Continued on Page 2
In this Issue
Will Donald Trump be the “Hero of
Haarlem”? 1
Economic and Interest Rate
Forecast—January 2017 3
Market Review Data Diffusion |
ADS Index 4
Are States Jumping on the Trump
Bandwagon? 5
Cybersecurity: An Emerging State
and Local Government Risk and
Opportunity 6
Fast Start to New Year's Volume 8
Repatriation of Untaxed Foreign
Earnings 10
Market Review Historical Monthly
Bond Price Changes 12
Market Review The Yield Curve 13
Market Conditions 15
Loop Capital Markets Upcoming
Negotiated Calendar 16
Municipal Strategy Report
A Monthly Analytical Services Division Publication January 2017
Will Donald Trump be the “Hero of Haarlem”?
Often confused with “Hans Brinker and the Silver Skates”, it is the “Hero of
Haarlem” that tells the tale of a Dutch boy that saves his country by putting his
finger in a dike that has sprung a leak. The Dutch boy saves the community and is a hero. Wouldn’t it have been better if someone had had the foresight to spend a few
guilders on routine maintenance? We can be the heroes of the moment, reacting to
each crisis as it arises like the Dutch Boy, or we can be guided by a set of beliefs that
can allow us to create a more lasting environment of safety, security and prosperity. Plugging the dike is the default position. Our President’s public harassment of
companies lawfully planning to relocate jobs to Mexico is not a policy that can be
applied uniformly, consistently and fairly; it is a finger in the dike. Will President
Trump continue to be the Dutch boy, or will he find a set of guiding beliefs?
By Chris Mier, CFA | Strategist
President Trump represents a GOP
constituency of one—the pragmatic,
impatient, pro-business corner of the party.
He is at odds with the GOP orthodoxy of
small government, balanced budget, low debt,
free trade, and free markets. Untethered by
ideology, Trump’s impulsive and id-driven
actions give him the advantage of speed. They
do not assure outcomes that are consistent,
fair or enduring, however.
The Congressional gatekeepers, Mitch
McConnell and Paul Ryan, are functional
opposites of the President. They are the
torchbearers of the Reagan legacy and are
strongly committed to the basic values of
conservative politicians in the Republican
Party. The tension between the
Administration’s proclivities to “Impulsive
Pragmatism”, with its anti-establishment
temperament, is already highlighting the
challenges that will arise when the
administration’s id collides with the
Congressional leadership’s super-ego.
Luigi Zingales’ Pro-Market article entitled
“Donald Trump’s Economic Policies: Pro-
Business, Not Pro-Market”, contrasts the
difference between Trump’s pro-business
approach and a pro-market approach. Pro-
business, is a short-term, crisis-driven, finger-
in-the-dike approach to policy. Pro-market is
allowing your understanding of how free
markets work to guide your policy-making in
order to achieve long-term outcomes. The
pro-business approach solves one problem at
a time, seeks short-term results, and is
oblivious to inconsistencies that occur down
the road. Pro-market is long-term, recognizes
that the short-term may not produce results,
and has faith that long-term outcomes will
reflect the basic belief that competition is
good and leads to efficient, favorable
economic outcomes.
January 2017
Municipal Strategy Report
Page | 2
Will Donald Trump be the “Hero of Haarlem”?
The difference, a point Mr. Zingales makes very effectively, is that
there is a long-term cost to being pro-business as opposed to pro-
market, and that pro-business actions can come back to haunt the
performance of the economy over time. In the pro-business world,
inefficient companies are bailed out, in the pro-market world the
inefficient must be allowed to die so that that the market can
reallocate resources optimally.
The current proposal regarding the Border Adjustment Tax
highlights the peril between the two approaches. The Border
Adjustment Tax is designed specifically to address the trade deficit
and its impact on manufacturing jobs in the US. It provides for a tax
on imported goods and subsidizes exports. The tax is a destination-
based tax that levies taxes based on the difference between firms’
domestic revenues and domestic costs.
In the short-run, this tax policy may produce some desirable results.
The initial impact on financial markets would be to boost the value
of the dollar as the trade deficit is reduced. The reduction in the
trade deficit adds to GDP growth, functioning the same way as an
increase in fiscal spending. The boost in aggregate demand would
increase domestic inflation through the dual effect of increasing the
inflation rate of imported goods and through increasing strength in
aggregate demand. The dollar would rise as a result, along with
inflation and interest rates.
Moving out the time-line, rising growth, inflation, and interest rates
would likely prompt the Fed to increase the speed of their monetary
policy adjustment, putting investors at risk for a significant sell-off
in bonds.
Source: FRED
A stronger dollar hurts nations that have borrowed in dollars or that
rely on US dollar investment for economic development. A rise in
the dollar would also depress commodity prices, hurting countries
that rely on commodity exportation as a source of national income.
The net result is that the tax likely encourages a host of nations to
engage in a protectionist battle against the US.
The favorable impact of the tax may be very short-lived, however.
The narrowing of the US trade deficit would be slowed as the dollar
rises. Foreign central banks would respond with their own actions.
Global trade institutions may find the tax in violation of world trade
agreements and may take actions to counter US tax policies.
In the world of frictionless markets that adjust quickly and return to
equilibriums, a border adjustment tax that includes taxes on
imports and subsidies on exports would face a dollar increase
related directly to the size of the tax rate. This would have the effect
of fully offsetting the improvement in the trade balance. In the
meantime, the US would be facing a backlash for instituting
protectionist policies. Global growth would be slower.
Bond yields rise not only as a result of the rise in the dollar, but in
this case, as a result of the improvement in the trade balance. While
yields are often observed to fall when the dollar strengthens, they
also can be observed to rise, as has occurred recently and is shown
in the chart below.
Source: FRED
The Border Adjustment Tax is but one example of the peril of
selective application of solutions drawn from different and often-
conflicting ideologies. It reflects a desire to make good on campaign
promises and to please constituencies, but not to build enduring
policies based on market principles. This pro-business approach
will lead President Trump to assume the role of the Dutch Boy,
providing short-term solutions as long as he has fingers to spare.
0.00
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0Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Jul-17
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Border Tax Likely to Boost Inflation
NET EXPORTS
PCE TRIMMED
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Rising Dollar Associated with Rising Rates Since Sep-2016
TWEXB
DGS7
January 2017
Municipal Strategy Report
Page | 3
Economic and Interest Rate Forecast—January 2017
Figure 1 Economic and Interest Rate Forecast—January 2017
1Q’16 2Q’16 3Q’16 4Q’16 1Q’17 2Q’17 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18 4Q’18 A v g'16 A v g'17 A v g'18
Econ om ic Foreca st s
Rea l GDP 0.8 1.4 3.5 2.3 2.1 2.5 2.6 2.7 2.5 2.6 2.4 2.3 1.6 2.4 2.5
Cor e PCE Defla tor 1.6 1.6 1.7 1.7 1.8 1.8 1.9 2.0 2.2 2.1 2.1 2.0 1.7 1.9 2.1
Un em ploy m en t Ra te* 4.9 4.9 4.9 4.7 4.6 4.6 4.6 4.5 4.6 4.5 4.4 4.4 4.9 4.6 4.5
Non fa r m Pa y r olls (ch g in 1 000s) 587 439 636 495 510 500 490 495 480 470 460 450 2,157 1,995 1,860
S&P 5 00 1,951 2,075 2,162 2,185 2,290 2,319 2,348 2,377 2,407 2,437 2,467 2,498 2,093 2,333 2,452
Sh ort -T erm In t erest Ra t es*
Fed Fu n ds Ta r g et (%) 0.37 0.37 0.40 0.45 0.70 0.90 1.09 1.15 1.15 1.35 1.40 1.60 0.40 0.96 1.38
3 -Mon th LIBOR (%) 0.62 0.64 0.79 0.92 1.15 1.33 1.50 1.54 1.52 1.70 1.73 1.90 0.74 1.38 1.71
7 -Da y SIFMA (%) 0.08 0.40 0.55 0.66 0.75 0.85 1.05 1.10 1.10 1.30 1.35 1.55 0.42 0.94 1.33
T rea su ry In t erest Ra t es*
2 -Yea r Tr ea su r y (%) 0.83 0.77 0.72 1.00 1.17 1.40 1.57 1.60 1.58 1.75 1.78 1.94 0.83 1.43 1.76
3 -Yea r Tr ea su r y (%) 1.02 0.91 0.84 1.23 1.41 1.66 1.82 1.85 1.84 2.02 2.05 2.22 1.00 1.69 2.03
5 -Yea r Tr ea su r y (%) 1.36 1.24 1.12 1.61 1.85 2.06 2.22 2.25 2.24 2.43 2.46 2.65 1.33 2.10 2.45
7 -Yea r Tr ea su r y (%) 1.68 1.53 1.39 1.93 2.16 2.35 2.50 2.53 2.53 2.72 2.75 2.94 1.63 2.39 2.74
1 0-Y ea r Tr ea su r y (%) 1.91 1.74 1.56 2.13 2.35 2.64 2.78 2.81 2.81 3.00 3.03 3.22 1.84 2.65 3.02
3 0-Y ea r Tr ea su r y (%) 2.72 2.57 2.28 2.83 2.95 3.11 3.23 3.25 3.26 3.38 3.41 3.55 2.60 3.14 3.40
Mu n icipa l In t erest Ra t es*
3 0-Y ea r MMD (%) 2.76 2.42 2.15 2.86 2.96 3.10 3.20 3.20 3.19 3.29 3.30 3.41 2.55 3.12 3.30
Mu n i Yield Cu r v e Slope (%) 2.31 1.85 1.60 2.02 2.02 2.06 1.96 1.91 1.90 1.80 1.76 1.67 1.95 1.99 1.78
Factors Supportive of Lower Rates
Q4 GDP growth decelerated to a 1.9% annual rate from 3.5% in
Q3, with trade subtracting 1.7% from expansion.
New home sales tumbled 10.4% in December, while existing home sales are down 2.8%, as recent increase in mortgage rates reduced affordability.
Durable goods orders fell for second consecutive month on
reduced Pentagon orders.
Increasingly protectionist sentiments reflected in the American withdrawal from the Trans Pacific Partnership, as well as looming trade war with Mexico, could cause dislocations that will hurt economic growth.
Factors Supportive of Higher Rates
U.S. job growth was solid in December, while hourly earnings rose
0.4% to 2.9% YoY, the fastest pace in 7 years.
Consumer spending expanded at 2.5% rate in Q4, while retail sales rose 0.6% last month.
Vehicle sales in December expanded at 18.3 million annual rate,
pushing 2016 total to record 17.5 million.
Business investments rose in Q4 for the first time in five quarters.
U.S. construction spending increased 0.9% to the highest level since April 2006.
President Trump’s proposals for across-the-board tax cuts,
infrastructure spending and rebuilding the military would boost economic growth, if implemented.
P: Preliminary Data * 3-month average Source: Loop Capital Markets’ Analytical Services Division and Short-Term Desk. Black Text: Actual Blue Text: Forecast as of January 10, 2017
January 2017
Municipal Strategy Report
Page | 4
Market Review Data Diffusion | ADS Index
Figure 2 Data Diffusion Index vs. 10-Yr Treasury Yield
After Treasury rates surged in the
aftermath of November election, the long-
run relationship between the data
diffusion index and 10-yr Treasury yield
was restored.
Data Diffusion Index: We calculate the
Data Diffusion Index based on 30 different
weekly and monthly economic releases,
such as construction spending, capacity
utilization and new home sales. If the
number came above the consensus
estimate (which is positive for economic
growth) the index would increase by one,
and vice versa. The Treasury yield is
expected to track the data diffusion index
(the yields would increase as the economy
exceeds expectations and vice versa).
Source: FRED, Loop Capital Markets
Figure 3 Aruoba-Diebold-Scotti Business Conditions Index (12/31/2007—1/14/2017)
Since the election, ADS business
conditions index rose from -0.40 to 0.26.
The comparison is relative to trend growth
rate of about 2%, represented by the flat
line.
Reading the ADS Index: The index is
designed to track real business conditions
at high frequency. Its underlying
(seasonally adjusted) economic indicators
(weekly initial jobless claims; monthly
payroll employment, industrial
production, personal income less transfer
payments, manufacturing and trade sales;
and quarterly real GDP) blend high and
low-frequency information and stock and
flow data.
Source: Federal Reserve Bank of Philadelphia
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2.50%
2.75%
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3.25%
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Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 Jun-15 Oct-15 Apr-16 Sep-16 Jan-17
Yie
ld
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Data Diffusion Index 10-Yr Treasury Yield
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January 2017
Municipal Strategy Report
Page | 5
Are States Jumping on the Trump Bandwagon?
By Rachel Barkley | Vice President
Infrastructure was a key component of the new federal administration’s
campaign platform. As touted, the $1T plan would focus on transportation, water, electric, telecommunications and security infrastructure. While many of the details of such a plan are unknown, the Administration has proposed using approximately $137B in federal tax cuts to generate private-sector investment to complete projects with
revenues attractive to investors, such as toll roads, bridges and airports. Conventional municipal financing would be available for projects not suitable for private investment. Representatives from both sides of the political aisle will debate the
feasibility of the proposed federal plan in months to come. However, no matter whether the President’s plan materializes as advertised, some market participants have speculated this might lead to an increased concentration of infrastructure investment at the state and local level.
As states are now in the process of delivering their annual State of the State addresses and unveiling their proposed budgets, this gives us an opportunity to see if states are jumping on the infrastructure bandwagon.
So far, this doesn’t seem to be the case. To date 26 states have delivered their annual addresses. Of these, 54% have noted infrastructure as a priority for the coming year. This is lower than the past two years, when 75% and 67% of states highlighted the issue in their 2016 and 2015 State of the State addresses, respectively. Of the ten topics we track in these
addresses, infrastructure currently ranks only the seventh most commonly discussed item behind education, economic development, budgets, taxes, healthcare and public safety, as shown below. Over the past four years, it had ranged from third to fifth most popular focus for governors, echoing this year’s decline in focus.
Of the 14 states that have highlighted infrastructure efforts this year, 11 of them had made it a focus of the 2016 State of the State address as well, indicating their prioritization of infrastructure needs had been set
before the Trump proposal came out. Of the three new states highlighting infrastructure needs this year, two (New Mexico and North Dakota) did not give State of the State addresses last year. Only New
Mexico concentrated on the issue this year after not discussing it in
2016. Moreover, the majority of states discussed similar levels of infrastructure investment as in the prior year. The two states that have detailed the largest infrastructure plans, New York and Indiana, both have programs that are continuations of those
unveiled in 2016. New York’s Governor Cuomo introduced a $100B capital plan last year, Built to Lead. The plan is the largest in the state’s history, including a new Tappan Zee Bridge, replacing LaGuardia Airport and major renovations to the other state airports, improvements to the MTA, LIRR and Metro-North as well as roads and
bridges. This year, Cuomo discussed plans to renovate JFK International Airport through a similar manner as the ongoing LaGuardia Airport project, with $7B of private sector revenues. Regional airports, including the Plattsburgh International Airport and
the Syracuse Hancock International Airport, will also be a focus. The state plans to invest $2B on water infrastructure. Indiana’s new Governor Holcomb, meanwhile, focused on infrastructure as a means for economic development. He means to
develop a state master infrastructure plan that includes improving highway access to Chicago, encouraging more routes from the state’s airports and creating a fourth water port. For comparison, in 2016 then-Governor Pence also detailed plan to invest additional funding roads and bridges as well as proposing the creation of an additional water
port. Conversely, Virginia, West Virginia and Wisconsin have had the most notable increase in planned infrastructure from the past year. Virginia and Wisconsin went from having rather limited infrastructure plans,
related to higher education facilities and broadband, respectively, to advocating for more substantial investments in rail and road projects. West Virginia may have come the closet in jumping on the Trump infrastructure bandwagon. In 2016, then-Governor Tomblin discussed
legislation that would allow sales tax revenues which were deposited into the Road Fund to be moved to the General Fund to help the state balance its budget. This year, Governor Justice, announced plans to pool $225MM of state funds and then leverage this with private investors to produce $1.4B of total funds for infrastructure.
Despite the comparative lack of increased focus on infrastructure from prior years, it is worth noting that some states are focusing on infrastructure to a greater degree than others. While the taking on of substantial additional debt can be a credit negative, infrastructure is key
to all states’ long-run competitiveness and needs to be addressed. States compete to offer the most productive environment for businesses and residents, which in turn create jobs and economic activity. Physical infrastructure, including roads, bridges, airports, and of increasing importance, broadband internet, are high quality business inputs that
directly impact economic efficiencies.
100% 100%
81% 77%65% 62%
54%
15% 12%5%
0%
20%
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60%
80%
100%
120%
% o
f St
ates
Inc
ludi
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hem
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State of the State Address Themes 2017YTD
January 2017
Municipal Strategy Report
Page | 6
Cybersecurity: An Emerging State and Local Government Risk and Opportunity
By Rachel Barkley | Vice President
After Russian interference in the recent federal election,
cybersecurity is becoming a frequently discussed issue at the state
level as well. To date, a quarter of governors have included
cybersecurity in their 2017 State of the State addresses, up for 15% a
year prior. However, state and local governments have already been
compromised or have endured attempts to be comprised on a
number of occasions in recent years, including a June 2016 attack
on the Illinois Board of Elections that results in up to 90,000 voters’
data being leaked.1 At the beginning of 2017, Burlington Electric
Department, one of Vermont’s two largest electric utilities, found
malware on one of its computers that was originally believed to be
linked to a cyberattack effort.2 While the power grid was not found
to have been penetrated, it highlighted the potential danger state
and local governments face from cyber-threats. Information
systems, power, water and wastewater utilities, emergency call
centers and hospitals are among the government divisions that
require cybersecurity.
The University of Cambridge Centre for Risk Studies looked at the
potential impact of a cyberattack on the US power grid in 2015.
Assuming such an attack would be able to inflict physical damage
on 50 generators in the Northeast, including New York City and
Washington, D.C., 93 million people could be without power for up
to two weeks. This would temporarily halt production in an area
that accounts for a third of the country’s economic output, leading
to a negative economic impact ranging from $243B to $1T.3 A
significant portion of this would adversely impact governmental
entities, including a loss of sales revenue to electric utilities and a
loss of sales revenues to business, leading to reduced sales tax
revenues for state and local governments. Other areas directly
under government management, including water, airports, health
and safety, would also be affected with road traffic, crime rates and
hospitals impacted.
Cyber risk is not expected to recede in the coming years and may
increase as technology continues to evolve, making governments’
response to it increasingly important. The National Association of
Chief Information Officers (NASCIO) and Deloitte released a report
in 2016 detailing the state of cybersecurity across the states, the
2016 Deloitte-NASCIO Cybersecurity Study. As indicated by its
increased focus in State of the State addresses, governments are 1 Arizona Cybersecurity Incident the Latest in a Growing List of Attempts. Government Technology.
January 13, 2017. 2 US States focus on cyber security as threat by Russian hackers increase. Tech First Post. January 2,
2017. 3 Business Blackout. University of Cambridge Centre of Risk Studies. 2015.
ratcheting up their cybersecurity efforts. Roughly 29% of governors
are currently briefed on cybersecurity measures on a monthly basis,
up from 17% two years ago. 4 In April 2016, the Connecticut Public
Utilities Regulatory Authority published updated cybersecurity
standards for utilities within the state. 5 New York’s Governor
Cuomo called for increasing the state’s cyber protection efforts in
his January 2017 State of the State address, including modernizing
cybercrime laws and establishing a Cyber Incident Response Team.
Top Five Barriers to States Addressing Cybersecurity Challenges
According to Chief Information Officers
Going forward, a lack of funding and a lack of adequate staff are
seen by state Chief Information Officers (CIOs) as preventing them
from adequately addressing cyber threats.6 In 2016, CIOs reported
that cybersecurity accounted for only 0%-2% of state’s overall IT
budget, while cybersecurity funding has remained stagnant in
roughly a third of states over the past two years. Apportioning
larger portions of the budget to cybersecurity may be tough for
states in the near future. State revenues have had tepid growth at
best over the best year, with tax revenues up only 0.2% YTD (chart
shown on the next page).7 Rising pension and Medicaid costs may
require some difficult choices regarding cybersecurity funding.
Some states, however, are looking at the evolving cybersecurity field
as an economic opportunity. The cybersecurity sector is expected to
increase from $75B in 2015 to $170 by 2020. Meanwhile industry
job postings have increased 74% in 2015 alone.8 CISCO, the
4 2016 Deloitte-NASCIO Cybersecurity Study. Deloitte and the National Association of Chief
Information Officers. 2016. 5 PURA Cybersecurity Compliance Standards and Oversight Procedures. Connecticut Public Utilities
Regulatory Authority. April 6, 2016. 6 Deloitte and NASCIO. 2016. 7 U.S. Census. 8 One Million Cybersecurity Job Openings In 2016. Forbes. January 2, 2016.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Lack of sufficientfunding
Inadequate availabilityof cybersecurity
professionals
Lack of documentedprocess
Increasingsophistication of threats
% C
itin
g B
arri
ers
Source: Deloitte-NASCIO
January 2017
Municipal Strategy Report
Page | 7
technology company, has estimated that there are roughly one
million unfilled job openings in the field,9 leading many states to
actively recruit cybersecurity companies. The National
Cybersecurity Intelligence Center, a public-private partnership, has
recently opened office in Colorado, resulting in 1,000 new job
openings. Idaho is set to finance and own two research facilities, the
Cybercore and the Collaborative Computing Center, which will be
paid for with lease payments by the Idaho National Lab, a federal
nuclear energy and national security research facility,10 while
Georgia’s Governor Deal announced in his State of the State address
that the National Security Agency has begun construction on a new
cyber command headquarters at Fort Gordon in Augusta. The
facility is expected to cost $2B. To complement this, the proposed
state budget includes $50MM for a state-owned facility, the Georgia
Cyber Innovation and Training Center, which will soon begin
construction, allowing the state to be a national center for public
and private cybersecurity.
However, a skills gap prevents some of these jobs from being
filled.11 To address the skills gap, as well as attract students,
universities are offering cybersecurity training. Wichita State
University announced this month is will add a new undergraduate
program as well as a graduate certificate in cybersecurity. The
University of Maryland, Wayne State University, Oklahoma State
University and Texas A&M University are among the universities
also offering cybersecurity related courses, while George
Washington University Law School and the University of Maryland
Law School are among the schools offering Masters of Laws (LLM)
degrees with concentration in cybersecurity.
Going forward, how states and local governments address potential
cybersecurity challenges, balance funding needs and potentially use
the cybersecurity industry as a catalyst for economic development,
should be of increased focus for analysts.
9 Mitigating the Cybersecurity Skills Shortage. CISCO. 2015. 10 Gov. Otter Addresses Cyber-security Concerns in State of the State Address. KPVI.com. January 9,
2017. 11 CISCO.
State Tax Collections YoY% Change
Source: US Census
5.6%
7.6%
4.6%
2.7%
1.5%
-1.6%
1.4%
-4%
-2%
0%
2%
4%
6%
8%
10%
2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3YoY
% C
hang
e in
Sta
te T
ax
Col
lect
ions
January 2017
Municipal Strategy Report
Page | 8
Fast Start to New Year's Volume
By Ivan Gulich | Senior Vice President
New issue volume in the first few weeks of 2017 was surprisingly
strong, outpacing the respective weekly volumes in 2016 (which saw
record issuance) by about 23%, on average.
January volume is traditionally weak, representing about 72% of
average monthly volume through the rest of the year. But 2017 is
different, with January volume likely surpassing $31.2 billion issued
in the same month in 2007. Depending on private placement
issuance, which has not been tallied yet, and additional deals that
may come to market, this month’s volume may be close to, or even
surpass record $32.6 billion issuance in January 2010, which was
boosted by BABs.
Going into 2017, refunding volume was expected to decline
significantly, as yields rose after November election on expectations
of stronger economic growth and rising inflation. This was
accompanied by muni fund outflows. However, as rates have
stabilized and fund flows turned positive again, there is evidence
that issuers who have missed an opportunity to refund in 2016,
decided to do so in 2017.
For example, the largest 5 bond series issued year-to-date are
refundings:
Potential savings are large enough to justify refundings of some
outstanding bonds even at yields that are significantly higher than
they were in January 2016.
0
2,000
4,000
6,000
8,000
10,000
12,000
1* 2 3 4
($ m
illi
on)
Week #
New Issue Volume YTD
2016 2017
* 1 fewer trading date in 2017
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
($ m
illio
n)
January Volume
Date Issuer Description State Amt (MM)
1/9/2017 TRIBOROUGH BRDG & TUNNEL NY 902.98
1/16/2017 CHICAGO ‐A ‐REF IL 886.00
1/9/2017 TSASC INC ‐REV ‐REF ‐A NY 613.37
1/9/2017 NEW JERSEY ECO DEV AUTH‐B NJ 563.60
1/2/2017 UNIV OF PITTSBURGH‐A‐TXBL PA 512.48
1/16/2017 LOS ANGELES DEPT WTR PWR CA 500.00
1/16/2017 TRANS COMMISION ‐B ‐REF TX 474.14
1/16/2017 DENVER CITY & CO SD #1 CO 466.68
1/9/2017 MICHIGAN UNIV REGENTS ‐A MI 464.75
1/10/2017 WASHINGTON ST ‐SER D WA 462.76
1/24/2017 NASHVILLE AND DAVIDSON CO TN 457.25
1/25/2017 LOS ANGELES CO MTA ‐SER A CA 455.71
1/2/2017 LOS ANGELES ARPT DEPT ‐B CA 451.17
1/16/2017 TSASC INC‐REV‐REF‐B‐SUB NY 450.00
1/9/2017 WISCONSIN ST ‐REV ‐A WI 427.77
1/2/2017 TX ST UNIV SY‐REF‐A TX 425.55
1/9/2017 TEXAS A&M UNIV SYS‐A‐TXBL TX 388.71
1/19/2017 UNIV OF HOUSTON SYS BRD TX 379.45
1/9/2017 UNIV OF CONNECTICUT ‐A CT 311.20
1/2/2017 DIST OF COLUMBIA ‐ REF DC 301.58
1/12/2017 OHIO ST ‐ COMMON SCH ‐A OH 300.00
1/9/2017 TRIBOROUGH BRDG & TUNNEL NY 300.00
1/23/2017 BAY AREA TOLL AUTH ‐ F‐1 CA 300.00
1/9/2017 CHICAGO TRANSIT AUTH IL 296.22
1/16/2017 TRANS COMMISSION ‐A ‐REF TX 296.02
TOTAL 11,387.35
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Trading Day #
10-Yr MMD (%)
Jan-16
Jan-17
January 2017
Municipal Strategy Report
Page | 9
As yields rose again last week, the volume declined, although it is
still above the respective volume a year ago.
By comparing largest 25 bond series issued year-to-date versus the
same period last year, we also noticed that:
Deals that came to market in 2017 were larger, on average,
than last year.
The share of revenue bonds that came to market rose from
56% of the total in 2016 to 71%.
Taxable issuance rose this year.
While it is too early to draw broad conclusions about issuance
trends for the entire year, a strong 2017 start is very encouraging. It
signals that the refunding volume may be larger than expected,
despite the increase in rates, which are still low by historical
standards.
The implementation of stimulative economic policies by the new
administration (tax cuts, infrastructure spending, regulation
overhaul, etc.) would likely improve state and local government tax
revenues as well. This dynamic would support new money
issuance, as state and local government officials have more
confidence to borrow and invest when fiscal conditions are
favorable.
January 2017
Municipal Strategy Report
Page | 10
Repatriation of Untaxed Foreign Earnings
By Ivan Gulich | Senior Vice President
Repatriation
The federal government taxes U.S. companies based on their
worldwide income at 35% corporate rate. But, if the company
leaves their overseas earnings in foreign countries, either in cash or
in plants and equipment, these assets are exempt from taxation
until the firm brings them back (repatriates) to the U.S.
When companies repatriate earnings, they receive credit for foreign
corporate taxes paid. However, since corporate tax rates in other
countries are lower than in the U.S., the tax bill from repatriation
would still be significant. Repatriated earnings would be subject to
state taxation as well.
To avoid the tax hit, companies have “parked” large amount of
accumulated earnings in foreign countries. It is estimated that S&P
500 firms held $2.246 trillion in untaxed foreign earnings at the
end of 2015.12 By adding 2016 earnings and those accumulated by
smaller companies, total untaxed foreign earnings are estimated to
be around $2.6 trillion currently.13 Much of this amount is invested
in plants or used as working capital for foreign subsidiaries. Cash
that could be repatriated under favorable legislation is estimated
between $1 trillion and $1.5 trillion.
Information technology and healthcare (pharmaceuticals) account
for more than ½ of accumulated foreign earnings.
Source: The Analyst’s Accounting Observer
12 Jack Ciesielski: S&P 500: Untaxed Foreign Earnings in 2015 Kept Growing, The Analyst’s
Accounting Observer, May 24, 2016 13 Shawn Tully: The Best Stock to Own If Trump Brings Foreign Cash Home, Fortune, Jan 23, 2017
Apple alone was sitting on $231.5 billion pile of cash as of August
2016. CEO Cook said he wouldn't bring overseas funds to the U.S.
"until there’s a fair rate”. 14 Accumulating cash outside the U.S.
presents a problem for companies such as Apple, which pay a large
portion of their cash flow as dividends to shareholders. Unwilling
to tap its overseas cash, Apple has borrowed money in capital
markets to pay the dividends, boosting its long-term debt from
nearly zero in 2013 to $75 billion in 2016.15
Plans to Facilitate Repatriation
The ability to repatriate overseas cash at a favorable tax rate ranks
high on business community’s wish list for the next legislative
session. With GOP controlling Congress and fellow CEO in the Oval
Office, business leaders are optimistic that the tax holiday on
repatriated profits would become a reality. The measure would
most likely not be enacted as a stand-alone legislation, but become
part of a comprehensive tax reform.
House Republican Proposal
The tax reform “blueprint” developed by Ways and Means
Committee Chairman Brady, published in June 2016, envisions
massive overhaul of the tax code. Even though this document is not
a legislative proposal that the House can act upon, it indicates the
direction of the potential legislation.
The House proposal would replace the existing system, where U.S.
corporations are taxed on their worldwide income, to a territorial
system, under which companies would be taxed based on where
they sell products.
Earnings accumulated under the old system would be repatriated at
8.75% rate if held as cash. Earnings invested in plant and
equipment would be taxed at a one-time 3.5% rate, payable over 8
years.16
Trump’s Proposal
On the campaign trail, Trump proposed repatriation of overseas
cash at a one-time rate of 10%. Windfall tax, along with tax credits,
would be used to fund infrastructure projects.
14 Jena McGregor: Tim Cook, the interview: Running Apple ‘is sort of a lonely job’, Washington Post,
August 13, 2016 15 Shawn Tully: The Best Stock to Own If Trump Brings Foreign Cash Home, Fortune, Jan 23, 2017 16 KPMG: House Republican tax reform “blueprint—initial observations, June 28, 2016
30.4%
20.6%12.0%
10.2%
9.6%
6.9%
6.0%4.2%
Accumulated Foreign Earnings by Sector (2015)
Information Technology
Healthcare
Industrials
Consumer staples
Financials
Energy
Consumer Discretionary
Materials
January 2017
Municipal Strategy Report
Page | 11
Potential Impact of Repatriation Legislation
In assessing the 2004 repatriation tax holiday, implemented by the
Bush administration, Senate Permanent Subcommittee on
Investigations found that the top 15 companies that repatriated
earnings cut a net 20,931 jobs between 2004 and 2007, slightly
decreased the pace of their spending on research and development
and increased executive compensation. The effective tax rate on
repatriated earnings was roughly 5%, instead of 35% corporate tax
rate.17
It should be noted that the legislation was promoted as a vehicle for
hiring workers and conducting research and prohibited using the
money for share buybacks and executive compensation.
In assessing the impact of potential new legislation, analysts doubt
that repatriating profits would boost investments in plants or R&D
among technology and pharmaceutical companies since these
companies already have access to all the cash they need for
investments. Instead of boosting economic growth, the windfall
would most likely flow to shareholders in the form of dividends,
share buybacks and M&A deals.
While repatriation of profits may not materially improve U.S.
economic growth, it would boost revenue in states that tax
corporate income by companies that would repatriate cash. It
would seem that California, where many high tech companies are
located, could benefit significantly from repatriation of overseas
cash, as the state corporate tax rate is 8.84%. It should be noted,
though, that corporations are skilled at sidestepping state taxes by
opening offices in states that don’t tax corporate income.18
17 Kristina Peterson: Repatriation Tax Holiday a 'Failed' Policy, The Wall Street Journal, Oct 10, 2011 18 Duhig, Kocieniewski: How Apple Sidesteps Billions in Taxes, New York Times, April 28, 2012
January 2017
Municipal Strategy Report
Page | 12
Market Review Historical Monthly Bond Price Changes
Figure 4 Muni Benchmark Callable Scale — Average Bond Price Changes (January)
We show historical bond price changes for
each point on the muni benchmark callable
curve during the month of January for the
last 16 years.
March returns were positive about ½ of
the time, with bond prices appreciating, on
average, 0.40% across the curve.
Sources: Loop Capital Markets
Figure 5 Muni Benchmark Callable Scale — Average Bond Price Changes (January)
The 10-yr point has the highest expected
return as well as standard deviation. The
returns are more volatile in the 10 to 20-yr
range than on the long end of the curve.
Source: Loop Capital Markets
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
1.75%
2.00%
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
Mea
n R
etu
rn
Sta
ndar
d D
evia
tion
St Dev
Mean Return
AAA MMD - MO NTHLY PRICE CHANGE
Maturity 5 10 15 20 25 30Jan-01 1.36% 0.39% -0.08% -0.23% -0.15% -0.08%Jan-02 0.04% 1.09% 0.70% 0.85% 1.00% 1.00%Jan-03 -1.29% -2.52% -1.72% -0.94% -0.70% -0.70%Jan-04 -0.40% -1.11% -0.87% -0.63% 0.16% 0.24%Jan-05 -0.62% 0.32% 0.72% 0.95% 1.35% 1.42%Jan-06 -0.18% -0.16% -0.32% -0.39% -0.63% -0.47%Jan-07 -0.66% -1.42% -0.95% -0.95% -0.87% -0.79%Jan-08 2.20% 2.18% 0.24% -0.47% -0.47% -0.31%Jan-09 3.09% 4.76% 1.99% 0.71% 0.47% 0.31%Jan-10 -0.27% 0.08% -0.88% -0.95% -0.55% -0.63%Jan-11 -0.98% -1.20% -1.96% -1.33% -0.62% -0.78%Jan-12 0.64% 1.24% 3.89% 3.94% 3.42% 3.34%Jan-13 0.09% -0.82% -0.81% -0.49% 0.00% -0.24%Jan-14 0.63% 1.96% 2.02% 2.34% 2.65% 2.73%Jan-15 1.73% 2.65% 1.64% 1.88% 2.63% 2.95%Jan-16 1.18% 1.74% 1.15% 0.90% 0.49% 0.57%
Mean 0.41% 0.57% 0.30% 0.32% 0.51% 0.53%St Dev 1.22% 1.84% 1.57% 1.44% 1.35% 1.38%
January 2017
Municipal Strategy Report
Page | 13
Market Review The Yield Curve
Figure 6 1-Year Forward Roll-down—Muni Benchmark Curve* (January 17, 2017)
The yield curve shows rich (8 to 11-yr, 22+
yr) and cheap (13 to 19-yr) points on the
AAA MMD curve, based on one year
holding period returns and assuming no
change in the yield curve. 19-yr maturity
offers the highest expected total return.
Source: Loop Capital Markets | *Callable AAA-rated G.O. bonds
Figure 7 Monthly Price Change — AAA GO Bonds* (12/23/16 — 1/23/17)
Yields declined on the front and back ends
of the yield curve and were flat in the
middle. This resulted in a somewhat
unusual distribution of returns over the
last 4 weeks.
Source: Loop Capital Markets | *Price Change Only
Figure 8 Implied Municipal Volatilities
Implied volatilities rose from mid-
December to mid-January, as yields
declined across most of the curve. Since
non-callable bonds appreciate faster in
declining interest rate environment than
their callable counterparts, the price
differential between the two, and the
respective implied volatilities, increased as
a result.
Source: Loop Capital Markets | *10-year call
0.00%
1.00%
2.00%
3.00%
4.00%
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
Yie
ld &
Tot
al R
etu
rn
Maturity (Yr)Ideal YC Ideal YC RolldownActual YC Actual YC Rolldown
* Callable AAA rated G.O. bonds
Cheap
Rich
(20)
(18)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
0
2-0.10%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
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
Yie
ld C
han
ge (
bp
s)
Bo
nd
Pri
ce C
han
ge
Maturity (Yr)Price Change Yield Change
10%
15%
20%
25%
30%
35%
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Maturity (Yr)12/19/16 1/17/17
January 2017
Municipal Strategy Report
Page | 14
Figure 9 Current vs. Historical Municipal Yield Curves (%)
Yields are about 45 bps higher, on average,
across the curve, then they were 12 and 24
months ago.
Figure 10 3-Month Average Benchmark Muni Curve Yield
Yields are currently above their average
values over the last 3 months. Yields
moved within 82 to 89 bps range for
maturities 6-yr and above in the last 3
months.
Figure 11 Muni and Treasury Yield Curves and Ratios
Muni/Treasury ratio curve retains a
somewhat unusual shape. On the front
end muni yields are lower than Treasury
yields, while in the 15 to 30-yr area of the
curve the ratios are above 100%.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
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
Maturity (Yr)1/23/15 1/22/16 1/23/17
Source: MMD
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
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
Average Yields (10/24/16-1/23/17) Current Yields (1/23/17)Maturity
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
80%
90%
100%
110%
120%
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
Yie
ldRat
io
Muni Benchmark Curve Treasury Curve Ratio Ratio = 100% Ratio = 110% Ratio = 90%
January 2017
Municipal Strategy Report
Page | 15
Market Conditions
Figure 12 2 to 30-Yr Muni Spread (bps)
Flattening is expected in 2017, consistent
with tighter monetary policy.
At the end of previous 2 tightening cycles,
the slope has flattened to 92 and 109 bps,
respectively.
Currently, the 2 to 30-yr spread is 196 bps,
62 bps more than in July ‘16, when yields
reached historic lows.
Figure 13 Declining Inflation Expectations
Fed's five-year forward breakeven inflation
rate, derived from TIPS and regular
Treasury yields, has jumped close to 2.0%
on expectations of higher economic
growth.
Source: FRED
Figure 14 Lipper Weekly Municipal Mutual Fund Flows ($ Billion)
As yields declined, investors returned to
the muni market, with muni bond funds
boosting their assets by about $1.5 billion
in two weeks and then increasing
marginally last week.
Source: Lipper
125
150
175
200
225
250
275
300
325
350
375
Jan-99 Jan-01 Jan-03 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
(BPS
)
1.2%
1.5%
1.7%
2.0%
2.2%
2.5%
2.7%-3.25
-2.75
-2.25
-1.75
-1.25
-0.75
-0.25
0.25
0.75
1.25
1.75
2.25
Dec
-14
Jan
-15
Feb-
15
Mar
-15
Ap
r-15
May
-15
Jun
-15
Jul-
15
Au
g-15
Sep
-15
Oct
-15
No
v-15
Dec
-15
Jan
-16
Feb-
16
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
Au
g-16
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb-
17
10 Yr A
AA
MM
D -
Scale Inverted
Mu
ni F
un
d F
low
s ($
Bil
lio
n)
Lipper Flows ($ Billion) 10-Yr AAA MMD (%)
January 2017
Municipal Strategy Report
Page | 16
Loop Capital Markets Upcoming Negotiated Calendar
DatePar Amount
($ mil)Issue Loop Capital’s Role
1/31/17 300.0 DC Water and Sewer Authority Senior Lien Revenue Bonds Co-Senior Manager1/31/17 330.0 New York City Municipal Water Finance Authority W&S System Revenue Bonds Co-Manager2/1/17 478.5 Oklahoma Turnpike Authority Second Senior Revenue Bonds Selling Group2/2/17 24.4 Illinois Housing Development Authority Co-Manager2/6/17 75-90.0 New Jersey Educational Facilities Authority, Ramapo College of New Jersey Co-Manager2/7/17 800.0 The City of New York General Obligation Bonds Fiscal 2017 Series C & D Co-Senior Manager
Analytical Services Division
Loop Capital Markets’ Analytical Services Division (ASD), established in 2002, publishes a variety of reports that
provide clients with relevant and timely information about the bond market and investor demand. The ASD is one of
the largest analytics groups dedicated to investment banking, providing analytics and commentary on the economy,
monetary policy, and a variety of public finance issues.
Chris Mier, CFA, Managing Director 312.356.5840 | [email protected]
Ivan Gulich, CFA, Senior Vice President 312.913.2204 | [email protected]
Rachel Barkley, Vice President 312.913.2297 | [email protected]
Eliana Yun, Junior Analyst 312.913.2236 | [email protected]
Vania Petkova, Analyst 312.913.2229 | [email protected]
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“Senator, are you going to
believe me, or what you
see with your lying eyes.”*
* Line courtesy of Groucho Marx