municipal bonds and the yield curve

Municipal Bonds

and

The Yield Curve

Wealth Management

Presented To:

SIRS, $ums Investment GroupDate: September 26 2018

Time: 8:00am

Location: Legends Restaurant

at the Diablo Creek Golf Course

Presented By:

John W Hutchinson CFP®

First Vice President/Investments

(925) 746-6575

[email protected]

500 Ygnacio Valley Road, Suite 490

Walnut Creek, CA 94596

The Hutchinson Wealth Management Group of Stifel

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• Introduction

• Overview of Stifel

• Stifel Public Finance

• Fixed Income

• Reasons to Invest

• Municipal Bonds

• Ratios

• The Yield Curve

• Current Ideas

• Wrap Up - Q & A

Presentation Overview:

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John Hutchinson, CFP® |

First Vice President/Investments

Mr. Hutchinson has been in the investment industry for more than 20 years, including eight years with Stone & Youngberg,

LLC prior to its 2011 merger with Stifel. He also spent six years working on the bond desk as a Fixed Income Specialist

with Charles Schwab, preceded by more than a year at Merrill Lynch as an Investment Advisor. Prior to beginning his career

in the investment industry, Mr. Hutchinson owned and operated Hutchinson Insurance Agency in the San Francisco Bay

Area for seven years as a Farmers Insurance Agent.

Mr. Hutchinson earned the CERTIFIED FINANCIAL PLANNER™ professional certification in early 2003. To become a

CFP® professional, he successfully completed a comprehensive course of study culminating in a 10-hour, two-day test

proving his knowledge in financial planning matters. In addition, he is California insurance licensed (California Insurance

License Number 0758442) for life, health, and variable insurance (including annuities and long-term care).

John enjoys cycling, swimming, skiing, and coaching his children in recreational sports. He has competed in several events,

namely the Death Ride in Markleeville, California, in which he rode his bicycle 130 miles and climbed over a 16,000-foot

elevation in one warm day. John, his wife, Lisa, and their two children reside in Pleasant Hill, California.

“My mission is to become our clients’ trusted advisor and really know and understand their dreams, goals, desires,

and fears when it comes to their overall wealth planning. I am dedicated to helping our clients build, maintain, and

protect their wealth as well as guide them in passing wealth to their heirs in the most beneficial, tax-efficient means. I

strive to deliver excellent client service far exceeding expectations.”

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Stifel Overview

• Broad-based, full-service securities firm

– Founded in 1890 with a rich history of providing financial services

– Based in St. Louis

– More than 7,300 associates, including our affiliates

– Member SIPC, New York Stock Exchange, and all principal exchanges

– Web site: www.stifel.com

• Highly regarded wealth management firm

– More than 390 offices across the nation and in Europe (Stifel Nicolaus Europe Limited)

– More than 2,300 affiliated financial advisors

– Entrusted with approximately $250 billion in client assets

• Nationally recognized institutional investment banking firm

– 111 senior research analysts (covering 12 sectors)

– 400 investment bankers (in both vertical industry and focused product groups)

– 309 institutional salesmen

– 155 position and sales traders

• Broad municipal finance expertise and resources

– 150 public finance professionals

– 29 public finance locations

• Well capitalized public firm

– Approximately $2.7 billion in stockholders’ equity

– Listed on the NYSE: SF

– Significant employee ownership – Approximately 30%

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20 Years of Growth

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Overview of Stifel Services

• Annuities

– Variable, Immediate, Fixed Indexed, and Fixed

• Asset Allocation

• Cash Management

– Check Writing

– Debit Card

– Electronic Money Transfer (eMoney)

– Stifel Mobile

– Bill Payment Services

– Stifel Access (online account access)

• College Planning

– 529 College Savings Plans

– Education Savings Accounts

• Common Stocks

• Consulting Services (Fee-Based Programs)

• Corporate Executive Services

– Cashless Stock Options Exercise

– Control and Restricted Stock Transactions

– Rule 10b5-1 Plans

• Equity Line of Credit

• Estate Planning

• Exchange Traded Funds and Notes

• Financial Planning

• Fixed Income Investments

– Certificates of Deposit

– Collateralized Mortgage Obligations (CMOs)

– Corporate Bonds

– Government and Agency Securities

– Municipal Bonds

• Insurance

– Business Owner Needs

– Disability Insurance

(Individual and Group)

– Life Insurance

(Individual and Business Policies)

– Long-Term Care Insurance

• Investment Banking

• IRAs

– Traditional, Roth, and Rollovers

• Managed Money

• Money Market Funds

• Mutual Funds

• Options

• Preferred Stocks

• Public Finance

• Research

• Retirement Planning

• Retirement Plans

– 401(k) Plans

– 403(b) Plans

– Profit Sharing Plans

– Money Purchase Plans

– SEP IRAs

– SIMPLE IRAs

– Defined Benefit

• Syndicate Offerings

• Tax Planning

• Unit Investment Trusts8888

Public Finance Overview

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Public Finance Rankings

2017 National Negotiated New Issues

10101010

• More in-state California resources than

any other firm:

– 34 Bankers

– 3 Underwriters

– 6 Traders (2 desks, LA and SF)

– 2 Research Analysts

• (ask me about our weekly MMO

distribution list)

All covering California

• Most active California underwriter

– Stifel priced 227 transactions in 2017

keeping us in constant dialogue with

investors; nearly 30% of all California

transactions in 2017

– This consistent underwriting volume has

been sustained over many years

– Consistent rankings evidence our success

Rank Underwriter

Par

($MM)

No. of

Issues

1 STIFEL $7,845 227

2 Piper Jaffray 2,360 95

3 Raymond James 1,817 80

4 RBC 3,789 72

5 Citi 7,664 66

6 Morgan Stanley 6,574 52

7 Bank of America 5,497 49

8 J.P. Morgan 4,515 31

9 Hilltop 579 29

10 Wells Fargo 1,333 27

Industry Total 54,414 805

2017 California Bond Underwriter Rankings

Municipal Market Credentials

California Senior Managed Experience

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Fixed Income-Bonds

Fixed income securities have five main comparable

characteristics:

1. Quality

2. Coupon or Yield

3. Taxation (or Taxes)

4. Maturity and Market Risk

5. Liquidity12121212

Quality

Credit Risk: Moody’s Standard

& Poor’s

Investment Grade:

Highest Quality Aaa AAA

High Quality (very strong) Aa AA

Upper Medium Grade A A

Medium Grade Baa BBB

Non Investment-Grade:

Somewhat Speculative Ba BB

Highly Speculative Caa CCC

Most Speculative Ca CC

Imminent Default C C

Default C D

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Coupon or Yield

• Coupon

• Current Yield

• Yield to Maturity

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Taxation or Taxes

Income earned on fixed income investments may be taxed

in different ways.

• Municipal Bonds:

– Taxable Municipal Bonds

– Tax equivalent yield

• Treasuries and Government Agencies

• Corporates, CDs, Etc..

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Maturity and Market Risk

Investors have many options (Risk):

• Money market next day liquidity vs. longer term 30 year

bonds.

• Generally - Shorter maturities pay less rates of return than

longer maturities.

• Fixed rates longer term subject to market volatility

– Variable rates.

• Interest rates rise – Think Teeter / Totter

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Teeter / Totter

Yields / Prices:

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Liquidity

Liquidity

•Refers to the ability to convert a security into cash

quickly is an important investing consideration.

•Some investments can be converted by writing a check.

•Others require sale at prevailing market value (which

may be more or less than the investor’s cost) or incur

penalties for early withdrawal.

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Municipal Bonds

Municipals:

• Issued by states, cities, towns, or public commissions to

provide money for schools, hospitals, and other public

works.

• Funding's to operate, local governments and public entities,

such as school districts, often issue municipal bonds to

meet their financial needs.

• Free from Federal and in some cases state and local taxes.

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Municipal Bond Types

• General Obligation Bonds:

• General obligation of a state/local government (city, county, school district, etc.)

• Secured by power of issuer to levy taxes

• May either be an unlimited or limited tax pledge

• Not “riskless” — rated by rating agencies

• Generally pay interest semiannually (unless zero coupon)

• Revenue Bonds:

• Project financing

• Secured by revenue stream of special project or facility financed by issuance of

the bonds.

• Not backed by a pledge of government agencies

• Rated by rating services as to issuer’s ability to pay

• Generally pay interest semiannually (unless zero coupon)

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Reasons To Invest In Municipals

• Diversify

• Wealth Preservation

• Tax-Advantaged Income

• Supplement to Retirement Savings

• Non-correlation

• Balance

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Diversify

Diversify with Municipal Bonds:

• Like most bonds, municipal bonds can offer your portfolio

diversification potential.

• Diversification won’t guarantee gains or protect against

losses:

– Might reduce overall volatility and improve overall

portfolio returns.

– With a wide rage of choices to meet investment

objectives regarding:1. Investment quality

2.Maturity

3.Choice of issuer

4.Bond type

5.Geographical22222222

Tax Free Income

Tax Free Income:

• Generally free from regular federal income tax and, in

many cases, state and local income taxes.

• Investors need to compare taxable vs. tax-advantaged rate

of return using “Taxable Equivalent Yield” formula.

• The taxable equivalent rate is:

• the tax-advantaged rate ÷ (1 - your tax bracket rate).

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Tax-Advantaged Vs. Taxable YTM

Determining Taxable Equivalent Yield:

Taxable Equivalent Yield =

Tax-Advantaged Yield %

______________

(1 - Tax Bracket Rate)

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Supplement Retirement Savings

Supplement Retirement Savings:

• Retirement Savings

• Steady Stream of Income

• Check a month

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Non-Correlation

Non-Correlation:

• The best equity/market hedges have little or no correlation

with equities.

• Municipal bonds tend not to fluctuate as much as stocks

depending on the portfolio duration.

• Using Beta as a measurement:– A slightly negative Beat means these bonds tend to move in slightly opposite directions

of equities.

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Balance

Balance:

• Using Municipals in your Portfolio’s Asset Allocation can

help to balance your portfolio.

• May create a steady stream of portfolio income.

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Key Risk Parameters

Risk: Definition: Cause & Effect:

Interest Rate Risk The risk associated with ongoing

decline and rise of interest rates.

Rising yields cause bond prices to fall.

Yield Curve Risk The risk associated with the changing

slope of the yield curve.

A flattening yield curve causes short

term bonds to under-perform long term

bonds

Credit Risk The risk that a bond will default and

not make timely payments

Bonds may lose value it their credit

ratings are downgraded.

Liquidity Risk The risk that a bond cannot be bought

or sold quickly.

A market crisis can reduce liquidity

resulting in difficulty in selling

undesired bonds, further depressing

the price of those bonds.

Cash Flow Risk The uncertainty of future cash flow to

a bond holder.

In a low interest rate environment, a

bond may be called prior to maturity,

resulting in fewer interest payments

than anticipated

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How to Calculate & Considerations

How Do I Calculate “It” (Muni / Treasury)?

• Divide muni yield with equivalent Treasury yield:

– Example:

• AAA rated 10 year muni bond = 2.43% (tax exempt)

• 10 year Treasury = 2.87% (federally taxable)

• Ratio = 2.43% / 2.87% = 85%

• Some Considerations:

– Treasuries might drop in uncertain times causing the

ratio to increase.

– Munis are less liquid vs. Treasuries.

– This is a tool to use when deciding when munis might be

a good time to buy, and used by institutions to price

bonds. 29292929

California Yield Spreads

California Yield Spread to AAA MMD

-15

5

25

45

65

85

105

1/2

/20

13

3/2

/20

13

5/2

/20

13

7/2

/20

13

9/2

/20

13

11

/2/2

01

3

1/2

/20

14

3/2

/20

14

5/2

/20

14

7/2

/20

14

9/2

/20

14

11

/2/2

01

4

1/2

/20

15

3/2

/20

15

5/2

/20

15

7/2

/20

15

9/2

/20

15

11

/2/2

01

5

1/2

/20

16

3/2

/20

16

5/2

/20

16

7/2

/20

16

9/2

/20

16

11

/2/2

01

6

1/2

/20

17

3/2

/20

17

5/2

/20

17

7/2

/20

17

9/2

/20

17

11

/2/2

01

7

1/2

/20

18

3/2

/20

18

5/2

/20

18

7/2

/20

18

Yie

ld S

pre

ad (

bps)

10 year

30 year

1/1/13 - 8/13/1830303030

Yield Curves

0

1

2

3

4

5

6

5 Years 10 Years 15 Years 30 Years

Normal

Flat

InvertedYie

ld %

Three Yield Curves

Years To Maturity 31313131

Treasury Curve

Treasury Yield Curve

2/10/17-8/10/18

0

0.5

1

1.5

2

2.5

3

3.5

1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr

2/10/2017

8/10/2018

Year to Maturity

Source: TM3

Yie

ld %

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Municipal Curve

Municipal Yield Curve

2/10/17 – 8/10/18

0

0.5

1

1.5

2

2.5

3

3.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

AAA GO 2/10/2017

AAA GO 8/10/2018

Year to Maturity

Source: TM3

Yie

ld %

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Historical Inverted Yield Curves

The below chart shows the 2-year/10-year spread.

The grey shaded areas are periods of U.S. recession

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What Was Covered Today

Today We Covered:

• What/who is Stifel:

– History and Growth of the Firm and Services Provided.

– Public Finance Team:

• Stifel’s Rank in Municipal Market.

• Fixed income five similarities

• Types of munis

• Reasons to invest with munis.

• Ratios - AAA rated MMD to Treasury.

• Yield Curve

35353535

Questions:

Q & A

Presentation Card

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The End:

John Hutchinson CFP®

First Vice President/Investments - Stifel

500 Ygnacio Valley Road

Suite 490

Walnut Creek, CA 94596

Toll Free (866) 746-4774

Direct: (925) 746-6575

Fax: (925) 930-9433

[email protected]

CA Insurance Lic. #0758442

An introduction to another good friend like yourself would be a

wonderful compliment!

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Risks and Important Disclosures:

Clients should consult their financial advisors regarding unknown financial terms and concepts.

This information is intended for use by clients with their financial advisors. Clients should consult their financial advisors before making any

investment decisions.

Financial advisors should consider the suitability of the manager, strategy, and program for its clients on an initial and ongoing basis.

This presentation is for general information purposes only and should not be construed as specific tax or investment advice. Past performance

does not guarantee future results. Charts are for illustrative purposes only and do not reflect any particular investment.

A WORD ON RISK

Investing involves risk; principal loss is possible . Debt or fixed income securities are subject to credit risk, market risk and interest rate risk.

The value of and income generated by debt securities will decrease or increase based on changes in market interest rates, the credit quality of

issuers and general economic and market conditions. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make

interest and principal payments when due. High yield or lower rated bonds carry heightened credit risk and potential for default. Investors

investing in municipal securities should contact their tax advisor regarding the suitability of tax-exempt investments in their portfolio. Stifel is

not a tax advisor. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions

and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT), and in some cases other federal income

taxes, and/or state and local taxes, based on state of residence. Income from municipal bonds held by a portfolio could be declared taxable

because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant

conduct of a bond issuer.

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municipal bonds and the yield curve

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