TIB Ticker - Tax-Exempt Municipal Bonds

February 03, 2012Daily Rates & Viewpoints From the Officers & Staff of TIB.

Tax-Exempt Municipal Bonds

Three prominent groups have advised Congress concerning deficit reduction (debt reduction & stimulating the U.S. economy):

Bowles-Simpson proposal – Eliminating all tax expenditures and replacing tax-exempt bonds with taxable bonds with direct federal subsidies.
Domenici-Rivlin proposal – Eliminating certain tax expenditures and replacing tax-exempt bonds with taxable bonds with direct federal subsidies.
Wyden-Coats proposal – Eliminating many tax expenditures and replacing the tax-exempt feature of municipal bonds with tax credits.

Tax Expenditures are defined under the Congressional Budget Impoundment Control Act of 1974 as revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability. These tax expenditures include any reduction in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. Tax-exempt municipal bonds are included in this definition.

According to a December 2011 study published by Bernardi Securities, Inc. entitled Tax-Exempt Municipal Bonds: The Case for an Efficient, Low-Cost, Job-Creating Tax Expenditure, the following concerns were identified in altering the tax-exempt bond mechanism/industry:

Non-partisan market researchers estimate the revenue gain from the repeal to be 65% lower than government estimates that assume (unrealistically) that investors will not adjust their portfolios and reduce their investments in municipal bonds.
The repeal could negatively impact jobs and other taxpayer benefits as a result of projects that are financed with tax-exempt bonds. “Repeal at a time when policymakers are counting on public infrastructure projects to spur job growth seems to diminish such efforts”.
Federal intervention could jeopardize reciprocal immunity and separation of powers. Local authorities could stand to lose their autonomy when it comes to financing and project management.
Taxpayers would be saddled with debt guarantees reminiscent of the sub-prime mortgage era.

While these proposals have met resistance and have not been enacted, they bear watching. We need to let our elected representatives know the important role municipal bonds play in our banks, as well as our communities.

Barry Renfroe Barry Renfroe
Sr. Vice President
brenfroe@mybankersbank.com

Market Levels @ 8:10 AM CST

TIB Fed Funds & MMDA Rates - Previous Day
Agent	0.20%	Prin	0.05%	MMDA	0.30%
Agent	0.20%	STAR Prin	0.10%	STAR MMDA	0.35%

Key Indices/Commodities
1 - Month LIBOR	0.26%	Dow Jones	12705.41
3 - Month LIBOR	0.52%	NASDAQ 100	2859.68
1-Yr LIBOR	1.08%	S&P 500	1334.70
1-Yr CMT	0.14%	Spot Gold	1754.60
Prime	3.25%	Spot Silver	34.05
3-yr LIBOR Swap/Offer	0.59%	Spot Crude Oil	96.98
5-yr LIBOR Swap/Offer	1.01%	CRB Index	312.60
3 Mo - Fed Fund Futures	0.11%	6 Mo - Fed Fund Futures	0.12%

US Treasury Yields		US Non-Callable Agency Yields
Yield	Maturity	Yield	Spread
0.00%	90 - Days
0.00%	180 - Days
0.17%	2 - Year	0.24%	7bp
0.27%	3 - Year	0.42%	15bp
0.72%	5 - Year	1.00%	28bp
1.88%	10 - Year	2.32%	44bp
3.09%	30 - Year
171 BPs		Yield Curve(2's-10's)

Sample 1x Callable Agency Issues
Description	Call Date	YTC	YTM
FNMA 1.05 2/27/17	2/14	1.05%	1.05%

Select MBS Levels
Description	Coupon	Yield	Spread/Duration*
15-Yr FNMA	3.50%	2.19%	150 / 4.30
30-Yr GNMA	3.50%	2.97%	85 / 9.99
*Duration @ 12 month Historical CPR

Morning Commentary:	Reed Bateman
The first Friday of each month is always an exciting one with nonfarm payroll and unemployment releases, and today certainly didn’t disappoint. Despite an ADP employment release on Wednesday that was lower than forecast and revised lower for the previous month, today’s releases paint a different picture. Nonfarm payrolls increased by 243K in January, substantially more than the 140K estimate, and the unemployment rate declined from 8.5% to 8.3%. The drop in the unemployment rate drop can be somewhat contributed to a large 0.3% decline in the participation rate, as people left the work force. Private and manufacturing payrolls jumped sharply as well, up 257K and 50K respectively. While the unemployment rate did decline to the lowest level in three years, the U6 underemployment rate, which includes marginally attached and part time workers is still quite high at 15.1%. As you can imagine, Treasuries sold off in price immediately after the release. Just before 8 central, we have the 10-year down 3/4ths of a point in price and yielding 1.90%, with shorter maturities off a little less and longer maturities off more as the curve has steepened. Dow futures reflect an open 100 points higher as the increase in hiring shows companies are confident about the economy going forward.

Morning Commentary:

Reed Bateman

The first Friday of each month is always an exciting one with nonfarm payroll and unemployment releases, and today certainly didn’t disappoint. Despite an ADP employment release on Wednesday that was lower than forecast and revised lower for the previous month, today’s releases paint a different picture. Nonfarm payrolls increased by 243K in January, substantially more than the 140K estimate, and the unemployment rate declined from 8.5% to 8.3%. The drop in the unemployment rate drop can be somewhat contributed to a large 0.3% decline in the participation rate, as people left the work force. Private and manufacturing payrolls jumped sharply as well, up 257K and 50K respectively. While the unemployment rate did decline to the lowest level in three years, the U6 underemployment rate, which includes marginally attached and part time workers is still quite high at 15.1%. As you can imagine, Treasuries sold off in price immediately after the release. Just before 8 central, we have the 10-year down 3/4ths of a point in price and yielding 1.90%, with shorter maturities off a little less and longer maturities off more as the curve has steepened. Dow futures reflect an open 100 points higher as the increase in hiring shows companies are confident about the economy going forward.

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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