Shocking surge: Municipal bonds strength based on several fluid factors

Cumberland Advisors John Mousseau

Excerpt from “The Bond Buyer”…

Shocking surge: Municipal bonds strength based on several fluid factors

By Chip Barnett
July 01 2019

With under a $1 billion of bonds and notes selling this week, municipal bond investors were looking beyond the week’s offerings — to fundamentals and performance.

So far this year, muni yields have declined to an almost shocking extent, according to George Friedlander, Managing Partner at Court Street Group.

He cites a recent report by John Mousseau, CEO of Cumberland Advisors that shows the magnitude of the decline in absolute and relative yields since the beginning of the year.

Mousseau noted that muni yields have dropped sharply when measured either using MMD or MMA benchmarks. Since the beginning of the year 10-year muni yields are down 63 basis points; 30-year muni yields are down by as much as 67 basis points; 10-year muni yields as a percentage of Treasury yields have dropped from 84% to 79% using MMD; and 93% to 90% using MMA; and 30-year yields have dropped from 100% to 90% using MMD and from 105% to 96% using MMA.

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Municipal calendar grows to $7B as the summer reinvestment season arrives

Cumberland Advisors John Mousseau

Excerpt from “The Bond Buyer”…

Municipal calendar grows to $7B as the summer reinvestment season arrives

By Christine Albano & Chip Barnett
May 31 2019

The food fight among municipal investors is expected to reach new heights with the arrival of the summer reinvestment season, municipal managers and observers said.

Some say it will be the first time in a decade that the municipal market’s lofty prices, severe lack of supply, and intense demand will combine to create a historical repeat of the climate following the financial crisis.

John Mousseau, president and chief executive officer of Cumberland Advisors, agreed that the reinvestment season could far surpass other years given the current market technicals.

“We expect demand to be strong, the amount of reinvestment to be strong, and the overall supply to be light relative to the demand,” he said on May 30.

To make matters worse, said the absence of refunding issues is complicating the existing supply famine — and impacting prices, he noted.

Continue reading at the Bond Buyer website: www.bondbuyer.com




How Federal Tax Reform Has Impacted Real Estate

Cumberland Advisors John Mousseau

Excerpt from…

How Federal Tax Reform Has Impacted Real Estate

The short-term effects haven’t been as bad as predicted, but local governments are still worried about the long term.
by | May 20, 2019

SALT change has driven some people to make moves and may be slowing some markets.

A couple in Old Tappan, N.J., moved to a nearby town last year to reduce their tax bill by $10,000. Fairfield County, Conn., which has some of the highest property taxes in the nation, has seen a surge in homes going on the market over the last six months. In Florida, where many northeasterners have second homes, there’s been a rush to switch residency to the lower-tax state, says John R. Mousseau, director of fixed income for Cumberland Advisors in Sarasota.

“Almost anyone I talk to here who has a second home is looking to do that trade,” he says.

Continue reading at the Governing Magazine website: www.governing.com




Upcoming slate should see ‘plenty of demand’

Cumberland Advisors John Mousseau

Excerpt from…

Upcoming slate should see ‘plenty of demand’

By Aaron Weitzman
Christine Albano

Published April 18 2019

Next week’s calendar should benefit from timing and availability of paper coming on the heels of both the income tax deadline and the holiday-shortened week.

Munis will be very much on the minds of lots of people who paid larger bills due to the state and local tax changes, which may increase demand for next week’s slate, according to John Mousseau, director of fixed income at Cumberland Advisors.

“One way to combat that is to own more tax-free bonds,” he said, indicating that the market next week will absorb new supply with ease.

Overall, he said the market may be poised for a change from the current norm.

“The strength the market has experienced has to abate somewhat,” Mousseau added. “This is just some normal reversion to the mean.”

He noted that visible supply has averaged $7 billion so far in 2019.

“This is all very navigable for the market,” Mousseau said.

Continue reading (with subscription) at The Bond Buyer website: www.bondbuyer.com




SALT-Fueled Rally in Muni Market Faces Tax-Day Test

Excerpt from bloomberg.com article,

SALT-Fueled Rally in Muni Market Faces Tax-Day Test

By Amanda Albright
April 1, 2019

The rally in the $3.8 trillion municipal-bond market is about to face a major tax-season test. All year, analysts have credited the $10,000 cap on state and local tax deductions for driving a record-setting amount of cash into tax-exempt debt as investors look for ways to cut what they owe to the federal government. The wave of money helped propel a five-month rally that’s pushed yields on some municipal bonds to the lowest against Treasuries since at least 2001.

“The demand side has been big,” John Mousseau, chief executive officer and president of Cumberland Advisors, said in an interview. “The market is a little bit vulnerable to a backup in yields and a bit of a selloff.”

 

Read the full article at the Bloomberg website: www.bloomberg.com

 




Mousseau: The SALT (state and local taxes) conundrum

Excerpt from the Sarasota Herald Tribune’s article,

Mousseau: The SALT (state and local taxes) conundrum

There have been headlines recently describing the drop in state tax revenues versus forecasts for some of the higher-tax states such as California, New York, and New Jersey. Part of the falloff is due to an exodus of higher-income residents from high-tax states, such as the ones above, for states with low or no income taxes, such as Florida, Texas, and Nevada.

Exacerbating this effect is the SALT provision of the 2017 tax bill (in effect for the 2018 calendar tax year). It puts a $10,000 cap on the amount of deductible state and local income taxes and local property taxes. This cap, of course, effectively raises the effective rates of these taxes by an amount equal to the loss of deductiblity.

Prior to this year, being able to deduct state and local taxes in full meant that taxpayers subject to the old 39.6 percent highest marginal tax rate effectively wrote off almost 40 percent of their taxes. The SALT change means that, on a cash-flow basis, both people’s property taxes and income taxes will effectively rise almost 40 percent from what they paid last year. For obvious reasons, this new tax bite has generated much consternation and many crosscurrents.

Continued…

 

Read the full article at the Sarasota Herald’s website: www.heraldtribune.com

 




The Slow Housing Market Can Hurt Government Revenues, But Doesn’t Have To

The Slow Housing Market Can Hurt Government Revenues, But Doesn’t Have To

How much home sales impacts a place depends a lot on its property tax policies.

by February 21, 2019

Excerpt below.
Cumberland Advisors John Mousseau

Home sales have been ticking down for months. It’s been particularly bad in the West, where 15 percent fewer homes were sold in December compared to the previous December. The slowdown is widely expected to continue, but how it affects local governments will differ.

Cumberland Advisors CEO John Mousseau is watching places where wealth is concentrated and where taxes are high, including Boston, New York City and its suburbs in Northern New Jersey and Fairfield County, Conn. Homeowners in these places are no longer getting the tax breaks they used to on their properties. “As long as there’s no recession,” he says, “I think home prices in places like these will stagnate or maybe even decline a little.” That could further hurt the local government’s property tax revenues.

But declining home prices aren’t necessarily a bad thing, Mousseau says. According to Fitch’s data, several major markets — including many out West — are currently overvalued. “I think what you’ll see is a realignment of house prices,” he says. “The idea that house prices can go up 6 or 7 percent a year — I think that’s going to go away.”

Read the full article at governing.com.


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Deals pour in to slightly firmer market

Excerpt from…

Deals pour in to slightly firmer market

By Aaron Weitzman
Christine Albano

Published January 15 2019, 1:50pm EST

New deals were rolling in, with timing benefiting issuers as the market firmed.

Strong demand will likely lead to oversubscriptions on the Pennsylvania Housing Finance Authority deal after a significant portion of the longer maturities were spoken for in Monday’s retail order period, according to John Mousseau, president and chief executive officer of Cumberland Advisors.

Orders were two times oversubscribed for the 2044 maturity, which was priced at 4% and seven times oversubscribed for the 2047 maturity, which was priced at 4.05% in the retail order period.

Mousseau predicted Tuesday’s institutional pricing would result in the 2047 maturity being bumped five basis points to 4%.

“Most deals have had very good follow through,” Mousseau said late on Monday.

“With January 1 rollover dwarfing new issuance, it’s usually a good seller’s market and this January is no different,” he added.

Continue reading (with subscription) at The Bond Buyer website: www.bondbuyer.com




Climate change, a rising tide affecting the muni market

Excerpt from…

Climate change, a rising tide affecting the muni market

By Sarah Wynn
Published January 08 2019, 12:45pm EST

WASHINGTON — Portfolio managers are feeling the heat when it comes to investing in bonds that could potentially be affected by climate change.

Climate change has long been a point of political and social contention, and investors are throwing caution to the wind when making important bond transactions, while using a green thumb to do their part.

With his clients, Mousseau said he discusses climate and infrastructure, especially when it comes to residential developments along the coast.

“Just as a matter of policy, we generally try to avoid credits that are particularly vulnerable along any coasts,” Mousseau said.

Instead, he believes in diversifying by owning county bonds or multiple types of utility bonds, as opposed to smaller general obligation bonds that could get wiped out by a hurricane.

Mousseau said there will be an increase in green bonds — bonds used specifically for climate and environmental projects —and more institutional clients are starting to ask for them.

“I think there’s a heightened sense of people wanting to be involved in investments that benefit the environment and I think that grows every year,” Mousseau said.

Millennials, in particular, have shown interest in green bonds, which could cause a rise in issuance.

Development has increased in energy market countries and Mousseau believes green bond initiatives will become more important.

“All I’m saying is that the idea of green bond initiatives is certainly not stopping here,” he said.

Continue reading (with subscription) at The Bond Buyer website: www.bondbuyer.com




The November Bond Market Bounce

Here’s our first take after the midterm elections. The last three weeks of November have seen a bounce in the bond market, with intermediate and longer bond yields falling after spending most of 2018 rising.

Market Commentary - Cumberland Advisors - The November Bond Market Bounc

 

If we look at the US Treasury market (chart 1), we can see the rise in Treasury yields – across the board – from the end of 2017 to early November. A lot of this rise, in our opinion, was to give yields some competition with equity markets, which were certainly frothy early this year, in January, and then in late summer into September. In addition, better growth numbers for the economy, associated with last years’ tax cut, also helped push yields higher. However, core CPI is at 2.1% – approximately where it was at the time of the election in 2016 – though in early November the 10-year US Treasury yield was about 100 basis points higher, at 3.25%, than it was two years earlier. Thus, REAL yields had risen approximately 1% during this time period.

The November Bond Market Bounce Chart 01
Chart 01

 

Since early November we have seen 10-year US Treasury yields fall from 3.25% to 3% and 30-year US Treasury yields fall from 3.45% to 3.30%. Shorter yields have also declined. What’s going on? We think a number of factors are changing investors’ expectations about rates.
—(1) A slightly softer tone by the Federal Reserve is shifting expectations. While we expect to see the Fed raise the fed funds target in December to 2.25–2.5% percent, the markets certainly seem less married to the idea that we will see three or four rate increases next year.
—(2) Volatility in the equity markets has, we believe, led to some switching into bonds at the margin. Certainly, interest rates that are 80 basis points higher than at the start of the year and even HIGHER on a REAL basis have started to attract interest.
—(3) Previously hot real estate markets in the northeast, California, and other “hot” areas have now cooled. Homes that a year ago were often on the market for 4–5 weeks at most are now on for 4–5 months, and that time is lengthening. Bidding wars are now a thing of the past; and while the housing market may not be fully a buyers’ market, it has clearly transitioned from a sellers’ market. We think the provisions of last year’s tax bill, which dictated that state income taxes and local property taxes will no longer be deductible on federal taxes, are starting to have an effect now that we are less than six months from tax day. Clearly, areas that have high relative property taxes are grappling with what is now a higher after-tax cost of owning a home. Higher mortgage rates this year have also contributed to this cooling,
—(4) The market is reckoning with the fact that the increasing US government deficit will start to have ramifications that were not present over the past half dozen years.


In the charts above we see the growth in outstanding US government debt and Congressional Budget Office projections for future growth. We can see the growth of outstanding federal debt from $10.7 trillion in 2008 to an estimated $21.4 trillion at the end of this year. However, the net interest expense on that government debt barely budged between 2008 (at $252 billion) and 2017 (at $262 billion). But note the large jump this year and going forward. Interest expense on the government debt barely rose in the last decade because of ultra-low interest rates, particularly on shorter-term debt. The jump in interest expense going forward is a function of the higher interest rates in force today.

The November Bond Market Bounce Chart 04

For example, the above graph shows 5-year US Treasury yields going back more than a decade. Bonds that were issued in 2007 at 5% could be replaced when they matured in 2012 at a little more than 0.5%. We are now going the other way. Five-year notes that were issued in the middle of 2013 at around 1% were being replaced this year at almost 3%. This extra interest expense could act as a wet blanket on an economy that is still growing because of lower unemployment and tax cuts.

We think all of this activity has caused investors to ratchet down expectations. We have extended durations within our barbell strategy during the past two months and believe there are forces that should keep intermediate and longer-term interest rates in a trading range, with a bias to going lower. We believe that, with long Treasuries at 3.30%, longer tax-free municipal bond yields in the 4% range still represent excellent value – particularly in high-tax states that will be grappling with the SALT provisions of the tax bill.

We wish all our readers a great holiday season.

John R. Mousseau, CFA
President and Chief Executive Officer, Director of Fixed Income
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.