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