Rally Opportunity & Fed Watch Wednesday

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 

Other Opportunities In Michigan

Ronald Bernardi was quoted in the 8/13/13 issue of InvestmentNews regarding bond issuances in Michigan, post the Detroit bankruptcy filing.

“The bondholders might have to work out some kind of deal in Detroit, but to throw those debt-holders in the same group with the coffee vender doesn’t make sense,” said Ronald Bernardi, a muni bond trader and president of Bernardi Securities, Inc.

Read Full Article (InvestmentNews site registration required)

City of Detroit Bankruptcy

Ronald Bernardi was quoted in the 7/19/13 issue of InvestmentNews regarding the bankruptcy filing for the City of Detroit.

“There are a lot of good credits in the state, and Michigan has traditionally been supportive of bond holders, but Gov. Snyder’s support for this plan has been surprising,” said Ronald Bernardi, a muni bond trader and president of Bernardi Securities Inc.

Read Full Article (InvestmentNews site registration required)

 

City of Detroit Finances

Ronald Bernardi was quoted in the 5/16/13 issue of InvestmentNews regarding bonds issued by the City of Detroit.

“For several years, Detroit’s finances have been below average,” said Ronald Bernardi, a municipal bond trader and president of Bernardi Securities, Inc. “In recent years, they’ve been issuing debt just to pay their operating costs. Anyone that is invested in Detroit the last several years has been investing in junk credit.”

Read Full Article (InvestmentNews site registration required)

 

Muni Maven’s view on Stockton CA

Ronald Bernardi was quoted in the 4/9/13 issue of InvestmentNews article titled “Take Five: Muni mavin Ronald Bernardi on the tremors from Stockton“.

“Ronald Bernardi, a municipal bond trader and president of Bernardi Securities Inc., puts the Stockton, Calif. bankruptcy in perspective.”

Read Full Article (InvestmentNews site registration required)

 

 

 

Municipal Bonds Surge Into the New Year

Municipal bond yield levels ended December and the year at the lowest nominal levels in several decades.

Elements of confusion

In December of 1981, I completed the first year of my nascent municipal bond career somewhat confused by 12% taxable money market rates and near 12% non-taxable 20-year, “AA” rated bond yields. 

Last week, with 30 years of bond market experience behind me, I reflected on the significance to you, our clients, of money market rates near zero, 2% taxable 10-year U.S. government bond yields and mid-maturity, non-taxable bond yields flirting with a 2% handle. My experiences aside, elements of confusion remain. I have many thoughts on the topic and will share some with you in our upcoming January “Year in Review” publication.

Demand surging into the new year, then supply

The month of December saw a surge in demand for municipal bonds coupled with a paltry (by historical standards) supply. We look for this dynamic to continue into the early part of 2012, keeping municipal bond rates at or near current levels. New issue supply will increase in 2012 from 2011 levels, but we do not expect the supply surge to occur until later in the year.

2011 municipal bond returns beat most stock indices

Mid and longer duration municipal bond portfolio returns in 2011 were solid and beat most stock indices on a nominal, pre-income tax basis. For taxpayers in a 28-35% federal income tax bracket, the effective, after-tax returns for most portfolios were excellent. It is unrealistic to expect similar returns from these same portfolios in 2012. 

Eight straight quarters of tax revenue growth

State and local governments received some good news in December with the release of the Q3 statistic that tax revenues rose 4.1% in the quarter – making for eight consecutive quarterly gains in this category. Additionally, the gain was driven by increases in property, sales and personal income taxes. This eases, somewhat, the pressure on budgets of state and local governments for now. 

Good news for the municipal bond market and a nice way to start 2012.

On behalf of everyone at Bernardi Securities, Inc., thank you for your continued confidence and we wish you a happy and healthy 2012.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
January 3, 2012

 

Municipal Bond Yields Trend Lower

Municipal bond yield indices moved lower during the month, continuing the trend established during the second half of January. Factors contributing to the ongoing rally include the relative dearth of new issue supply, a quiet market overall and an abatement of the deluge of bond fund redemptions of prior months. Generally, investors continued to reach for high-quality bonds during the month. This resulted in lower yields and higher prices in this sector of the market in particular, with wider credit spreads at month end. The market rally led to an approximate 30 basis point yield decline for 10 year maturity, non-taxable municipal bonds during February.

Lastly, the idea of allowing states to file for bankruptcy — which current law does not permit — has been publicly aired and discussed at length in recent weeks. Congress, in fact, held hearings on the topic during the month and it appears the idea has lost traction in Washington, as of this writing.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
March 2, 2011 

For more information, contact your Investment Specialist.

Municipal Bond Market Rallies, No Near Term Reversal in Sight

Bond prices rose during the month and bond yields declined from March end of month levels. The 10 year taxable Treasury bond ended the month yielding approximately 1.95%. The price rally was particularly felt in the non-taxable municipal bond sector. A manageable new issue supply was easily absorbed by available cash balances, as well as new funds available from both maturing/called bonds and recent mutual fund inflows. It does not appear this rally will reverse itself in the near term. 

Despite April’s bond market bullishness, the U.S. sold $16 billion in TIPS at a NEGATIVE 1.08% yield. This underscores the widely held belief of many investors that consumer prices will eventually rise.

Low issuance trend likely to continue in 2012, maintaining yields 

Municipal bond refinancings year to date have increased substantially from 2011 levels while new money issuance remains low as state and local governments continue to pare back capital projects. Net new issuance of municipal bonds in 2011 was negative by approximately $50 billion and it appears this trend will continue in 2012. The persistence of this dynamic will serve to help maintain bond yields in current range levels – absent a shift upward in Treasury bond yields or new and expanded municipal bond default and bankruptcy situations. 

States’ revenue collections exceeded pre-recession levels for the first time

The Nelson A. Rockefeller Institute of Government reported states collected more quarterly tax revenue during the fourth quarter of 2011 than they collected one year earlier. This is the first time states’ revenue collections exceeded collection levels prior to the recession. The fourth quarter 2011 collections were approximately 3% higher than an earlier fourth quarter peak in 2007.

Over the last five years states have reduced spending by more than $290 billion, with fiscal year 2012 cuts alone totaling $140 billion according to data compiled by the Center on Budget and Policy Priorities. Most states are now drafting or approving 2013 budgets and it appears this budget cutting trend will continue for many of them.

Please contact your Investment Specialist if you have any questions on these latest market developments.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
May 3, 2012 

Treasury, Municipal Bond Yields Advance

Bond yields on both U.S. Treasury and municipal bonds were on the rise in March and ended the month at higher levels than the month before. The 10-year taxable Treasury bond yielded 2.21% at month end, up from 1.97% on February 29th, but down from mid-month levels of 2.37%. Municipal bond yields increased similarly in March with the 10-year “A” rated index ending the month at 2.87%, up from 2.73% at the end of February, but down from mid-month levels that topped 3.05%.

Refinancing continues to dominate supply 

Municipal bond supply of new issues remained at manageable levels and was absorbed by the market for the most part. State and local government debt refinancing continues to dominate the new issue supply in 2012 – with nearly 70% of Q1 new issue supply comprised of refunding issues. This dynamic means fewer new securities have come to market to this point of the year, translating into a lower available supply of issues for investors. 

State revenue growth continued, but weakened 

The Rockefeller Institute reported state revenue growth weakened in the 4th quarter of 2011 compared to recent prior quarters. This is not surprising given moderating economic conditions and the expiration of certain stimulus provisions of the ARRA program. Generally, states’ revenue picture and overall fiscal situations continue to show improvement since bottoming out in 2010. As an example, The Center on Budget and Policy Priorities estimates that states will have projected cumulative deficits of $47 billion for the fiscal year 2013 beginning on July 1, 2012. Three years ago, this figure was $190 billion. Despite this improvement, most state and local governments still have much work to do in order to restore and balance budgets. Progress is slow and occurring at varying speeds around the country.

Harrisburg missed G.O. payment

Harrisburg, PA missed a payment on its general obligation bonds on March 15th. At this point, the default will not be felt by investors because bond insurer AMBAC covered Harrisburg’s March 15th payment obligation. Previous to this default, Harrisburg had missed bond payments on its incinerator related debt. This is its first G.O. bond default in recent memory. 

Assured Guaranty placed on Moody’s watch list

Lastly, Moody’s placed Assured Guaranty (AGM) bond insurance on its rating watch list with negative implications. Currently, AGM is rated “aa3” with a negative outlook. If Moody’s acts, the rating on AGM will most likely fall into the “single A” rating category. AGM is rated “AA minus/stable outlook” by Standard and Poor’s. 

A downgrade by Moody’s will most likely translate into fewer financial guarantee underwriting opportunities for AGM in the future. Additionally, a downgrade should benefit income oriented investors and be detrimental to liquidity conscious, trading portfolios.

Please contact your Investment Specialist if you have any questions or concerns.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
April 3, 2012 

Customer Protection Information

August 2012

To our Clients:

In recent months there have been a number of high profile failures of commodity investment firms. MF Global and Peregrine Financial have been in the news and are charged with misuse of customer funds.

These events highlight the differences in the way the commodities industry and the broker-dealer industry are allowed to operate via their respective regulators. Securities broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities & Exchange Commission (SEC) which have strict rules regarding the separation of customer funds and firm funds. Commodity brokers are regulated by the Commodity Futures Trading Commission (CFTC), which has different rules.

As you may know, Bernardi Securities, Inc. clears through Pershing LLC, a division of the Bank of New York Mellon. This relationship allows us to focus on helping you manage your bond portfolio. Pershing provides custody and safekeeping services along with processing all cashiering, interest payment, security redemption, trade confirmation, and statement mailing functions.

Industry rules require Pershing LLC to segregate customer funds from its own assets. This means that your assets are not a part of Pershing’s operating or investment accounts. Pershing is required to keep sufficient net capital to assure the return of customer assets in the event of failure or liquidation.

Bernardi Securities, Inc. and Pershing are both members of the Securities Investor Protection Corporation (SIPC), a non-profit organization that provides coverage to investors if their brokerage firm becomes insolvent. It covers the replacement of missing securities and cash up to $500,000, with a limit of $100,000 for cash. Pershing provides additional account coverage through Lloyds of London which protects your assets up to an overall aggregate level of $1 billion for assets in the custody of Pershing.

We believe our clearing relationship with Pershing provides our customers with the highest level of protection available today. This agreement allows us to focus on our main mission-managing customer bond portfolios and providing high quality offerings. We do not have custody or access to customer funds and have no desire to seek it.

We hope this letter provides you with an additional level of comfort. Please feel free to contact me at (312) 281-2010 if you have any questions.

 

Sincerely yours,

Eric Bederman

Chief Operating & Compliance Officer

 

This document has been prepared by Bernardi Securities, Inc. (BSI) for our clients and other interested parties. Within this document, we may express opinions about the direction of financial markets, investment sectors, trends, and taxes. These opinions should not be considered predictions of future results, and are subject to change at any time. Past performance is not indicative of future returns. Nothing in this document represents a recommendation of any particular strategy, security or investment product. This information is provided for educational purposes only and was obtained from sources considered reliable, but is not guaranteed and not necessarily complete. BSI offerings are made by prospectus or official statement only. Income may be subject to state and local taxes and the federal alternative minimum tax. Additional risks associated with investing in municipal bonds include credit risk, interest rate risk, and reinvestment risk. Please consult your tax professional regarding the suitability of tax-free investing. Please consult your investment specialist for more information.

Municipal bonds not FDIC insured * May lose principal * Not appropriate for all investors