Transcript August 2008 - the Municipal Bond Club of Baltimore

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
Between Aug. 2005 and Sept. 2005, the
consumer sentiment index dropped 12.2
points, the largest one-month decline since
December 1980.
Source: University of Michigan; Dismal.com
Retail & Food Services Sales
January 2001 through August 2008
Source: Dismal.com
CPI
August 2008
CPI : +5.4%
Core CPI*: +2.5%
Source: Bureau of Labor Statistics
*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
County
Aug 08
Aug 07
% Chg
Garrett
40
37
8.1%
Talbot
39
40
Queen Anne’s
49
St. Mary’s
Frederick
County
Aug 08
Aug 07
% Chg
Worcester
100
134
-25.4%
-2.5%
Anne Arundel
433
594
-27.1%
53
-7.5%
Prince George’s
430
611
-29.6%
102
112
-8.9%
Baltimore County
577
842
-31.5%
201
222
-9.5%
Allegany
45
67
-32.8%
Caroline
18
27
-33.3%
Baltimore City
430
662
-35.0%
Carroll
106
171
-38.0%
Charles
97
175
-44.6%
Howard
275
304
-9.5%
Dorchester
20
23
-13.0%
Cecil
76
89
-14.6%
Washington
89
106
-16.0%
Calvert
51
104
-51.0%
Montgomery
787
963
-18.3%
Kent
10
24
-58.3%
Wicomico
67
86
-22.1%
Somerset
1
15
-93.3%
Harford
226
295
-23.4%
Source: Maryland Association of Realtors
MD: -25.8% in August 2008
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
Source: Economy.com, Bureau of Labor Statistics
National Nonfarm Employment
by Industry Sector Groups
August 2007 v. August 2008
Absolute Change
-283k All
Told
Bush Scorecard
Private Sector: +3,353,000
Public Sector: +1,651,000
Total: +5,004,000
Source: Bureau of Labor Statistics
Unemployment Rates, U.S. States (SA)
August 2008
Rank
State
Rate
Rank
State
Rate
Rank
State
Rate
1
South Dakota
3.3
18
Arkansas
4.8
35
Connecticut
6.5
2
Nebraska
3.5
19
Alabama
4.9
35
Florida
6.5
3
North Dakota
3.6
19
Delaware
4.9
35
Oregon
6.5
4
Utah
3.7
19
Vermont
4.9
38
Missouri
6.6
5
Wyoming
3.9
22
Texas
5.0
38
Tennessee
6.6
6
Oklahoma
4.0
23
Wisconsin
5.1
40
Kentucky
6.8
7
West Virginia
4.1
24
Massachusetts
5.3
41
Alaska
6.9
8
Hawaii
4.2
25
Colorado
5.4
41
District of Columbia
6.9
8
New Hampshire
4.2
26
Maine
5.5
41
North Carolina
6.9
10
Montana
4.4
27
Arizona
5.6
44
Nevada
7.1
11
Maryland
4.5
28
New York
5.8
45
Illinois
7.3
12
Idaho
4.6
28
Pennsylvania
5.8
46
Ohio
7.4
12
Iowa
4.6
30
New Jersey
5.9
47
South Carolina
7.6
12
New Mexico
4.6
31
Washington
6.0
48
California
7.7
12
Virginia
4.6
32
Minnesota
6.2
48
Mississippi
7.7
16
Kansas
4.7
33
Georgia
6.3
50
Rhode Island
8.5
16
Louisiana
4.7
34
Indiana
6.4
51
Michigan
8.9
Source: Bureau of Labor Statistics
•U.S. unemployment rate: August=6.1%
IMPLICATIONS
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 YR
2009
1.95
2.05
2.42
2.95
99.25
2 YR
2010
2.33
2.42
2.82
3.16
116.35
3 YR
2011
2.62
2.76
3.13
3.39
109.82
4 YR
2012
2.84
2.99
3.33
3.62
102.35
5 YR
2013
3.04
3.17
3.54
3.86
102.46
7 YR
2015
3.41
3.54
3.87
4.32
102.67
9 YR
2017
3.79
3.90
4.25
4.75
104.25
10 YR
2018
3.96
4.07
4.42
4.95
104.41
12 YR
2020
4.28
4.42
4.80
5.31
108.80
14 YR
2022
4.55
4.67
4.99
5.60
111.65
15 YR
2023
4.64
4.77
5.09
5.72
111.91
17 YR
2025
4.75
4.88
5.23
5.91
110.79
19 YR
2027
4.85
5.00
5.34
6.03
109.51
20 YR
2028
4.87
5.03
5.38
6.07
108.24
25 YR
2033
5.05
5.20
5.56
6.07
113.96
30 YR
2038
5.07
5.20
5.56
6.07
116.20
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.