Municipal Market Commentary

Municipal Market Commentary – June 5, 2014

Bond Investing in a Low Interest Rate Environment

For many individual investors today’s interest rates seem to be at historically low levels. If you are a borrower, buying a house or a car, these rates are in your favor. On the other hand, if you are investing for income, today’s bond and CD rates can seem to be working against you. This perception can lead some to “reach for yield” often by lowering investment credit quality standards or seeking the “too good to be true” alternative investment opportunities.

Successful fixed income investors have learned that credit quality and a focus on the security of an investment are key factors in making investment decisions. This holds true in all interest rate environments. High rates or low, the return of your investment (i.e. the principal amount invested)should be more important than the return on your investment. But this raises the question: Are interest rates today really at historically low levels?

If you were an investor in the 1980’s you could place your money in FDIC insured bank CD’s and earn in the neighborhood of 12%. Sounds good, compared to today’s rates but then, inflation was at 15%. This meant your high rate CD was actually costing you 3% every year, and that’s before you factor in the impact of income taxes. When you look at today’s nominally lower rates and the significantly decreased impact of inflation, today’s investment opportunities look pretty good. That brings us to the key point, high quality fixed income investment opportunities do exist today. But how do you assess value and credit quality in today’s market? First of all credit rating agencies can provide a short hand view of the current comparative credit quality of various issuers. For example the following table shows the current credit ratings of General Obligation bonds issued by various states.

Sampling of State G.O. Bond Ratings

For the municipal bond market, many issuers also use credit enhancements such as bond insurance. However not all insurance is the same.Municipal bond insurance is only as good as the claims paying ability of the insurance provider. The following table shows the credit quality of various bond insurers.

Sampling of Muni Bond Ins Providers

Not all bonds in the market may meet your needs or represent comparable value. Is a 1 year bond a better value than a five, ten or 30 year bond? A glance at the current yield curve chart can show where the sweet spot for value is in terms of maturity. Another point of comparison to consider relates to the after tax yields available on different classes of fixed income offerings. For example, are municipal bonds a better value than U.S. Treasury bonds?

In summary, we recommend that investors should always look at the credit quality of your bond investments. Then compare various offerings, in today’s interest rate environment, based on maturity range and issuer type.

Trader’s Analysis

Our Trader’s Analysis charts the historical spread in yield between tax free municipal bonds and benchmark 10 year U.S. Treasury obligations.

H&W Graph

Source: Guggenheim Investments. Barclays Capital and Bloomberg. Past performance is no guarantee of future results. The chart shown is for illustrative purposes only; it is not meant to forecast, imply or guarantee the future results of any Guggenheim Investments product. The U.S. Municipal Index covers the U.S.D-­‐denominated long-­‐term tax-­‐exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-­‐refunded bonds. On the Run is the most recently issued U.S. Treasury bond or note of a particular maturity.

Why Hennion & Walsh

We are specialists in tax-free municipal bonds.

Tax-free municipal bonds are Hennion & Walsh’s heritage – it’s who we are. When we founded Hennion & Walsh over 24 years ago, we started out as specialists in tax-free municipal bonds. We built our reputation by selling high quality municipal bonds to individual investors looking for potentially safe, predictable income that’s tax-free. Although we are a full-service brokerage firm today, including portfolio management services, our clients still enjoy the value of our expertise finding municipal bonds for their investment needs. We also still deliver the same one-onone personalized service we’ve provided since our founding in 1990.

Unlike some competitors, we offer individual investors direct access to municipal bonds in the primary and secondary markets. Bonds are a dynamic investment. While some of our clients are looking to buy and hold, others are interested in frequent trading opportunities. We provide the investment opportunities that each client is looking for with a full service municipal bond trading desk, current market information, and investing opinions designed to enable clients to make the right decisions.

Because of our active municipal bond trading desk we are able to identify and purchase blocks of attractive municipal bonds when they become available in the primary and secondary markets. In addition, Hennion & Walsh aims to offer investors the highest standards of professional conduct for their accounts.

Personalized service isn’t just a slogan at Hennion & Walsh. It’s how we do business.

It’s no wonder that many people turn to professionals for help, guidance, and advice when it comes to their investments. The question is to whom they should give this responsibility.

At Hennion & Walsh, we believe that the management of wealth should be taken as personally as its accumulation. We recognize the commitment our clients have made to building and maintaining their investments. Knowing this, how could we not manage and protect those investments as carefully – and as personally – as we can?

More than 15,000 clients call upon us for our advice and expertise. We deliver one-on-one attention that enables us to truly understand our clients’ needs and work in close partnership with them, regardless of account size. We do not have a call center or voicemail – we personally answer each call our clients make. We have built our firm’s reputation on developing strong, mutually beneficial relationships designed to last a lifetime.