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The Municipal Bond Market in the Aftermath Municipal Bond Club of Baltimore September 25, 2008

The Municipal Bond Market in the Aftermath Municipal Bond Club of Baltimore September 25, 2008. Presented by: Anirban Basu, CEO Sage Policy Group, Inc. Morris Segall, President SPG Trend Advisors. Historic and Projected World Output Growth, 2004 through 2009*.

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The Municipal Bond Market in the Aftermath Municipal Bond Club of Baltimore September 25, 2008

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  1. The Municipal Bond Market in the AftermathMunicipal Bond Club of BaltimoreSeptember 25, 2008 Presented by: Anirban Basu, CEO Sage Policy Group, Inc. Morris Segall, President SPG Trend Advisors

  2. Historic and Projected World Output Growth, 2004 through 2009* Source: International Monetary Fund *2008-2009 data are projections

  3. Estimated Growth in Output by Select Global Areas, 2008 Source: International Monetary Fund

  4. University of Michigan Consumer Sentiment SurveySeptember 2001 through August 2008 Between Aug. 2005 and Sept. 2005, the consumer sentiment index dropped 12.2 points, the largest one-month decline since December 1980. Source: University of Michigan; Dismal.com

  5. Retail & Food Services SalesJanuary 2001 through August 2008 Source: Dismal.com

  6. CPIAugust 2008 CPI : +5.4% Core CPI*: +2.5% Source: Bureau of Labor Statistics *Core CPI: All items less food and energy

  7. 15-Year & 30-Year Fixed Mortgage RatesJanuary 1995 through September 2008 Source: Freddie Mac

  8. U.S. New Home SalesJanuary 1999 through August 2008 Source: Economy.com, Census Bureau

  9. Change in Unit Sales by Maryland JurisdictionAugust 2007 vs. August 2008 Source: Maryland Association of Realtors MD: -25.8% in August 2008

  10. Net Change in U.S. JobsJanuary 2000 through August 2008 8/08: -84k Over the last 12 months (Aug. to Aug.) the U.S. lost 283k jobs Source: Economy.com, Bureau of Labor Statistics

  11. National Nonfarm Employmentby Industry Sector GroupsAugust 2007 v. August 2008Absolute Change -283k All Told Bush Scorecard Private Sector: +3,353,000 Public Sector: +1,651,000 Total: +5,004,000 Source: Bureau of Labor Statistics

  12. Unemployment Rates, U.S. States (SA) August 2008 Source: Bureau of Labor Statistics • U.S. unemployment rate: August=6.1%

  13. Implications

  14. Total Municipal Bond Debt Outstanding • Latest estimates place debt outstanding at $2.66 trillion. Source: S&P All Muni Index

  15. G.O. Municipal BondsBloomberg Daily Generic OAS Yields, 9/23/2008 Source: Bloomberg

  16. Market Update • The municipal bond market was a casualty of the current credit crisis with yields uncharacteristically exceeding comparable Treasury issues. • As the credit crisis wore on, investors increasingly shunned risk. • Housing issues suffered from the mortgage market meltdown. • Insured issues suffered from the credit downgrades and losses of municipal bond insurers.

  17. Market Update (cont.) • Long term bond issuance through August was virtually flat with 2007 at approximately $295 billion. • New bond issuance was strongest in Development, Environment, Health Care, Transportation and Utilities. • Not surprisingly new issue weakness was led by housing followed by general purpose and education sectors.

  18. Market Update (cont.) • In addition, variable rate (short put) issues saw the biggest increase (+220%) in year over year volume. • Concurrently, issues backed by Letters of Credit increased by over 370% year to year from $10.9 billion to over $52 billion. • While Long term bond issuance was virtually flat through August, municipal note issuance increased over 14% to over $36 billion at the end of August.

  19. Market Update (cont.) • Safety was also a principal objective as issues backed by letters of credit and with variable rates (short put) increased substantially from 2007 levels. • Leading sectors in note finance this year have been General Purpose and Education sectors. • New money financing represented the bulk of note issuance while refundings represented the bulk of long term bond issuance this year.

  20. Outlook • While the municipal bond market seems to have stabilized with the redemption of auction rate preferred issues by brokerage firms, the market will need the full government “bailout” to provide more stable liquidity. • Investors continue to be risk averse and will stress safety of principal and liquidity. • State and local government finances are facing increased budget deficits from revenue shortfalls and are also facing limits on new bond issuance.

  21. Outlook (cont.) • Increasingly programs will have to be cut. • Many states have already raised taxes and property tax increases have peaked. • We expect an increase in downgrades of state and local government credit ratings and in the credit ratings of agency and revenue bond issues. • We expect interest rates to rise as a result of an increase in U.S. Treasury interest rates from increased deficit

  22. Outlook (cont.) • Conversely, we expect either a repeal or major adjustment in the AMT tax that would benefit municipal bond investment. • Likewise a rise in Federal income taxes which we expect will also increase the attraction of municipal securities.

  23. Conclusion • In conclusion, the municipal bond market will face increasing supply from financially stressed issuers but increasing demand from investors seeking tax avoidance. • However, investor selection of municipal debt will be more discriminating.

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