November 27, 2013Daily Rates & Viewpoints From the Officers & Staff of TIB.

Municipal Bond Characteristics

Municipal bonds can be an attractive instrument to a bank’s portfolio. The income they produce is generally not taxable and they are perceived to be a safe investment. However, investing in municipal bonds can be a challenge for many. The portfolio manager must analyze all available data to determine if the municipality will be able to repay its debt before purchasing a municipal bond. They must also decide if a general obligation (GO) or a revenue bond is a better fit for their bank portfolio based on these analytics; however GOs typically are the better fit for community banks. There are many key characteristics to consider when evaluating both types of bonds.

General obligation bonds are backed entirely by the issuer’s ability to repay its debt based on their ability to levy and collect taxes. Revenue bonds are issued to finance a revenue generating project that provides essential services. The current financial condition and the characteristics of the issuer are of primary importance to the investor. A majority of community banks will focus on the general obligation sector of the municipal market, given the municipality’s ability to increase taxes if necessary to meet obligations.
The tax base of general obligation bonds should be examined as it can help determine if the issuer can repay its debt. Several debt ratios should be examined to better understand the financial soundness of the issuer. The first is net debt per capita, which indicates the ability of local residents to support their government’s debt burden through taxes. This ratio can be used to measure the government’s ability to continue to pay its debt service costs through its current levels of tax revenue. Also, the net debt to assessed value ratio will measure the municipality’s net debt compared to the specified value of the real property being assessed for tax purposes. The lower the ratio, the less risky its bonds are deemed to be, since there is less risk of the government being unable to finance repayment of the bond issue. Lastly, it is important to analyze the overlapping debt, which refers to the financial obligations of one political jurisdiction that also falls partly on a nearby jurisdiction. This type of debt is common in most states due to the numerous jurisdictions for different tax purposes, such as a new school or road.

Since interest on revenue bonds is not funded by taxes levied, bondholders take on the risk of the project not generating enough funds to repay its debts. Revenue bonds often have protective covenants written into their indentures that can have restrictions on the issuance of additional bonds. There are three forms of these restrictions, open-end indenture, which permits additional bonds provided the prior year’s revenue is adequate to cover the new issue, closed-end indenture, which subordinates all future bonds except those required to complete construction of the project, and project completion, which is similar to closed-end, but it requires issuing bonds to complete construction. The money obligated for the payment of debt service and for the making of other deposits required by the bond contract is called pledge revenue. A gross revenue pledge promises that all revenues received will be used for debt service prior to deductions for any expenses, while a net revenue pledge promises that net revenues, after expenses, will be used for payment of debt service. The debt service coverage ratio measures the ratio of net operating income to total debt service. A ratio of two or more is generally considered acceptable.        
Knowing how to evaluate municipal bonds is extremely important and can help determine what can be a good fit for your portfolio. All important information should be provided to you so an informed decision can be made. Please contact your TIB Capital Markets officer if you would like to discuss the municipal bond market-- we’re always glad to help!

Justin Baack
Banking Officer

Market Levels @ 7:10 AM CST

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.16% Dow Jones 16072.80
3 - Month LIBOR 0.23% NASDAQ 100 4017.74
1-Yr LIBOR 0.57% S&P 500 1802.70
1-Yr CMT 0.13% Spot Gold 1251.60
Prime 3.25% Spot Silver 20.00
3-yr LIBOR Swap/Offer 0.63% Spot Crude Oil 92.72
5-yr LIBOR Swap/Offer 1.43% CRB Index 274.33
3 Mo - Fed Fund Futures 0.09% 6 Mo - Fed Fund Futures 0.09%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.00% 90 - Days    
0.00% 180 - Days    
0.23% 2 - Year 0.29% 6bp
0.49% 3 - Year 0.60% 11bp
1.30% 5 - Year 1.47% 17bp
2.68% 10 - Year 3.14% 46bp
3.76% 30 - Year    
245 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FHLMC 5/8 12/19/17 12/14 1.16% 1.14%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-Yr FNMA 3.00% 1.99% 106 / 3.68
30-Yr GNMA 3.50% 2.94% 146 / 4.63
*Duration @ 12 month Historical CPR
Morning Commentary: David Terrell

We had a mixed bag of economic data this morning.  Durable Goods Orders dropped another 2.0% and even stripping out Transportation from the index, it declined 0.1%.  However, initial jobless claims dropped to their lowest level in two months.  The LEI (leading economic indicators) increased 0.2, but economists expected the index to remain flat.  The Chicago Fed Activity Index and the Chicago Purchasing Manager both declined, while Consumer Confidence increased.  All of this data has pushed the Dow above 16,100 and has set it on pace for its fourth new high in as many days.  It will be interesting to see how black Friday retail sales fare.  US Household Net Worth has now easily exceeded its prerecession high by 8.5%.

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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