- We are pleased to announce the opening of our new Public Finance Office in Peru, Illinois to better serve our central Illinois clients:
BERNARDI SECURITIES, INC.
1125 PEORIA STREET | PERU, ILLINOIS 61354
(815) 587-8970
- We now have Public Finance offices in the southern, central and northern regions of the State of Illinois:
- Our Illinois Public Finance Team has decades of experience in the Illinois Public Finance marketplace. Bernardi Securities, Inc. has specialized in Illinois Public Finance for nearly 30 years and our Chairman, Edward Bernardi, has over 55 years of experience in this business. We thank you for your confidence over the past three decades and appreciate your referrals. We look forward to speaking to you in the coming year.
Please contact any member of our team:
On Wednesday, July 2nd, Ronald P. Bernardi, joined by Mayor Steve Benjamin, (Columbia, South Carolina) and Kevin Burke, (President and CEO, Airports Council International – North American) spoke at the Municipal Bonds for America Coalition’s panel discussion on Capitol Hill. The three panelists explained the importance of maintaining the tax-exempt status of municipal bonds in its entirety. The panelists noted that the tax-exempt status helps promote investment in our nation’s infrastructure, stimulates public and private investment in job creation and incentives investors to allocate funds to a historically safe asset class. Tax-exempt bonds are issued by over 50,000 state and local governments representing a three trillion dollar industry. In fact, 75% of our nation’s infrastructure is financed with municipal bonds. They went on to note that tax-exemption has historical precedents rooted in our nation’s federalist system and is a capital market that is envied around the world.
Link to Ronald’s remarks here
Link to MBFA’s summary here An Overflow Crowd Attends the Muni Bonds 101 Seminar
For more information, please visit the Municipal Bonds for America Coalition website.
To learn more about this topic, review our most recent municipal bond tax exemption research insights.
On July 2, 2014, the MBFA Coalition held a “Municipal Bonds 101” seminar on Capitol Hill for congressional staff and interested parties focusing on the importance of preserving the present-law treatment of tax-exempt municipal bonds.
The seminar featured a distinguished panel of municipal finance experts from varying backgrounds who explained the benefits of the traditional municipal bond market to staff from key congressional personal and committee offices. Panelists included:
- Ron Bernardi, Principal, President and CEO, Bernardi Securities
- Mayor Steve Benjamin, Columbia, South Carolina
- Kevin Burke, President and CEO, Airports Council International – North America
The education seminar featured panel presentations, an interactive discussion and fostered a great learning environment for key hill staffers. This “Muni Bonds 101” seminar is the second we’ve hosted in two years and has proven to be a key component in an ongoing effort by the MBFA Coalition to educate policy makers and staff on the benefits of the municipal market and the negative implications of scaling back or eliminating the tax exemption on municipal debt.
- Click here for the Bond Buyer article that covered the Muni Bonds 101 Seminar
For more information on the Municipal Bonds for America coalition, please visit our website: www.munibondsforamerica.org
Yield Penalties & Investment Opportunities Analyzed
CHICAGO, June 12, 2014 – Bernardi Securities, Inc. published a paper titled the “Illinois Effect” on Local Municipal Bonds. The analysis explores the increased borrowing cost paid by a municipality with solid credit metrics located in Illinois and the investment opportunities created by these bond market inefficiencies.
“Illinois’ fiscal problems at the state level are well known. What’s less well known is how this affects Illinois’ municipalities and the cost of infrastructure citizens depend on every day,” said Ronald Bernardi, President of Bernardi Securities, Inc. “Through independent municipal credit research, investors can identify market opportunities to help creditworthy Illinois municipalities fund public purpose infrastructure projects.”
Local governments with good credit metrics that are not overly dependent on the State for funding often pay higher yields on their bonds than similar municipalities in other states. The Bernardi report, distributed to clients on Tuesday, features a credit research analysis comparing the creditworthiness of one Illinois local government bond issuer to a similar credit issued in another state on the same day.
Key findings from the white paper:
- Most S&P Illinois local municipal bond ratings are well above the State rating. While the S&P rating on the State of Illinois’ G.O. bonds is currently the lowest of any U.S. state, S&P maintains many high-grade ratings on Illinois municipalities. 50% of the local governments in Illinois rated by S&P are currently rated AA- or higher, and 92% are rated A or higher. This indicates that others also believe there are good credits within Illinois, despite the negative headlines about the State’s finances.
- Illinois vs. non-Illinois yield comparison case study revealed difference of 15 basis points. The pricing of two bonds issued on the same day with the same rating were compared as an illustration of the “Illinois effect” — Houston County, Alabama and Peoria County Community School District No. 323, Illinois. Peoria’s 10-year maturity pays an additional 15 basis points over Houston.
- Yield penalty paid by local Illinois issuer unjustified. Both municipal bond issuers were analyzed using the Bernardi municipal credit research process. Despite having a stronger security pledge and underlying credit quality, the 10-year maturity for the Peoria bond pays an unjustified additional yield over Houston’s warrants.
The Bernardi report highlights the importance of thorough, independent municipal bond credit research. There are many local Illinois issues with good credit fundamentals that provide attractive investment opportunities due to the “Illinois effect”. The paper is available for download at https://bernardisecurities.com.
About Bernardi Securities, Inc.
A leading municipal bond boutique based in Chicago, Bernardi Securities, Inc. specializes in active municipal bond portfolio management and innovative public finance services. The firm underwrote and marketed more than $2.1 billion in bond issues last year to help finance public purpose municipal, county, school, park and water/sewer districts throughout the country. The Bernardi mission has remained the same since the firm’s founding in 1984 – specialize in the municipal bond market to deliver superior performance for clients. For more information, visit www.bernardisecurities.com or follow the firm on Twitter @BernardiMuni.
For more information, please contact Matt Bernardi at 312-281-2015 or [email protected].
To our Customers:
As you may know, the IRS has mandated requirements for clearing broker-dealers, such as Pershing LLC, to provide cost basis information for covered securities on the 1099 tax reporting forms that are sent out in the early part of each year.
Beginning in 2011, various types of securities phased in reporting requirements and became “covered.” In 2014 certain bonds are now covered by these requirements. This means that bonds purchased, or otherwise acquired by you, after 1/1/2014 are now covered by the reporting requirements.
Along with cost basis tracking, the IRS requires specific ways that bond premiums and bond discounts are reported by Pershing. Below is a brief summary of the way covered bond holdings will be handled:
| Bond type and premium/discount status | IRS required accrual method | Your options |
| Tax-free bonds purchased at a premium | The premium is amortized to the yield-to-worst date using the constant yield/scientific method | No changes allowed |
| Taxable bonds purchased at a premium | The premium is amortized to the stated maturity using the constant yield/scientific method. | You may opt out of amortizing taxable bond premiums. If you opt out the total premium will be reported when the bond is disposed. |
| All bonds purchased at a discount |
Accretion Calculation The default is to accrete the discount on a straight line/ratable basis. Accretion Method The default is to NOT include market discount accretion annually as income. The accrual will be realized as income upon disposal. |
Accretion Calculation
You may opt for the constant yield/scientific calculation. Accretion Method You may opt to include market discount accretion on an annual basis as income. |
The IRS required default method for amortizing premiums for taxable bonds and accreting discounts for all types of bonds may differ from the method you prefer. We do not provide tax advice; however, we do recommend that you consult with your tax professional regarding the options allowed. If you would like to make any changes, please complete a cost basis change form and return to us by September 30, 2014.
Please contact your Investment Specialist if you have any questions about the options available.
As always, we greatly appreciate the opportunity to assist with your investment needs.
Sincerely yours,
Eric Bederman
Chief Operating Officer
Since the end of last year, the 10-year Treasury has worked its way to 2.66%, down from 3.02% on December 31st. A combination of emerging market unrest – both financial and political – and the seemingly perpetual polar vortex has caused the economy to slow, sending bond yields lower and prices higher. Municipal bonds have rallied concurrently with Treasuries, but to a slightly greater extent. The 10-year muni/Treasury ratio has decreased from 101.1% in early January to 94.51% on February 27th1. This means the average municipal 10-year rate is equivalent to 94.51% of the 10-year Treasury rate.
Prices benefit from lower supply & stabilizing market
Municipal bond prices have benefitted from a relatively lower supply of new issuance volume, paired with the market stabilizing after the negative initial reaction to Detroit and Puerto Rico’s financial woes. Low issuance is largely driven by the rising yield curve, meaning many refinancing opportunities are not currently feasible. Additionally, as higher tax rates set in, investor demand for non-taxable income is on the rise.
Fund flow reversal signals retail reengagement
Recent mutual fund flows indicate a gradual reengagement of retail investors to the asset class. According to the ICI Institute, we have experienced six straight weeks of municipal bond inflows totaling $1.6 billion. This is paltry in comparison to the previous 33 straight weeks of outflows totaling $65.3 billion, but is certainly a positive trend.
Tapering expected to continue
Assuming U.S. growth continues at its recent pace, we expect new Fed Chair Janet Yellen to continue current Fed policies of tapering. The market is not anticipating the first rate hike until 2015 given tame inflation readings well below the 2% target and employment figures, which still demonstrate an economy functioning at under-capacity levels.
As always, please call us if you have any questions or would like a portfolio review.
Sincerely,
Matthew Bernardi
Bernardi Securities, Inc.
February 28, 2014
(1) Source: Bloomberg
Ronald P. Bernardi was quoted in a 1/8/14 article on MuniNet Guide regarding municipal bond tax exemption:
As Congress debates the future of tax exemption for municipal bond interest, one industry professional says it’s time for those whom it will directly affect – state and local government officials, taxpayers and citizens – to speak up.
In a recent report entitled, “A Century of Tax-Exempt Municipal Bonds: The Good, the Bad and the Ugly,” Ronald Bernardi, president and CEO of Bernardi Securities, Inc. says, “If these collective voices go unheeded, rest assured, the financial necks of towns, cities, villages, counties, school, water, sewer and park districts across the country will be snug in a noose ….”
Bernardi highlights the many benefits of the tax-exempt bond market (“the good”) – from providing a low-cost financing vehicle for state and local governments to creating jobs for local citizens, investment in public purpose infrastructure projects, and ensuring local input and control over community projects.
He also addresses the major criticisms of municipal bond tax exemption (“the bad”) and the challenges that state and local governments would likely face if tax exemption is repealed (“the ugly”).
Despite continual mutual fund outflows, the municipal market has kept pace with a significant rally in the Treasury market over the course of the last two months. Broadly speaking, municipal bonds are still inexpensive compared to Treasuries as the muni/Treasury ratio – the municipal rate divided by the corresponding Treasury rate – stands at 108%. Overhang of headline risk stemming from financial meltdowns in Detroit, Puerto Rico and places yet to be named will likely cause this high ratio to persist for some time. This dynamic presents an opportunity for fixed income investors.
Despite continual mutual fund outflows, the municipal market has kept pace with a significant rally in the Treasury market over the course of the last two months. Broadly speaking, municipal bonds are still inexpensive compared to Treasuries as the muni/Treasury ratio – the municipal rate divided by the corresponding Treasury rate – stands at 108%. Overhang of headline risk stemming from financial meltdowns in Detroit, Puerto Rico and places yet to be named will likely cause this high ratio to persist for some time. This dynamic presents an opportunity for fixed income investors.
Bond price rally defies 22-week fund outflow
Since topping out at a touch above 3%, the 10-year Treasury has rallied in price and fallen to a yield of 2.52%. The rally was kick-started by a surprising delay to the Federal Reserve’s tapering of their QE program in mid-September and is supported by the continued weak growth of the economy. The Fed is meeting this week, though no monetary policy change is expected. Many economists now expect tapering will be delayed until March 2014.
This sustained bond price rally since early September, however, comes in spite of 22 straight weeks of municipal bond fund outflows totaling $48.8 billion. The total outflows over the course of this time period are minor compared to the overall size of the $3.7 trillion market, but serve as an indicator of investor sentiment for the asset class. It is interesting to see that over this time span equity fund outflows have also been negative, even as the S&P reaches new all-time nominal highs. It appears that historically low rates, paired with stock markets at all-time highs, is pushing money to the sidelines reinforcing the reality of an economy continuing to experience anemic growth.
MUB discount disappearance signals stabilizing demand?
ETFs and mutual funds have been victims of the significant fund outflows as they were forced early in the fall to sell composite securities in order to meet redemption demands from fleeing investors. It was reassuring to see the MUB – the most actively traded municipal ETF – trade back to its Net Asset Value (NAV) after trading at a discount for over three months. In this instance sellers were forced to sell at a price BELOW the actual value of the underlying securities. The disappearance of the MUB’s discount may portend stabilizing demand for municipal bonds and is comforting to see from a market volatility perspective.
Watch the Fed this Wednesday for rally signals
Municipal bond rates are inextricably linked to the Treasury market, which is dictated by the Federal Reserve and underlying economic growth. Should the Federal Reserve downgrade their view of the economy in their statement released this Wednesday, expect the above mentioned bond market rally to continue.
Thank you for your continued confidence. Please call us with any questions you may have.
Matt Bernardi
Bernardi Securities, Inc.
October 29, 2013