1) Our Perspective MUNI YIELD LIMBO: HOW LOW CAN YOU GO? – FEBRUARY 2016 Ronald Schwartz, CFA Managing Director, Senior Portfolio Manager, Tax-Exempt Ron is a Senior Portfolio Manager focused on the TaxExempt Strategies. He has worked in the investment management industry since 1982. Ron received a B.A. in Business Administration from Adelphi University and is a CFA Charterholder and a member of the CFA Society of Orlando. Only two months after the Federal Reserve Bank introduced its first rate hike in nearly a decade, tax free yields have declined to five-decade lows (see chart below). Investors that have been sitting in cash waiting for higher muni yields must have been sorely disappointed. Despite the decrease in yields, demand for munis has remained strong and sustained with 21 straight weeks of positive mutual fund flows, taking aggregate inflows this year to $9.8bn. Municipal bonds are up 1.6% YTD even after finishing 2015 as the top-performing major asset class. As we have repeatedly stated over the past few years, we continue to believe long term rates will remain lower for longer, and we remain constructive on the municipal sector because of its tax exempt income, strong technical factors, healthy fundamentals, and compelling yields compared to global fixed income rates. Tax Free Yield Have Reached the Lowest Level in More Than 50 Years Source: Janney Fixed income Strategy; Bond Buyer 20 GO Index Scott Andreson Director, Municipal Research Scott is the Director of Municipal Research for Seix Investment Advisors. He has more than 16 years of investment experience. He earned his MPA from USC and is a current board member of the National Federation of Municipal Analysts. Muni yields are much lower than they were in the 1980s, but as this Morgan Stanley chart below shows, long municipal bond yields over the past 150 years have averaged approximately 4%. Maucalay New England Municipal Bond Yields Bond Buyer 20 S&P Index of High Grade Municipal Bonds for US MMD 20Y Yield CONTRIBUTORS Dusty Self Director, Portfolio Manager, Tax-Exempt Phillip Hooks, CFA Vice President, Municipal Credit Research Source: Morgan Stanley Research, S&P Dow Jones Indices, Bond Buyer, MMD, NBER
2) Our Perspective MUNI YIELD LIMBO: HOW LOW CAN YOU GO? – FEBRUARY 2016 While U.S. interest rates are low, they remain attractive compared to global fixed income rates, particularly compared to the central banks of four developed countries and the Eurozone that are employing negative-interest rate policies. In fact, municipal yields are near their highest levels in 20 years compared to European government debt. Current Yield Spread vs. Tax-Exempt Munis Cur AAA Tax-Exempt Muni 10 Yr Yield Spain 10 Year Yield 1.66 1.79 -12 Italy 10 Year Yield France 10 Year Yield Germany 10 Year Yield 1.57 0.56 0.20 10 109 145 3YR AVG 5YR AVG 10YR AVG 20YR AVG Spread Z-Score Spread Z-Score Spread Z-Score Spread Z-Score -66 0.5 -180 1.0 -129 0.8 -112 0.8 -64 70 114 0.7 0.8 0.8 -171 14 73 1.1 1.2 1.2 -131 -12 28 1.1 1.8 1.8 -118 -32 -9 1.0 2.3 2.2 Source: Bloomberg, Thomson Reuters, JP Morgan Volatility is likely to remain throughout the year given the current macroeconomic backdrop and soaring political uncertainty from the presidential election. Investors appear to be seeking safe havens from global financial market volatility and evolving monetary policy. Tax exempt bonds appear to fit the safe haven bill as they are highly rated with an extremely low default rate. In addition, munis have basically no correlation to equities, and very low correlation to other fixed income classes, while offering good risk adjusted returns.* As a result, we expect demand for tax exempt bonds to remain solid, especially as investors continue to realize how compelling munis are on a taxable equivalent yield (see below). Finally, while yields may be lower YTD, muni/Treasury ratios, an indicator of relative value, have actually gotten cheaper since late last year. AAA Tax-Exempt Yield Taxable Equivalent* A Tax-Exempt Yield Taxable Equivalent* 2 Year 0.52 0.92 0.69 1.22 *Highest equivalent of 43.4% with Medicare net investment income tax. Source: Municipal Market Data 2/24/16 Source: Municipal Market Data 2/26/16 * As of 1/15/16 versus Barclays US Aggregate, Global Aggregate, US Credit Corp, US High Yield 5 Year 0.89 1.57 1.23 2.17 10 Year 1.71 3.02 2.24 3.96 30 Year 2.78 4.91 3.34 5.90
3) Our Perspective MUNI YIELD LIMBO: HOW LOW CAN YOU GO? – FEBRUARY 2016 The assertions in this perspective are Seix Investment Advisors’ opinion. Barclays Municipal Bond Index is a widely recognized index of investment grade tax-exempt bonds. The eight subsets of the Index are market weighted. The Index includes general obligations, revenue bonds, insured bonds, and pre-refunded bonds. Standard & Poor’s 500 Index is an unmanaged index of 500 selected common large capitalization stocks (most of which are listed on the New York Stock Exchange) that is often used as a measure of the U.S. stock market. Investors cannot invest directly in an index. Credit Ratings noted herein are calculated based on S&P, Moody’s and Fitch ratings. Generally, ratings range from AAA, the highest quality rating, to D, the lowest, with BBB and above being called investment grade securities. BB and below are considered below investment grade securities. If the ratings from all three agencies are available, securities will be assigned the median rating based on the numerical equivalents. If the ratings are available from only two of the agencies, the more conservative of the ratings will be assigned to the security. If the rating is available from only one agency, then that rating will be used. Any security not rated by S&P, Moody’s, or Fitch is placed in the NR (Not Rated) category. Ratings do not apply to a fund or to a fund’s shares. Ratings are subject to change. Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a fund’s fixed income securities will decrease in value if interest rates rise and vice versa. A fund’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful. This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their specific financial needs and goals before making any investment decisions. Past performance is not indicative of future results. ©2016 Seix Investment Advisors LLC. Seix Investment Advisors is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms.