Cumberland Advisors Market Commentary – 2019: Bonds Roar Back

2019 saw bond yields turn around from their climb in 2018 and move lower. Since the Federal Reserve changed their language last December to being accommodative and data-driven, we have seen yields across the board come down a lot.

2019 Bonds Roar Back

There is no question that this drop in yields was driven, in large part, by what were low or negative yields in Europe and Japan. The 10-year Treasury started the year at 2.70% and ended the year at 1.90% after making a low in early September at 1.45%.

The drop in Treasuries in the latter part of the summer was dramatic. We saw the 10-year Treasury move from a 2% yield to 1.50% in the space of two weeks as US yields moved to catch up on the downside with European and Japanese yields.

Muni yields also saw a significant drop in the year, with 10-year AAA muni yields moving from 2.28% to 1.44% and 30-year AAA munis moving from 3.02% to 2.09%. The drop in muni/Treasury yield ratios was impressive, with the 10-year yield ratio moving from 84% to 76%; but just as impressive was the 30-year muni ratio/Treasury’s moving from 100% to 88%.

What are some of the takeaways?

* The flattening Treasury yield curve – which was such a source of concern in the summer – unflattened. As we have written, we never saw the flattening curve as much of a concern, because it was accompanied by long yields falling as opposed to short-term yields being jacked up by the Fed. Indeed, the Treasury yield spread between the 2-years and 10-year has risen from a minus 5 basis points in late summer to 26 basis points currently.

* Inflation has remained steady. Core inflation began the year at 2.2%. The trailing twelve-month is 2.3% as of November. This means that the 10-year bond REAL yield went from +50 basis points to -40 basis points currently. We know that negative REAL yields generally don’t last. They didn’t last in 2016, and we don’t think they’ll last now. Election years tend to be volatile in that regard.

10yr US Treasury Yield vs Core CPI

* The muni story was impressive. Not only did ratios drop, but muni supply ended up an impressive $424 billion after 2018’s $338 billion. The increase really came from two sources. Issuers took advantage of low rates just to sell new money, locking in almost historically low long rates. But we also saw a phenomenon that wasn’t being considered in the higher interest-rate environment of 2018. That is, issuers used the taxable bond market to advance refund older higher-coupon debt, to the tune of $70 billion taxable issuance in 2019. The 2017 tax bill took away tax-exempt advance refundings. However, with the drop in rates, many issuers could issue taxable paper and refund bonds that might have had 4.5%+ original yields and 2–3 years left to call dates. The cost savings on out years more than make up for the negative interest-rate differential between taxable muni rates and Treasury rates.

* Demand continued to be voracious for munis in high-tax states such as California, New York, and New Jersey. The 2017 tax bill eliminated deductions for state income taxes and local property taxes, so there are few places other than munis from which to get a tax-free income flow. Also, bond fund inflows were dramatically higher than in 2018. We expect this demand to continue, although shorter-term tax-free yields are very expensive – look at the end of the year shorter-maturity ratios in the mid-60 percentiles!

* The terrific stock market of 2019 (S&P up 31%) bolstered municipal pensions. But the lower interest rates will hurt discounted liabilities as well as assumed returns going forward.

As we move into 2020, the negative real yields in Treasuries are causing us to play defense in bonds. That means a continuation of a barbell strategy, with some longer paper offset by shorter defensive structures. Given that the Federal Reserve cut the fed funds target three times in 2019 (the rate now sits at a target range of 1.50–1.75), we feel the Fed will play a pat hand for the most part in 2020, in part because they want to see what the effects of their rate cuts are and also because, in an ideal world, they would like to stay out of the political fracas.

Presidential election years are always interesting and usually volatile. We will keep everyone informed.

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


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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.

Continue reading with subscription at the Bond Buyer website: www.bondbuyer.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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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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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.




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