunding What is a Refunding? Issuance of new debt at lower interest rates to replace debt which is currently outstanding at higher ratesA refunding of debt can also entail the issuance of new debt at either lower or higher interest rates to restructure the payments on existing debt.Budget reliefCreates debt service capacity for new moneyFactors that make a refunding work:Lower Interest RatesTimeSavings Target: 3% in minimum present value savings
33 Refunding - ContinuedCurrent – refunding completed within 90 days of the call date on the bonds being refundedBond holders are notified and bonds are paid offAdvance – refunding completed more than 90 days before the call date on the bonds being refundedLong Escrow period – escrow reinvestment rate is criticalOnly one advance refunding of a new money bond issue is permitted by the IRSProceeds are “Escrowed” until call date then bond holders are paid off
34 Refunding - ContinuedTypically, 10 Years after the original borrowing, a 20 year bond interest rate can be replaced with a 10 year bond interest rateToday’s market allows issuers to capture:1) Rolling down the Yield Curve2) Historically Low Rates3) Steep Yield Curve
37 Taxable RefundingAdvance refunding rules only apply to tax-exempt debtIssuers are permitted to refund an issue more than 90 days prior to the call date even if the issue has been advance refunded once if it uses taxable debtFor the first half of 2013 spreads between taxable and tax-exempt rates were very narrow making it a very good tool to useSpreads have widened out and with the expectation that rates will remain low through 2014 it may make sense to wait to be able to use tax-exempt rates if an issue is callable 11/1/14 and becomes an current refunding as of 8/1/14
39 Build America Bond’sBuild America Bonds are a taxable municipal bond program enacted by congress in 2009 and extended through December 31, 2010.The taxable bonds receive an interest subsidy(originally 35%) and at the time a comparable if not a lower cost option to tax-exempt bonds.On March 1, 2013, approximately $85 billion of federal budget cuts went into effect, meaning all subsidy payments for direct-pay municipal bonds, including BABs, to be paid between that date and Sept. 30 would be reduced by 8.7% through 9/30/13 and 7.2% from 10/1/13 to 9/30/14.With the subsidy cut, issuers started to look to redeem Build America Bonds at par plus accrued interest because they believe the cuts in their federal subsidy payments under sequestration has triggered the extraordinary redemption provisions in their bond documents.The bond documents said an “extraordinary event” would occur and trigger a call if there was a change to the federal tax code, pursuant to which the federal subsidy payment is reduced or eliminated.”
40 Build America Bond Structure Subsidy shown is original 35%
41 Types of Call Features Extraordinary Redemption Provision (ERP) Percentage of Par Amount of bondsMake-Whole Provision
45 Bank Qualified Banks are large buyers of municipal bonds. However, Banks may not deduct the carrying cost (the interest expense incurred to purchase or carry an inventory of securities) of tax-exempt municipal bonds. For banks, this provision has the effect of eliminating the tax-exempt benefit of municipal bonds. An exception is included in the Code that allows banks to deduct 80% of the carrying cost of a "qualified tax-exempt obligation." In order for bonds to be qualified tax-exempt obligations the bonds must be (i) issued by a "qualified small issuer," (ii) issued for public purposes, and (iii) designated as qualified tax-exempt obligations. A "qualified small issuer" is (with respect to bonds issued during any calendar year) an issuer that issues no more than $10 million of tax-exempt bonds during the calendar year. Qualified tax-exempt obligations are commonly referred to as "bank qualified bonds."Effectively two types of municipal bonds were created under the Act; bank qualified (sometimes referred to as "BQ") and non-bank qualified. Although banks may purchase non-bank qualified bonds they seldom do so. The rate they would require in order for the investment to be profitable would approach the rate of taxable bonds. As a result, issuers obtain lower rates by selling bonds to investors that realize the tax-exempt benefit. In contrast, banks have a strong appetite for bank qualified bonds that are in limited supply. As a result, bank qualified bonds carry a lower rate than non-bank qualified bonds
46 Bank Qualified - Continued Any issuer that is planning to issue less than $10 million of tax-exempt securities in a calendar year should consider designating the issue as bank qualified in order to obtain the associated interest cost savings. Issuers requiring more than $10,000,000 may be able to take advantage of bank qualification by issuing two series of bonds. For example, for a $20,000,000 financing, a $10,000,000 issue could be sold this year and one could be sold next year to obtain 2 bank qualified issues. Similarly, for a $25,000,000 financing, $10,000,000 could be sold as bank qualified bonds this year and a non-bank qualified $15,000,000 issue could be sold next year.
48 Appendix C: Disclaimer and Additional Considerations
49 DisclaimerThis report has been prepared for informational purposes only, and does not constitute an offer, recommendation or solicitation to buy or sell any securities. The content of this report is based upon information generally available to the public from sources believed to be reliable. No representation is made that the information is accurate or complete or that any returns indicated will be achieved. Past performance is not indicative of future results. Price and availability are subject to change without notice. The Huntington Investment Company (HIC), or persons involved in the preparation or issuance of this material, may from time to time, have long or short positions in, and buy or sell, the securities, futures or options identical with those mentioned herein. HIC is a wholly owned subsidiary of Huntington Bancshares Incorporated (HBI) and is registered as a Broker Dealer with the NASD, and a member of SIPC. Investments are Not FDIC Insured, May Lose Value, and are Not Bank Guaranteed.49
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