MARKET UPDATE Safety and Security IN YOUR MUNICIPAL PORTFOLIO


Traditionally, municipal bonds have been viewed as a ‘safe haven’ sector with relative independence from most other asset classes. Municipal debt (specifically investment grade) generally correlates to the treasury interest rate complex and valuations are based on spreads versus the risk-free rate for comparable structures. As with many things these days, the traditional activity and stability might be subject to some temper tantrums. This usually well behaved corner of the fixed income universe is not divorced from the realities of 2020.


f Slight


adjustments to traditional buying behavior can help to diversify a municipal portfolio more than it may appear at first glance. “I only buy muni bonds from my


state.” We hear that statement with some regularity and we certainly understand the comfort factor when it relates to purchasing debt that originates from a buyer’s home state. When it comes to evaluating credit however, the state the debt originates from should not be the sole guiding light. If onef were to drive from northwestMissouri to southeastMissouri they would cover over 500 miles over the course of about eight hours. An investor in northwestMissouri should have much more familiarity with northeast Kansas, southwest Iowa and eastern Nebraska than the economic situation in the boot heel of Missouri.


f f A


visit to Minneapolis,Minnesota would be a shorter road trip for residents of northwest


Missouri. Regional familiarity is important and certainly worth considering as much as the state of origination.


f For reasons both


practical and impractical, the fact is that certain states trade at relatively cheap or expensive levels. For banks in Kansas, the pledging requirements for municipal bonds are so stringent that their debt often trades at more expensive levels than the numbers and credits would otherwise warrant. Conversely, there are strong credits in Illinois that trade too cheap simply because


they have the “IL” ticker attached to their debt. By expanding the geographic areas that are acceptable per the investment policy, banks can open themselves up to a lot more options that might be a better fit for the institution. The days of regulators chewing on bankers for buying out-of-state bonds are fading. As a result of the increased due diligence both before and after a purchase, investors have a much stronger counter argument for purchasing and holding those positions. Another refrain we occasionally


hear is, “I only buy general obligation bonds.” Traditionally, general obligation bonds (GOs) have been viewed as the most secure municipal investment due to an issuing entity’s ability to raise taxes (usually property taxes) on the population in order to cover debt service. “Essential Service” bonds have debt service that is secured by projects and user fees from critical infrastructure services such as water and waste water systems as well as power generation. Due to the essential nature of the services, investors find appeal in the stability and sustainability of the revenue streams even when city and state economies falter. General obligation bonds don’t always have a direct source of revenue, economic downturns can have a profound impact on the monies backing general obligation. Essential service revenue bonds can provide an excellent alternative to the traditional GO buyer. Augmenting these two parameters,


exclusively purchasing in state debt and one type of backing,


f strengthen the profile of their municipal


investors can diversify and f


portfolio. For an initial expansion of the geographic profile, we’ll often see investors expand the footprint to surrounding states. That small adjustment will usually grow the possible area of investment to another three or four states and provide many more options that may be more palatable than


ARTHUR W. SPELLMEYER, IV President, First Bankers’ Banc Securities, Inc.


awspellmeyer@FBBSinc.com


Missouri Kansas


Colorado


888-726-2880 866-530-2846


Oklahoma 405-638-3248 Texas


512-761-3931 720-709-7613


Member FINRA/SIPC


simply looking in one state. Similarly, the ability to purchase revenue bonds that are backed by essential services can provide diversification away from a municipality or state budget. This adjustment can help insulate credits from exogenous factors and political strife. As always, evaluating credits should be done periodically and with the blessing of the investment committee and board. FBBS has the resources and expertise to help craft language in investment policies as well as assist in credit evaluation both at the time of purchase and on an ongoing basis.


MIB Community BANKING 5


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