Confidential Vanguard Municipal Market Outlook Philadelphia FPA May 17, 2011 Mike Kobs Senior Portfolio Manager Muni Bond Group.

Slides:



Advertisements
Similar presentations
Bell work. What is a Bond? Bond  is like an IOU for a loan you’ve made to an institution  From a government or a corporation.  given for a certain.
Advertisements

By Sean Hutchens and Jun Park.  Municipal Bonds  History of Municipal Bonds  Characteristics of Muni Bonds  Types of Muni Bonds  Bond Rating  Muni.
Chicago Board of Trade Interest Rate Products Market Development 2003 Taipei Interest Rate Futures Conference November , 2003.
0 STATE OF CALIFORNIA GENERAL OBLIGATION BOND PROGRAM UPDATE ASSOCIATION OF CALIFORNIA CONSTRUCTION MANAGERS CONFERENCE MAY 20, 2009.
2-1 Chapter 2 BOND ISSUERS. 2-2 The United States Treasury  The U.S. Treasury performs primarily the following functions.  Collects taxes.  Pays the.
FIN352 Vicentiu Covrig 1 Bond Instruments (chapter 14)
November 2007 Overview of Collateralized Loan Obligations.
Chapter 1 Introduction to Bond Markets. Intro to Fixed Income Markets What is a bond? A bond is simply a loan, but in the form of a security. The issuer.
1 Valuing Bonds Chapter 6 Fin 325, Section 04 - Spring 2010 Washington State University.
Introduction to Debt Markets
Chapter 10 Bond Prices and Yields. U.S. Credit Market Instruments O/S 2008 Q3 By Selected Major Borrowers (Not Exhaustive List) Corporate & Foreign Bonds.
All Rights ReservedDr David P Echevarria1 CHAPTER 7 BOND MARKETS.
8.1 Credit Risk Lecture n Credit Ratings In the S&P rating system AAA is the best rating. After that comes AA, A, BBB, BB, B, and CCC The corresponding.
Municipal Bond Types & Characteristics Yinyin Cao.
FIN432 Vicentiu Covrig 1 Bond Instruments (chapter 14)
Chapter 11. The Level & Structure of Interest Rates Loanable funds market Risk Structure of Interest Rates Loanable funds market Risk Structure of Interest.
Bonds: Fixed Income Securities Economics 71a: Spring 2007 Mayo chapter 12 Lecture notes 4.3.
Financial Management Series Number 12 BONDS & BOND RATINGS Alan Probst Local Government Specialist UW-Extension Local Government Center (608)
> > > > The Financial System Chapter 17. Learning Goals Outline the structure and importance of the financial system. List the various types of securities.
Chapter 10 Bond Prices and Yields
Finance 300 Financial Markets Lecture 16 Professor J. Petry, Fall, 2002©
An Introduction to Bonds Tina Horvath. What is a Bond? w Debt instrument: When one purchases a bond, one essentially lends an organization such as the.
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 14 Bond Prices and Yields.
Chapter 10 The Bond Market. Copyright © 2009 Pearson Prentice Hall. All rights reserved Chapter Preview In this chapter, we focus on longer-term.
Ch 5. Bond and their Valuation. 1. Goals To discuss the types of bonds To understand the terms of bonds To understand the types of risks to issuers and.
Capital market Instrument: Treasury note and bonds. Federal agency debt. Municipal bonds Corporate bonds Common stock.
Marcus Perry.  Municipal Bonds are issued by state and local governments.  Municipal Bonds are attractive to investors due to the federal tax exemption.
INVESTMENTS | BODIE, KANE, MARCUS Chapter Fourteen Bond Prices and Yields Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction.
Business in Action 7e Bovée/Thill. Financial Markets and Investment Strategies Chapter 19.
The Bond Market Meghan Barnes April 10, Overview Bonds and Bond Purchasers Issuers of Bonds Common Types of Bonds Bond Prices Measures of Yield.
Chapter 15 Investing in Bonds Video Clip Chapter 15 Bonds 15-1.
November, 2007 An Introduction to the Senior Loan Asset Class.
The Financial System Chapter 16.
The Risk and Term Structure of Interest Rates
Bond Prices Over Time Yield to Maturity versus Holding Period Return (HPR) Yield to maturity measures average RoR if investment held until bond.
THE BOND MARKET A Deeper Understanding of a Major Economic Market Based on presentations by Emma Ricci and Meghan Barnes.
Is the Risk-Free Yield Curve a good Predictor of Outcomes in Various Types of Bond Markets?
Chapter 12 Supplement A: Fixed-Income Securities Chapter 12 Supplement A Fixed-Income Securities.
 Fixed Income. What is fixed income?  When you hear fixed income what do you think about?  A type of investing or budgeting style for which real return.
Financial Markets, Instruments, and Market Makers Chapter 3 © 2003 South-Western/Thomson Learning.
Fundamentals of Corporate Finance Chapter 6 Valuing Bonds Topics Covered The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity.
Business in Action 6e Bovée/Thill Financial Markets and Investment Strategies Chapter 19.
INVESTMENT ALTERNATIVES. Assignment due on next lecture CHAPTER (1) : 1, 2, 5 and 13 CHAPTER (1) : 1, 2, 5 and 13 CHAPTER (2) : 1, 4, 12 and 26 (Questions)
The Financial System Chapter 16.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Investments: Theory and Applications Mark Hirschey.
Chapter 1 Introduction to Bond Markets. Intro to Fixed Income Markets What is a bond? A bond is simply a loan, but in the form of a security. The issuer.
Investing in Bonds McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved
Personal Finance Chapter 13
2011 Mid Winter Financial Institutions Treasury Management Symposium Thomas Rasmussen Head of Municipal Sales, New York.
Matt Sieverson Meng Vue. Basics of Commercial Paper Regulations Ratings Risks Issuing Companies (GMAC) Dealer Paper vs. Direct Paper Foreign Market Current.
US Treasury Securities and T-bills Nguyen Hung Tien, Yonsei GSIS.
Financial Markets. Saving and Capital Formation Saving money makes economic growth possible One’s person savings can represent another person’s loan Savings.
Financial Markets Chapter 11 Section 2 Bonds and Other Financial Assets.
Presenter Name Title MFS Investment Management ® Keep more of what you earn Tax-efficient MFS municipal bond funds © 2009 MFS Investment Management.
Chapter 6 Portfolio Management of Bond Funds. Holdings in Taxable Bond Funds (1) Issued by the U.S. government. U.S. Treasures Issued by federal government.
Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 17 Government Securities.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin 6-1 Chapter Six Bond Markets.
Chapter 5 Factors Affecting Bond Yields and the Term Structure of Interest Rates.
W!se Unit 5 Investing. What is Investing?  Putting money to work earning more money for the future.
Chapter 15 Investing in Bonds 15-1
Financial Markets.
Chapter Fourteen Bond Prices and Yields
The Risk and Term Structure of Interest Rates
Bond fundamentals Chapter 17.
Factors Affecting Choice of Investment Securities (continued)
Municipal Bonds BA 561 – Supply Chain Management April 30, 2012
Chapter Preview In this chapter, we focus on longer-term securities: bonds. Bonds are like money market instruments, but they have maturities that exceed.
CHAPTER 7 BOND MARKETS All Rights Reserved Dr David P Echevarria.
Chapter 6 The Risk Structure and Term Structure of Interest Rates
Presentation transcript:

Confidential Vanguard Municipal Market Outlook Philadelphia FPA May 17, 2011 Mike Kobs Senior Portfolio Manager Muni Bond Group

> 2 Confidential General Overview of the Municipal Market Review of Current Market Conditions Vanguard’s position on default risk and public pension underfunding Municipal Bond Market Outlook Q&A Municipal Bond Market Presentation

> 3 Confidential Issuers are typically state and local governments and not- for-profit entities Most municipal debt provides a tax-advantage for investors Borrowing cost advantage for issuers Relatively high credit quality Large number of independent issuers/credits Municipal securities are exempt from registration with the SEC Unique Characteristics of the U.S. Municipal Securities Market

> 4 Confidential “General Obligation” Notes and Bonds – Backed by the full faith and credit of a state or local government – All sources of revenue, unless specifically limited, will be used to pay debt service on the bonds “Revenue” Notes and Bonds – Issued to finance specific revenue-generating projects or utility systems – Secured solely by the revenues from the financed project or system How are U.S. Municipal Borrowings Secured?

> 5 Confidential $2.925 Trillion outstanding 50,000+ Issuers 1.18 million cusips How big is the Municipal Bond Market? Source: MSRB 2010 FactBook

> 6 Confidential Core Inflation Momentum Factors Municipal Bond Market- Credit Quality and Sectors

> 7 Confidential Municipal Bond Market- New Issuance Supply The Bond Buyer Source: The Bond Buyer

> 8 Confidential Municipal Bond Market- Holders of Municipal Debt Federal Reserve Board, Flow of Fund Accounts Source: Federal Reserve Board, Flow of Fund Accounts

> 9 Confidential Core Inflation Momentum Factors Municipal rates have risen from historical low levels

> 10 Confidential Core Inflation Momentum Factors Credit Quality Spreads

> 11 Confidential Core Inflation Momentum Factors Municipals look attractive versus high quality alternatives 10-Year Comparison 5/6/2011 MuniCorporate Quality Credit SpreadAAA (MMD)Yield Tax Eq Yield* Credit SpreadUSTYieldVs CorpVs Tsy AAA AA A BBB *35% Federal Tax Bracket

> 12 Confidential Core Inflation Momentum Factors Historical Municipal Default Statistics.89% [238 defaults ( )].04% [10 defaults ( )] 1.54% [1,604 defaults ( )].02% [10 defaults ( )] 1.57% [1,707 defaults ( )].01% [54 defaults ( )] 1.Moody’s Investors Services, U.S. Municipal Bond Defaults and Recoversies, (February 2010); Moody’s Investors Service Corporate Default ad Recovery Rates, (February 2010). Percentags based upon average one year default rate. 2.Standard & Poors, 2009 Global Corporate Default Study and Ratings Transitions (March 17,2010); Standard & Poor’s; U.S. Municipal Ratings Transitions and Defaults, (March 17,2010); Standard & Poor’s; U.S. 3.Fitch Ratings Inc. U.S. Public Finance Transition and Default Study ( ), March 25,2010; Fitch Ratings Global Corporate Finance 2009 Transition and Default Study.

> 13 Confidential Over the Counter Market 100’s of dealers 1.2% of securities outstanding trade daily on average, most of these trades are in denominations of less than $100,000 par value Evaluations are done daily by two pricing services: Thompson/JJ Kenny and IDC Muller Pricing convention is on a Yield to Worst basis Municipal Market Trading Conventions

> 14 Confidential Steep Yield Curve Cheap relative to Treasuries Wider Credit Spreads Headline Risk Regulatory Rhetoric Current Market Conditions

> 15 Confidential Steep Yield Curve

> 16 Confidential Cheap relative to Treasuries

> 17 Confidential Core Inflation Momentum Factors State and Local Government Challenges Pensions – the biggest long term challenge due to constitutional and statutory protections (estimates up to $3 trillion unfunded liability depending on discount rates selected) OPEB – huge promise to retirees with estimates up to $700 billion unfunded liability, generally pay-as-you-go; can be altered by legislature Medicaid – on the way to becoming largest line item in state budgets Education – continuing to be squeezed, particularly with the loss of ARRA funding Debt – much discussion of default, but debt burden remains within historical norms

> 18 Confidential Source: Rockefeller Institute

> 19 Confidential Source: Rockefeller Institute

> 20 Confidential Source: Rockefeller Institute

> 21 Confidential Source: Rockefeller Institute

> 22 Confidential Core Inflation Momentum Factors Municipal interest cost is manageable

> 23 Confidential Core Inflation Momentum Factors Unfunded Actuarial Liabilities from Pensions and OPEBs

> 24 Confidential Core Inflation Momentum Factors Debt levels have risen but are within historical norms

> 25 Confidential Core Inflation Momentum Factors Municipal Market Outlook Yield Curve – Flattening as Fed Tightens Credit Spreads – Wider than historical averages, differentiation in credit Headline Risk – As the budget process moves forward, difficult decisions about cutting services and raising revenues will be played out in the press Legislation Risk – Many initiatives to replace the tax-exemption in Munis will play out in the media and generate volatility depending on what form gains traction

> 26 Confidential Core Inflation Momentum Factors Q&A What concerns your clients about the Municipal Market?