Miami-Dade County jumps into legal fight over terminated toll-road agency

Excerpt from…

Miami-Dade County jumps into legal fight over terminated toll-road agency

By Shelly Sigo
July 25, 2019

Cumberland-Advisors-Patricia-Healy-In-The-News

A court hearing Thursday and Friday could determine the fate of the Miami-Dade County Expressway Authority, and a new party in the case may sway the outcome.

Miami-Dade County Commissioners decided Tuesday to become an amicus curiae, or friend of the court, in the lawsuit challenging House Bill 385. The bill abolishing the expressway authority become law July 3 when it was signed by Gov. Ron DeSantis.

Kimberly Olsan, a senior vice president at FTN Financial, said in a July 15 municipal commentary that the Legislature’s replacement of MDX with a new agency that has limited ability to raise tolls is a development that bears watching.

The bill Florida passed usurping the power of the MDX to raise rates and build projects is an example of an action that can affect credit quality, Patricia Healy, Cumberland Advisors’ senior vice president of research and portfolio manager, said in a July 17 column.

“The legislation is being challenged and even if the challenge is successful, it is clear the entity has had its independent rate-setting authority compromised,” Healy wrote.

If the MDX’s lawsuit is unsuccessful at keeping the authority intact, it’s unclear when its successor will meet for the first time.

Read the full article with subscription at The Bond Buyer website.




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


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Cumberland Advisors Market Commentary – 2Q2019 Review: Total Return Taxfree Municipal Bond: The Big Squeeze

The muni bond market has been on a tear so far this year. Not only have yields dropped, but they have dropped relative to US Treasuries across the board.

Market Commentary - Cumberland Advisors - The Big Squeeze (Municipal Bonds)

The chart below shows where we are now and where we were at the start of the year.

The big squeeze has been caused by the twin tentacles of increased demand and decreased supply.

We know that the demand has been fueled by the provisions of the 2017 tax bill. The new tax code’s removal of the state income tax and local property tax deductions has left few other areas in which income can be sheltered from federal taxes and has pushed demand in high-tax states into high gear.

Here we compare a general market yield curve from October 31, 2016, to New York and California curves at that time and further compare them to the same juxtaposition recently. We can see that the difference between these high-tax states and the national curve has increased greatly as bond demand has grown (and bid down the muni yield curve across the board).

Muni Squeeze, 10-31-16
Muni Squeeze Spread, 10-31-16
Muni Squeeze, 06-17-19
Muni Squeeze Spreads, 06-17-19

 

The fact that the limitation on deduction of mortgage interest has been reduced to $750,000 from $1,000,000 has been another contributing factor, in our view. At the margin, a person thinking of buying a more expensive home, when confronted by the mortgage deductibility issue, would stay put and instead own more municipal bonds as opposed to buying more real estate with a mortgage that is not deductible.The supply sideHere are the monthly supply numbers for the last four years (2019 year to date)

We can see the large supply bulges in 2016 and 2017. Both were caused by large amounts of advanced refunding supply. Record low interest rates in the first seven months of 2016 (when the 10-year Treasury touched 1.30% after the Brexit vote) spurred on that year’s supply bulge, whereas the passage of the tax bill late in the next year expanded 2017’s bulge. The bill prohibited advance refundings going forward, so naturally municipalities started to price as many advance refundings as they could bring to market (starting before the bill was even passed in November and December of 2017). Issuance has been running roughly 25–28% less ever since. One result is that issuers are using 5-year calls instead of the standard 10-year call the market was accustomed to. In a market where yields have dropped, this has meant that durations have gotten shorter at a time when investors want them to be longer to capture price gains in a declining yield environment.In the graph below we can see that issuance from 2014–17 has changed significantly, trending lower.

Municipal Bond Visible Supply

In our opinion, municipal bond pricing as well as supply has moved to a new normal. What could change this?One of the items would be an infrastructure bill. Right now, given the makeup of Congress and the focus on tariffs and trade, this outcome does not seem likely. We don’t believe that an infrastructure bill – if passed – would include an interest subsidy like the Build America Bonds (BABs), which enjoyed a 35% subsidy from the federal government. There is a lot of reluctance to replicate that model, given that the subsidy has fallen to the mid 20% levels due to various sequestrations. A more likely structure would have the federal government offering a direct subsidy on various projects.

Another item could be a return of advance refundings. Our own thoughts are that Congress did not save any money by prohibiting advance refundings, as the necessity to now do them with taxable bonds renders advance refundings much more expensive, if not impossible. We believe advance refundings were a tried and true way for municipalities to reduce debt-service costs and would like to see them return. We give this possibility a very low chance for passing anytime soon, but it can be brought up in other years. If it does come back, expect supply to explode – at least at these levels, where 4% bonds issued just last year could be candidates to be prerefunded to their first call date.

We remain cautious on the bond market for a number of reasons.

Inflation remains around 2%. It has not dropped markedly since yields have fallen from last October’s high. Below is a graph comparing the ten-year US Treasury yield to core CPI over the past five years. After breaching the 1% level last fall (when we expanded durations), it has since fallen to almost zero. Our premise is that the economy is NOT heading into recession, so we feel that some semblance of normalcy will return to this spread.

10 Yr Treasury with Core CPI – 5 Yr Period
Unemployment has stayed low, declining to 3.6%.
 Unemployment

We believe that some wage growth will pick up at these levels and eventually work its way into the general inflation rate. Though lower in the last two months, labor participation rates remain in an uptrend.The market is forecasting that the Federal Reserve will cut short-term interest rates a total of twice this year. Markets have a notably lousy record of forecasting actual Fed actions, and we think that is the case this time, too. We believe the Fed is happy to try to remain data-dependent, conscious of the fact that the economy is doing well and that there is not that much ammunition in the fed funds rate to cut short rates unless truly needed.

Summing up, munis are clearly in a brave new world from a pricing and supply standpoint. They are no longer as tremendously cheap as they were last fall. The low supply, combined with low rates, steady inflation, and low unemployment, keeps us in a cautious mode.

John R. Mousseau, CFA
President, 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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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




Cumberland Advisors Market Commentary – Q1 2019 Credit Commentary

A positive tone continues for the credit quality of municipal bonds, and municipal performance has been strong as a result of low supply, high demand, and lower rates. (See John Mousseau’s “http://www.cumber.com/1q2019-review-tax-free-municipal-bond-a-shining-first-quarter-for-munis/.”)

Cumberland Advisors Market Commentary - Municipal Credit

After some states reported revenues tracking well below projections in January, fears of a substantial drop-off in state tax collections are being allayed, with tax collections up year-over-year in February and March according to Morgan Stanley’s META 13 state sample (“Municipal Early Tax Analysis”). New Jersey may be bucking that trend, as revenue collections, though somewhat improved, are still under budget.

Source: AlphaWise, Morgan Stanley Research

Last quarter (see “http://www.cumber.com/q4-2018-credit-commentary-and-a-look-ahead-to-2019/”) we pondered whether the credit quality of municipal bonds was plateauing. However, with continued economic growth and upgrades still outpacing downgrades, we have likely not hit a plateau, though the upward slope in the improvement of credit quality is not as steep now. Economic activity and revenues are up generally, and many municipalities have built up rainy day funds, although wage pressure is appearing in budgets. And of course there are a number of municipalities that have not built up reserves or have not been able to attain structural balance and reduction of liabilities. There are numerous long term items that municipalities need to consider addressing sooner rather than later because they could become more burdensome.  These include funding pension plans, improving infrastructure and climate resiliency, adjusting to changing demographics, and being cyber secure.  The improved revenue picture has led some municipalities to add or expand programs and services while some have increased payments to pension plans or reduced debt. How municipalities plan and prepare are some of the determinants in assessing credit quality.

Upgrades continue to outpace downgrades

Moody’s released a rating revisions report for 2018 showing that for the fourth year in a row upgrades outpaced downgrades, demonstrating the continuing trend of improving credit quality across public finance. Rating changes were down almost 30% from 2017, with 480 upgrades compared with 392 downgrades; and, based on par, the value of bonds upgraded was more than double that of debt downgraded, at $99.4 billion compared with $42.0 billion. S&P’s most recent rating activity report, with data through the third quarter, also showed that rating-change activity declined and that upgrades outpaced downgrades. The only sectors to experience more downgrades than upgrades were Higher Education at both Moody’s and S&P and Healthcare at S&P. We have long noted the challenges these types of institutions have faced, such as declining enrollment at higher education institutions and a very competitive landscape for healthcare organizations.

Rating changes generally lag economic activity, for several reasons. A strong financial cushion or rainy day fund built up in good times enables a municipality to withstand a downturn in revenues or an unexpected increase in expenses. Rating agencies do not always immediately downgrade an issue on bad news; before they take action, they wait to see how the issuer will react and whether the issuer addresses the event or negative trend effectively. Other market participants can act sooner by exiting a bond before it is downgraded or buying a bond before it is upgraded. For example, Cumberland exited the bonds of the states of Illinois, New Jersey, and Connecticut years ago and avoided a long string of downgrades. Similarly, ahead of a major storm we compare our holdings with the trajectory of the storm and exit credits that might be affected negatively.

Many general-obligation bonds have lagged revenue collections, so that when the economy declined, revenues collected were based on an earlier period’s property values. This tendency is offset by lower growth in property tax collections during periods of recovery. New York City has a five-year lag in property valuations, and its debt has historically yielded countercyclical benefits.

Moody’s upgraded New York City’s general-obligation bond rating to Aa1 in March. The upgrade reflects continued strengthening and a diversification of New York City’s economy, reducing its reliance on volatile financial services. Moody’s cites the city’s competitive advantages, including a young and highly skilled labor pool, access to higher education and medical centers, strong domestic and international transportation links, and low crime rate. The upgrade also reflects the city’s ongoing strong budgetary and financial management, which includes frequent updates to multi-year financial plans, producing a transparent view of future budgetary pressures. Moody’s notes that although the city’s debt burden is above-average, the fixed costs for debt service, pensions, and retiree health care have decreased and are now below the median for the largest local governments and in the bottom five among the nation’s largest cities.

The municipality has historically budgeted conservatively and has mechanisms that trigger timely spending cuts or revenue increases. Much of the discipline involved in this process was instituted after New York’s financial crisis in the mid-1970s.

Sometimes states or municipalities that have been through a financial crisis emerge stronger. That may not be the case for Puerto Rico, however, because so far there is no discipline, and the people of the commonwealth and its bondholders are suffering. (See “1Q2019 Review: Puerto Rico,” by Shaun Burgess, http://www.cumber.com/1q2019-review-puerto-rico/.)

State Ratings Changes

There were no state rating changes in the quarter; however, the outlook for Connecticut’s rating was changed to positive by S&P, based on the increased likelihood that the state will preserve until the end of fiscal 2019 its recently replenished reserves at what S&P considers to be the strong level of 10.2%, and also based on prospects that the state’s high debt levels could moderate if the governor’s proposal for a “debt diet” is carried through into policy. The state has a plan to budget conservatively, use any excess income tax revenues above-budget to bolster reserves, and limit general-obligation debt borrowing. However, S&P notes that a budgetary balance could come from reductions in local aid, a tactic we have discussed before that provides states with flexibility, albeit at the expense of agencies and municipalities. Connecticut has a number of wealthy, highly rated municipalities that may have to raise taxes, a move which could cause a further exodus from the state. The state capital and other sizable cities have already challenged finances and ratings.

Internet Sales Tax Update

States’ 2020 budgets show incremental increases in sales tax collections through the taxing of transactions within a state from retailers that do not have a physical presence in that state – a result of the South Dakota v. Wayfair decision. We discussed the Wayfair decision in a commentary last July: http://www.cumber.com/scotus-two-major-rulings-with-positive-implications-for-municipal-bond-credit-quality/?print=pdf. Moody’s notes that, though small so far, the increases are a positive development for state governments, and a majority of sales tax growth is expected to come from remote retailers. Revenue estimates are just that, since data is currently limited and reporting issues need to be worked out. According to The National Law Review, 36 states have enacted laws allowing them to collect remote online sales taxes and an additional seven are considering legislation. Moody’s estimates these changes will help states that are rural and have few retailers, while states that have dense populations and numerous retailers will see less of an increase. All in all, this is a good development for municipal credits, because the trend of online purchasing continues to grow, and thus the new laws save a revenue source that had started to slow without the ability to collect on remote sales.

Changes in Accounting Improve Municipal Transparency – to a Point

Governmental Accounting Standards Board (GASB) Statement 88 requires that notes to financial statements present direct borrowings and direct placements of debt separately from other types of debt. Direct borrowings and direct placements may expose a government to risks that are different from or additional to those incurred with other types of debt, such as the option for early prepayment making direct debt a priority over public debt. Statement 88 also requires the disclosure of amounts of unused lines of credit, assets pledged as collateral for debt, and terms specified in debt agreements related to significant (1) events of default with finance-related consequences, (2) termination events with finance-related consequences, and (3) subjective acceleration clauses. This requirement will help to make evaluating a municipality’s’ debt picture much more transparent.

Incidentally, for years the National Federation of Municipal Analysts has encouraged municipalities to disclose information on new direct borrowings when those agreements are entered into, instead of disclosing those obligations only in financial statements. Such disclosures are especially important because most municipalities issue financial statements only annually, and many months after the end of the fiscal year. During the financial crisis, some bank loans and swap agreements resulted in bumped-up costs or large termination payments to municipalities, causing negative credit situations, so it is important for these items to be disclosed.

Infrastructure Plan: Desires Are High, But Prospects Are Meagre

Many agree that US infrastructure is in need of an overhaul. The American Society of Civil Engineers report card on the quality of US infrastructure grades it D+! There is bipartisan agreement that something needs to be done and that the federal government should lead the way or at least provide some funding, but there are now disparate proposals and suggestions that go beyond giving municipalities better access to federal funds to finance infrastructure investment. Some ideas include resurrecting the Build America Bond program or forming an infrastructure bond bank, and in February the Senate Finance Committee introduced a Public Buildings Renewal Act that would authorize $5 billion in private activity bonds (PABs) for construction and restoration of public buildings and permit government-owned buildings to be eligible for public-private partnerships without giving up their tax-exempt status. However, with election-year politics already taking up Congresspersons’ time, the prospects for a full plan this year or next are waning. We expect there to be lots of activity around Infrastructure Week, May 13–20, but a final program is not likely.

Short of a full infrastructure plan there may be hope that some changes can be introduced to make financing of infrastructure more affordable. Municipal Bonds for America (MBFA), a nonpartisan coalition of municipal bond issuers and state and local government officials and other municipal-market professionals are working to explain the benefits of the tax-exempt municipal bond market. MBFA and other groups such as the National Association of Bond Lawyers have submitted suggestions for encouraging more investment in infrastructure to congressional committees. Major suggestions include the following:

  • -Restore advanced refundings
  • -Expand private activity bonds
  • -Restore direct pay bonds (BABs)
  • -Increase the bank-qualified loan limit

At Cumberland Advisors, we continuously follow legislative developments, accounting pronouncements, economic and demographic trends, and other news items, incorporate them into our views of the economy and markets, and employ them in our buy and sell decisions. The majority of our municipal bond holdings have AA ratings with diverse economic bases and strong financial performance.

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
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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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




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% highest marginal tax rate effectively wrote off almost 40% 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% from what they paid last year. Here’s an example. Let’s say a New Jersey couple paid $30,000 in property taxes and $30,000 in state income taxes. Under the old method, their $60,000 would be reduced to $36,180 as they would have written the tax off at 39.7%, the old top federal marginal rate. Under the new method, state and local taxes are not deductible, except for the $10,000 limit. Thus, their new taxes are $50,000 ($60,000-$10,000), or 38% more.
For obvious reasons, this new tax bite has generated much consternation and many crosscurrents.

Muni Bond Standpoint
Some of the best-performing bonds in the past two years have been higher-grade issues from New York, California, New Jersey, and Connecticut. We have written on this effect, and we began to emphasize these bonds even in national accounts in the middle of 2017. As the tax bill was being discussed, it became evident that SALT was going to be part of the package. It meant that income from out-of-state bonds for taxpayers in high-tax states would have to overcome a higher yield threshold since more would be taken away by the nondeductibility of state and local taxes on a Federal return.

This past week we looked at yield curves for the high-tax states of California, New York, and New Jersey and then compared them to general market yield curves, which we show below as both nominal yields and then yields after the effects of state taxes on these out-of-state yields are factored in.

In-State vs Out-of-State Yields on an After-tax Basis

Source: Bloomberg

We can see that there is an after-tax give-up at every point on the yield curve in all three states for investors owning out-of-state bonds, with the greatest penalty occurring in California, which makes sense, since it has the highest marginal state tax rate. Clearly this situation has driven higher demand for in-state exempt bonds in all of these states as well as in other states with high state income taxes, such as Minnesota, Connecticut, and Massachusetts. With steeper yield curves in munis, the biggest give-up from a nominal interest rate standpoint is in the longest maturity end.

The most natural message from a chart like this is that investors in high-tax states should reduce the amount of out-of-state bonds in their portfolios relative to their in-state exempt bond holdings.

But it’s not that simple. There are credit issues to consider as well.

The following slides are from a State of New York presentation.



(Source: https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/SALT_Revenue_PP.pdf )

The gist of this presentation is that it bemoans the SALT elimination of deductibility and its impact on New York’s budget. There are presumably similar slides in other high-tax-state presentations. The nondeductibility of both the state income taxes as well local property taxes will have a greater effect on residents of high-tax states. The counterargument of conservatives is that high-tax states have raised taxes based on the deductibility subsidy provided by the federal government. In any case, the high-tax states are now facing the loss of high-tax-paying residents who leave for lower-tax states such as Florida, Texas, and Nevada (no income taxes and lower property taxes). At Cumberland we feel this issue has been holding the high-end housing market in high tax states ransom for the better part of the last twelve months, as the nondeductibility of property taxes hurts that market just as the SALT provisions hurt the higher-yielding out-of-state bonds.

So at this point we have higher demand for IN-STATE bonds. But if these high-tax states continue to lose population, that is a credit NEGATIVE over time. Though it may sound somewhat counterintuitive, we are starting to look at DIVERSIFYING into some out-of-state bonds in the high-tax states as a hedge against potential credit erosion. We have written about the credit issue before. State and local governments will be forced to CUT taxes from their constituents to make up for some of the higher EFFECTIVE income taxes and property taxes. If declining tax revenue is not made up, there is a chance of lower debt-service coverage on bonds.

The best way to employ this strategy in the management of muni bond portfolios is to refer to the chart above. The nondeductibility effect on out-of-state bonds is the least at the shorter end where lower-yielding bonds are. To the extent that we continue to manage bond portfolios on a barbell basis, the marginal addition of out-of-state bonds should come from the shorter maturities.

And finally, President Trump said this week that he would consider some changes to the SALT provision of the tax bill (and just as quickly, Senator Charles Grassley of Iowa, chair of the Senate Finance Committee, rejected the idea on principle).

Whereas the president will find sympathetic legislators on both sides of the aisle from Northeastern states and California, we suspect that the true reason for his step-back is that with residents moving at the margin from the Northeast, reliably Republican states such as Florida and Texas become less reliable. These states are becoming somewhat bluer at the margin as we write this. It is hard to conceive of Republicans winning the White House without Florida and Texas, and we feel that is the main reason for the president to revisit the issue.

In summary, SALT has increased demand for bonds in high-tax states, put a higher penalty on out-of-state bonds in high-tax states, and hurt revenue collections as some taxpayers move to lower-tax states. The situation will gain some clarity for individuals after April 15th of this year, once taxes are paid. But in always trying to lean on the idea of better credit, we will look to diversify somewhat in the high-tax states.

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

Gabriel Hament
Investment Advisor Representative: Foundations, Charitable Accounts & Private Individuals
Email | Bio

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
Email | Bio


*Please note: Cumberland Advisors does not give tax advice. Please consult your tax advisor for applicability of any of the concepts listed in this commentary to your particular situation.


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




Buyer Beware

Cumberland Advisors - Shaun Burgess - Portfolio Manager & Fixed Income Analyst

In a move that caught many observers by surprise, the Federal Oversight and Management Board (FOMB), which was created to oversee the restructuring of the Commonwealth of Puerto Rico, has requested that Judge Swain invalidate more than $6 billion of the territory’s debt. The move would affect uninsured general-obligation bonds issued in 2012 and after. The rationale for the FOMB’s argument is that the debt was issued in violation of the island’s constitutional debt limit. While others have called for this move previously, the FOMB has never vocally supported this extreme action until now. The bonds in question were apparently issued in adherence to practices used in prior debt issuances, and their validity came into question only following the island’s historic bankruptcy.

The move raises many questions. How did the island access capital markets if the debt violated the debt limit? Can the debt be invalidated if it was in compliance with practices used at the time and in prior debt issuances? If the calculations that were used were known to be incorrect, is there a case for fraud? Is there more debt the island may seek to invalidate? Is the move in line with the FOMB’s mandate of putting the island on a path to regain market access? How does this development affect other municipalities that may have used creative methods to skirt statutory debt limits? The biggest question, though, is who would be held accountable? It is easy to say that this problem affects only “soulless” hedge funds, but that is not true, especially with regard to bonds issued prior to 2012, when the general-obligation pledge was still rated investment-grade. And in any case, hedge funds bought the Commonwealth’s bonds based on the promise to be repaid. Being forced to take a haircut because of the inability to pay is understandable, but to get nothing because the calculations used were incorrect or inappropriate would be hard to stomach.

Whether Judge Swain agrees to the FOMB’s request remains to be seen, but the attempt raises serious questions about the direction of the FOMB and the broader implications for the $3 trillion municipal bond market.

Shaun Burgess
Portfolio Manager & Fixed Income Analyst
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