Municipal Market Guide - UBS
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Municipal
Market Guide
Chief Investment Office Global Wealth Management 17 September 2019
Riding out volatility
Boost in muni Ramp up in Profit taking in
issuance ransomware muni CEFs
ab This report has been prepared by UBS Financial Services Inc. (UBS FS).
Analyst certification and required disclosures begin on pg. 16.Contents
02 At a glance
At a glance
03 Market view
Volatility has returned to US fixed in- There also has been a noticeable surge
05 Portfolio themes come markets. President Trump’s 1 in the sale of taxable municipal bonds
06 Closed-end funds August tweet threatening higher tar- in the last two months. We suspect
iffs on Chinese goods ignited a 53 the increase is attributable to higher
07 Exchange-traded funds basis points (bps) reduction in 10-year Treasury bond prices (at least until two
Treasury yields as investors opted for weeks ago), which tend to suppress
08 Spotlight a risk-off strategy. The August rally the yields offered on taxable munis
10 In the news gathered steam as sovereign bond and thereby made taxable refundings
yields around the world sank further of outstanding tax-exempt debt more
12 Chartbook into negative territory. And then, just feasible. The opportunity to buy tax-
15 Endnotes as market sentiment in favor of even able munis may exist for another quar-
lower yields began to gain traction, ter or two but is unlikely to remain a
18 Disclaimer the 10-year Treasury yield reversed persistent trend as the net supply of
course and rose by 45bps in the space outstanding taxables is expected to
of just two weeks. diminish over time.
Municipal bonds, as is so often the In this edition of the Municipal Mar-
case, lagged the performance of Trea- ket Guide, we also review the perfor-
suries…in both directions. The net re- mance of closed-end funds (CEFs) and
sult is that year-to-date performance review two developments in the ex-
through 13 September was still up by change-traded fund (ETF) arena. Tar-
6.4%, off of the highs reported around get-maturity ETFs and the use of dif-
Labor Day but not too shabby for an ferent indices to assess performance
asset class that offers investors an op- come in for some scrutiny. We also
portunity to shield investment income shine a spotlight this month on the
from federal taxation. We are obliged credit risk posed by cyberattacks and
Authors to offer a note of caution, however. ransomware. State and local govern-
Thomas McLoughlin The forward visible supply of new mu- ments are susceptible to costly attacks
thomas.mcloughlin@ubs.com nicipal bond issues has increased in re- but have thus far escaped permanent
212.713.3914 cent weeks, which will be a headwind damage. Vigilance is warranted but
Kathleen McNamara, CFA, CFP to performance for the remainder of the risks appear manageable.
kathleen.mcnamara@ubs.com this month and into October.
212.713.3310
Theodore Galgano
theodore.galgano@ubs.com Total return by sector
212.713.2546 In %
Jeannine Lennon S&P 500
Taxable FI Agg
jeannine.lennon@ubs.com
Munis
212.713.3332
Build America Bonds
Sangeeta Marfatia Emerging Markets
sangeeta.marfatia@ubs.com Preferreds
212.713.7887 High Yield
David Perlman Investment Grade
david.perlman@ubs.com Agencies
TIPs
212.713.4861
Treasuries
DESKTOP PUBLISHING
–10 –5 0 5 10 15 20 25
Cognizant Group – Sunil Vedangi
2018 TR
Cover photo: gettyimages.com 2019 YTD TR
Source: ICE BofAML, Bloomberg, UBS, as of 12 September 2019Market view
Bout of volatility Focusing on the Fed and flows
Municipal yields bottomed out after the publication of the Au- Municipal bond market participants are now waiting on the
gust edition of the Municipal market guide: How low can they outcome of the Federal Open Market Committee (FOMC)
go? (15 August 2019). The tax exempt market established new meeting this week. The Fed futures market is currently pricing
record lows before reversing course as September got underway. in a 94.9% probability of a 25bps Fed funds rate cut. Bear in
As a point of reference, 10-year and 30-year AAA muni yields mind, Fed rate cuts are often a source of volatility for the fixed
sat at only 1.21%, and 1.83%, respectively, on 28 August 2019. income markets, including munis, and we don’t expect the
upcoming monetary policy decision on Wednesday at 2pm ET
Volatility returned to the US fixed income markets just as the to be the exception that proves the rule.
Labor Day holiday signaled the end of summer. In the past two
weeks, munis witnessed an abrupt reversal in yields of about On a year-to-date basis through 4 September, inflows to muni
30 basis points (bps) from their record lows. Munis have lost funds totaled USD 64.7bn according to the Investment Com-
1.3% thus far in September, reducing their year-to-date total pany Institute (see Fig. 1). More recently, Lipper has recorded
return to now sit at 6.4%. 36 consecutive weeks of net cash inflows to muni mutual
funds as of the 7-day period ending 11 September 2019. The
On the bright side, tax exempt bonds have held up better net positive flow of investor cash, totaling USD 66.5bn, marks
than their taxable brethren. An index of US Treasury securities 2019 as an extraordinary year for municipal mutual funds.2
has now produced larger losses (–2.5%) on a month-to-date Up for debate: whether the long stretch of strong inflows to
basis, as an example. And the yield on the 10-year govern- muni mutual funds is now poised to reverse course. After 10
ment benchmark note witnessed about a 45bps increase in straight months of positive total returns from tax-exempt pa-
the space of only two weeks. per (see Fig.2), the sector is now registering negative results on
a month-to-date basis through 13 September 2019.
The aerial attacks on two of Saudi Arabia’s key oil facilities on
14 September have temporarily halted the monarchy’s ability Technicals soften
to export 5.7 barrels per day (bpd) of oil. That’s roughly half The pace of muni bond redemptions has slowed, as is often
of Saudi Arabia’s output capacity and more than 5% of global the case this time of year. The amount of bonds maturing,
supply, according to state oil producer Saudi Aramco.1 React- combined with the proceeds from announced calls, totals only
ing to the news, Treasury securities have once again caught a USD 24.4bn through 16 September. That is down significantly
strong bid from global investors seeking a safe haven. As we from over USD 60bn in August, based on Bloomberg data. At
go to press, the 10-year US Treasury benchmark yield is now the same time, new bond sales are on pace to top USD 32bn
hovering around 1.85%. for September. Therefore, net supply is poised to turn positive,
Figure 1
Municipal mutual fund flows and long-term yields
Fund flows in USD millions (lhs), yields in % (rhs)
15,000 6
US presidential
10,000 5
election
5,000
4
0
3
–5,000
Rate volatility 2
–10,000
Rate volatility
Historically low yields 1
–15,000 Meredith Whitney
“60 minutes”
interview
–20,000 0
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Monthly Net New Cash Flow
AAA GO 30yr Monthly Yields
Note: September flows are MTD as of 4 September 2019
Source: Investment Company Institute, MMD, UBS, as of 13 September 2019
Municipal Market Guide SEPTEMBER 2019 3Market view
representing another near-term headwind for the market. The Figure 2
30-day forward calendar now sits at USD 13.2bn, up from an
Monthly muni total returns, August 2018 -
average of only USD 8.3bn year-to-date. Among the large issu-
ers expected to come to market with sizeable deals over USD August 2019
Total return in %
850mn are the Greater Orlando Aviation Authority (AMT), the
San Francisco Bay Area Toll Authority (taxable) and the Texas 2
1.6 1.5 1.6
Water Development Board (tax-exempt). 1.1 1.2
1 0.8 0.8
0.6
0.4 0.4
Muni issuance finally picks up 0.2
0
Year-to-date, total muni issuance (USD 253.7bn) is running
about 8% higher than this time last year (USD 234.1bn). In –0.6 –0.7
–1
August, the market witnessed its largest supply month of the
year (USD 38.5bn). At this stage, it appears that annual sup-
–2
ply may finish 2019 at levels closely aligned with our volume
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
forecast of USD 340bn to USD 350bn.3
Source: ICE BofAML municipal securities index, UBS, as of 30 August 2019
The uptick in supply was given a boost by the increase in tax-
able advance refundings, reflecting lower Treasury rates. As a
Figure 3
point of reference, total taxable muni volume climbed to USD
7.6bn last month, up from only USD 3.5bn in August 2018. AAA muni yields year-to-date
Regular readers of the Municipal Market Guide may recall that In %
tax-exempt advance refundings were eliminated in the wake 3.5
of the Tax Cuts and Jobs Act of 2017. However, the ability for 3
issuers to advance refund their tax-exempt debt with taxable
2.5
bonds is still permitted. The San Francisco Bay Area Toll Au-
thority is just such an example. 2
1.5
We expect taxable muni deals to be well received in the current
1
market environment. Bear in mind, taxable munis are attrac-
tive to a variety of market participants given the large amount 0.5
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
of negative yielding global bonds (USD 16tr).4 Spreads on
AAA GO 5 yr AAA GO 30 yr
long-dated high grade taxable munis now sit at about 60bps, AAA GO 10 yr
suggesting an attractive yield opportunity for crossover buyers
Source: MMD, UBS, as of 12 September 2019
and foreign investors. The opportunities may be short-lived;
the overall size of the taxable muni market is apt to shrink over Figure 4
the next year as some of the callable Build America Bonds is-
sued a decade ago will likely be called away.
AAA muni-to-Treasury yield ratios year-to-date
In %
Outlook 110
CIO continues to forecast a 10-year US Treasury note yield of 100
1.5% at the end of 2019, suggesting that rates will trend low-
er from current levels (1.85%). That said, we suggest that in- 90
vestors remain accustomed to bouts of volatility in the months
80
ahead. On a year-to-date basis, muni yields have fallen (see
Fig. 3). And, muni-to-Treasury yield ratios have been volatile, 70
reflecting the lag effect of the muni market vis-à-vis taxable
60
debt. Munis often underperform amid US Treasury bond mar- Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
ket rallies and vice versa. Technicals also play a role. In the 5 yr 30 yr
fourth quarter, we would view a back-up in muni yields based 10 yr
on temporary supply pressure as a buying opportunity. Security Source: MMD, UBS, as of 12 September 2019
selection remains important based on tight spreads.
4 SEPTEMBER 2019 Municipal Market GuidePortfolio themes
Consider barbells
Muni yield curves retain a much steeper slope compared to their Figure 1
taxable counterpart. As a point of reference, the 2s/30s on the Yield curves: AA muni GO, AAA muni GO,
AA muni curve remains above 100bps. At the same time, the and US Treasury
yield difference between the same two points on the govern- In %
ment curve is hovering around 53 basis points (bps). We be-
2.4
lieve 15-20 year tax-exempt bonds offer value of new capital
2.2
investments. In the taxable fixed income market, there are bet-
2.0
ter values among for short-dated bonds (see Fig.1). For private
clients who want to preserve some capital in the event rates rise, 1.8
a cross asset class barbell strategy will capture the higher mu- 1.6
nicipal yields farther out on the curve while avoiding the more 1.4
expensive tax exempt yields with maturities through 2025. 1.2
1
Stick to high-quality credits based on narrow spreads 0 5 10 15 20 25 30
At current levels, high yield munis do not offer sufficient incremen- AA muni GO US Treasury
tal yield to prompt investors to increase exposure. The yield gap be- AAA muni GO
tween lower-rated high yield munis (3.72%) and investment grade Source: MMD, ICE BofAML, UBS, as of 12 September 2019
munis (1.74%) now sits at only about 198 basis points (bps) based
on S&P’s muni indices (see Fig. 2).1 By comparison, this spread was
325bps five years earlier. That said, we still believe that a smaller Figure 2
strategic allocation to high yield makes sense within a diversified HY muni yields, IG muni yields and spread
portfolio. We recommend the use of a third-party manager to Lhs: Yield, in %; Rhs: HY minus IG yield, in bps
monitor credit developments in the high yield space.
6 350
300
Examine exposures to municipal sectors 5
Seek value in general airport revenue bonds. Airports are better 250
4
insulated from challenges posed by unfunded pension liabilities 200
than most types of municipal bonds (see Municipal Brief, Air- 3 150
port Obligors: Risk Assessment Framework, 5 September 2018). 100
2
50
Turn to toll roads for strong credit characteristics. See our Mu-
1 0
nicipal Brief, Toll Road and Bridge Obligors: Risk Assessment Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19
Framework, 2 October 2018. Investment grade muni YTW HY muni YTW minus IG muni YTW
High yield muni YTW
Be selective in private higher education sector. For credit selec-
Note: YTW = yield-to-worst
tion guidance, see Municipal Brief, Private Higher Education: Source: MMD, ICE BofAML, UBS, as of 12 September 2019
Risk Assessment Framework, 14 November 2018.
Exercise caution in healthcare area. This sector is undergoing
Figure 3
substantial transformation and consolidation, with significant
implications for credit quality. See Municipal Brief, Not For Municipal returns by maturity segment
Profit Hospitals: Risk Assessment Framework, 4 February 2019. Returns in %, duration in years
Maturity 2018 2019 YTD Effective
Add electric utility bonds to diversify holdings. See Municipal total return total return duration
Brief, Municipal Electric Utilities: Risk Assessment Framework, Municipals 1–3 Yrs 1.8 2.2 1.8
6 June 2019. Municipals 3–7 Yrs 1.8 4.4 4.0
Municipals 7–12 Yrs 1.3 7.1 5.9
Assess state government credit holdings. CIO’s framework placed Municipals 12–22 Yrs 0.9 8.1 7.7
47 or the 51 obligors in Categories 1 and 2, reflecting the sector’s Municipals 22+ Yrs 0.1 9.2 10.0
relatively low risk profile (see Municipal Brief: State Government
Source: ICE BofAML, UBS, as of 12 September 2019
Obligors – Risk Assessment Framework, 26 June 2019).
Municipal Market Guide SEPTEMBER 2019 5Closed-end funds update
Profit taking maybe, tax loss selling unlikely alone. This could be attributed to profit taking and pullback
Municipal closed-end funds (CEFs) in our coverage universe in the underlying muni market itself. We’d been expecting a
are all up double digits (about 17% on average through 12 pullback given the expensive valuations and potential for more
September), well ahead of their net asset value (NAV) returns distribution cuts and have therefore had a neutral view on our
of 10% and the underlying muni market return of 6.9%. We coverage universe for the last quarter.
include individual 2019 returns of all municipal funds under
coverage in Fig 1. Based on this strong performance, it seems Rich valuations
safe to say there will be minimal tax loss selling this year. Tax Despite the pullback, national leveraged municipal funds are
loss selling typically occurs in the fourth quarter. US Treasury still expensive at a 3% discount versus their 52-week and two-
10-year bond yields have risen from recent lows by 35 basis year average discount of 5% (Fig. 1). Similarly, state funds such
points (bps) to 1.85% this month and hence we are seeing as California are trading rich, at 1% discount versus a one-year
some weakness in the funds, down almost 3% in past week average discount of 4%.
Figure 1
Muni funds ratings, distributions and YTD returns
All values in USD unless otherwise noted
Fund Name Ticker Rating Price Premium/ Annual Distribution YTD market YTD NAV
(Discount) Distribution Rate (a) Return Returns
National Leveraged Municipal Bond Funds
BlackRock Investment Quality Muni Trust BKN Hold $15.60 –5.1% $0.68 4.4% 21.9% 11.6%
BlackRock Municipal Income Trust BFK Hold $13.91 –4.7% $0.64 4.6% 18.0% 9.4%
BlackRock Municipal Income Trust II BLE Hold $14.78 –1.8% $0.70 4.7% 18.3% 8.3%
BlackRock MuniVest Fund MVF Hold $9.18 –5.7% $0.43 4.6% 14.9% 9.6%
BlackRock MuniVest Fund II MVT Hold $14.68 –4.4% $0.67 4.5% 16.1% 9.8%
BlackRock MuniYield Fund MYD Hold $14.65 –2.5% $0.67 4.6% 20.9% 9.4%
BlackRock MuniYield Quality Fund III MYI Hold $13.38 –11.1% $0.53 4.0% 14.5% 12.2%
BlackRock MuniYield Quality Fund MQY Hold $14.95 –8.0% $0.64 4.3% 18.8% 10.8%
Eaton Vance Muni Bond Fund EIM Sell $12.78 –8.8% $0.51 4.0% 16.4% 10.1%
Eaton Vance Muni Inc Trust EVN Hold $12.72 –8.2% $0.57 4.5% 16.5% 11.1%
Neuberger Berman Muni Fund NBH Hold $14.90 –3.4% $0.75 5.0% 21.8% 8.3%
Nuveen Quality Municipal Income Fund NAD Hold $14.24 –10.6% $0.64 4.5% 17.6% 11.5%
Nuveen Municipal Credit Income Fund NZF Hold $15.91 –4.8% $0.79 5.0% 23.2% 13.0%
PIMCO Municipal Income Fund PMF Hold $14.42 7.3% $0.72 5.0% 19.3% 13.4%
PIMCO Municipal Income Fund II PML Hold $15.32 21.6% $0.78 5.1% 19.8% 13.8%
PIMCO National Muni Income Fund III PMX Hold $12.31 7.9% $0.61 4.9% 14.9% 13.6%
Invesco Muni Opportunity Trust VMO Hold $12.51 –7.5% $0.60 4.8% 15.8% 8.9%
Invesco Muni Trust VKQ Hold $12.52 –7.5% $0.62 5.0% 16.3% 9.4%
Non-Leveraged Muni Closed-End Bond Funds
Nuveen Muni Value Fund NUV Buy $10.47 –1.0% $0.37 3.6% 16.1% 8.6%
Nuveen Select Tax-Free Income Portfolio 3 NXR Buy $15.80 –4.0% $0.52 3.3% 13.4% 9.2%
Nuveen Select Tax-Free Income Portfolio 2 NXQ Buy $14.58 –5.0% $0.50 3.5% 11.7% 8.6%
Nuveen CA Muni Value Fund NCA Buy $10.33 –3.3% $0.34 3.3% 16.5% 8.5%
Nuveen NY Municipal Value NNY Buy $10.35 1.5% $0.36 3.5% 11.4% 6.9%
CA Muni Closed-End Bond Funds
BlackRock California Muni Income Trust BFZ Sell $13.69 –11.4% $0.50 3.6% 17.5% 10.2%
Eaton Vance CA Muni Income Trust CEV Hold $13.40 –6.9% $0.54 4.0% 25.0% 11.1%
Eaton Vance CA Muni Bond EVM Hold $11.31 –10.2% $0.47 4.2% 17.6% 8.9%
Neuberger Berman CA Muni Income Fund NBW Sell $13.91 –11.0% $0.54 3.9% 17.9% 9.4%
Nuveen CA Quality Municipal Income Fund NAC Hold $14.61 –9.0% $0.62 4.3% 18.7% 11.7%
PIMCO California Municipal Income Fund PCQ Hold $19.48 36.1% $0.92 4.7% 25.3% 13.0%
PIMCO CA Municipal Income Fund II PCK Buy $9.65 5.1% $0.42 4.4% 27.5% 14.8%
PIMCO CA Municipal Income Fund III PZC Buy $10.93 6.9% $0.50 4.6% 18.8% 12.4%
Invesco CA Value Muni Income Trust VCV Hold $12.91 –3.9% $0.58 4.5% 17.8% 8.6%
NJ Muni Closed End Funds
BlackRock MuniHoldings NJ Quality Fund MUJ Hold $14.05 –12.5% $0.63 4.5% 15.2% 9.1%
BlackRock NJ MuniYield Fund MYJ Hold $15.09 –6.8% $0.73 4.8% 20.5% 8.7%
NY Muni Closed-End Bond Funds
BlackRock New York Muni Income Trust BNY Hold $13.71 –9.9% $0.53 3.9% 15.0% 8.9%
Eaton Vance NY Muni Bond ENX Hold $12.09 –10.6% $0.50 4.1% 13.1% 8.2%
Eaton Vance NY Muni Income Trust EVY Hold $13.10 –12.0% $0.52 4.0% 17.6% 11.4%
Neuberger Berman New York Muni Fund NBO Sell $12.26 –13.4% $0.47 3.8% 13.1% 7.4%
PIMCO NY Municipal Income Fund PNF Hold $14.10 15.2% $0.64 4.5% 25.0% 13.0%
PIMCO NY Municipal Income Fund II PNI Buy $11.82 1.6% $0.48 4.1% 16.2% 12.9%
PIMCO NY Municipal Income Fund III PYN Buy $9.19 –1.7% $0.43 4.6% 10.0% 12.1%
(a) Distribution Rate: Annualized based on most recent monthly/quarterly distribution rate, as declared by the fund, divided by the current price. The rate may include investment income, short-term
capital gain, long-term capital gain and or return of capital.
Source: Bloomberg, UBS, as of 12 September 2019.
6 SEPTEMBER 2019 Municipal Market GuideExchange-traded funds update
A mixed bag of topics
Target maturity ETF review
bond at the time (Fig. 1). There are some trade-offs with target
Earlier this month, the iShares iBonds Sep 2019 Term Muni
maturity ETFs though. First, while investors have an estimate of the
Bond ETF (IBMH) liquidated and returned the net asset value
yield at the time of purchase, the monthly distributions and final
(NAV) to shareholders. As we’ve discussed in prior Municipal
NAV distribution at the time of purchase for these ETFs are un-
Market Guides, target maturity exchange traded funds (ETFs)
known. Second, target maturity ETFs will not be as tax efficient as
like IBMH are designed to mimic the experience of invest-
individual municipal bonds. While the current municipal bond ETFs
ing in an individual bond. Similar to individual bonds, these
exclude AMT bonds, investors in most states will still have to pay
ETFs have a maturity date and will become less interest-rate
state and local taxes on income earned from out-of-state bonds.
sensitive throughout the life of the investment. They broaden
Also, the final distribution rate generates a capital gain (loss) if it’s
out the use for ETFs as they enable ETF investors to con-
higher (lower) than the purchase price.
struct bond ladders and more easily match investments with
future liabilities. Target maturity ETFs also capture the ben-
Index changes
efits of the ETF wrapper around trading on an exchange and
Even though the investment decisions for passive ETFs are guided
diversification as these ETFs often hold hundreds of bonds.
by the index methodology, the human element isn’t completely
While iShares currently has the only target maturity ETFs for
removed. One example is that issuers can decide to change indi-
municipal bonds, Invesco has filed to launch BulletShares for
ces, which results in changes in the portfolio. There could be any
municipal bonds. So how did IBMH perform compared to
number of motivations behind an index change, such as a lack of
what was available at the time?
commercial success for the fund, cost reduction, and/or attempting
to improve upon the fund.
Target maturity ETFs enable ETF investors State Street recently announced that it will be changing the index
to construct bond ladders and more easily for the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB).
Effective on 1 October 2019, HYMB will switch from the S&P Mu-
match investments with future liabilities. nicipal Yield Index to the Bloomberg Barclays Municipal Yield In-
dex. While its ticker will remain the same, its name will change to
the SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond
IBMH launched in February 2014 and its NAV return since ETF. The new index tracks a more liquid subset of the high yield
inception was 1.3%. At that time, the yield on a five-year AA- municipal market, which can help with the management of the
rated municipal bond was around 1.3-1.4%. So IBMH was fund and may lead to tighter tracking of the index. HYMB currently
able to deliver the equivalent return available of an individual holds almost 1,400 bonds versus almost 25,000 for the S&P index
and over 19,000 for the Bloomberg index. HYMB will still be heav-
ily optimized, which is often the case for fixed income ETFs tracking
Figure 1 broad indices in less liquid markets. HYMB will also still provide the
IBMH delivered on the yield available at the time it broadest exposure to the high yield municipal market, as the other
launched broad-based ETF, the VanEck Vectors High-Yield Municipal Index
ETF (HYD), tracks an index of over 6,700 securities. Of note, the
1.50
Bloomberg index caps territories at 10%, whereas there was not
1.40 a territory cap with the S&P index. HYMB currently holds roughly
12% in U.S. territories, most of which is Puerto Rico at 10.4%, so
1.30
this exposure will be coming down with the new index.
1.20
1.10
1.00
IBMH AA bond yield
Source: Bloomberg, UBS, as of 12 September 2019. IBMH based on NAV return. AA bond
yield based on Bloomberg estimated yield for five-year AA-rated bond on 4 February 2014,
which is IBMH's inception date
Municipal Market Guide SEPTEMBER 2019 7SPOTLIGHT
Ransomware – could your
bond payment be held hostage?
Cybersecurity is receiving more attention from municipal bond Cyberattack: an attempt to gain illegal
investors after news reports revealed how state and local gov-
ernments are being targeted by cybercriminals. Ransomware access to a computer or computer system
attacks are on the rise and as recent high-profile events demon- to damage, destroy, or take hostage a
strate, US municipalities are not immune. Both large and small
municipalities have suffered crippling cyberattacks. One form
computer or computer network.
of cyberattack is called "ransomware," where malicious code is
downloaded on to a computer and is spread from one computer Ransomware: a type of malicious software
to another. Often it can spread from system to system, for exam-
ple from the accounting system to the 911 system hijacking parts designed to block access to a computer
of or entire municipalities’ critical operating systems. According system until a sum of money is paid, i.e.,
to a recent 60 Minutes report, more than 25% of US municipali-
ties report being attacked on an hourly basis.1 In the spring and
your computer is held for ransom.
summer of this year there were several successful high-profile
attacks on municipalities: In March, an unnamed western utility criminals. Typically, cybercriminals request a modest ransom
was attacked. In April, Cleveland Hopkins International Airport payment in the neighborhood of USD 50,000.2 A ransom
(flight and baggage information systems only) and in May was payment has to be reasonable and affordable in order to en-
the City of Baltimore’s turn to be held for ransom. In one day courage a municipality to pay it. Workarounds can be both
last month 22 Texas municipalities’ computer system files were time-consuming and costly. It reportedly cost the city of Bal-
encrypted and held for ransom in what cybercrime experts are timore about US 19mn to reconstruct its systems.
describing as one of the largest ever coordinated cyberattacks.
By using available liquidity, cash on hand, or available lines
In each of these recent cases, none of the cities paid the of credit—and often returning to older nontechnical solu-
cybercriminals the requested ransom, choosing instead to tions (paper and pencil)—issuers managed the awkwardness,
rebuild their systems through backup files, new equipment, embarrassment, and costs associated with cyberattacks. CIO
or work-arounds. The National Conference of State Legis- is not aware of any issuers that have been downgraded or
latures (NCSL) and the Federal Bureau of Investigation (FBI) missed a debt service payment due to a cyberattack but has
recommend municipalities do not pay ransoms. According to noticed an increase in the focus placed by the rating agencies
the two agencies, paying a ransom only further encourages related to issuers' preparedness for cyberrelated events.
Figure 1
States are recognizing the need for cybersecurity task forces
25
Kansas
Total number of cybersecurity task forces
Arizona
Illinois
Vermont
20 Louisiana
Oregon
Colorado New Hampshire
Missouri
15
Delaware Indiana
Iowa
North Dakota
California Idaho
10
Maryland
Montana
Georgia
5 Connecticut
Texas Rhode Island
Utah
Virginia
New York
0
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18
Date formed
Source: National Conference of State Legislators, UBS, as of 3 April 2019
8 SEPTEMBER 2019 Municipal Market GuideSPOTLIGHT Ransomware – could your bond payment be held hostage?
Russian interference in US Presidential elections March 2019. US officials reported that at
The concern over cyberattacks has also extended to electronic
voting systems. Information released in the recent Mueller re- least 27 universities in the US had been
port indicates Russian hackers breached electronic voter reg- targeted by Chinese hackers as part of
istration systems in two Florida counties;3 though it does not
appear any data was altered. The sheer size and success of
a campaign to steal research on naval
this, combined with ransomware attacks in Atlanta and Balti- technologies.
more, has prompted further scrutiny of the country’s election
systems. It is conceivable that hackers could potentially inter- The US Senate has introduced S. 315 – Department of Home-
fere with voters’ ability to register or to vote, or allow votes to land Security Cyber Hunt and Incident Response Teams Act
be altered. of 2019. The bill would require the Department of Homeland
Security to “maintain cyber hunt and incident response teams
Thus far, cyberattacks have had some negative impact on for the purpose of leading Federal asset response activities and
municipal credit as municipalities have to spend resources to providing timely technical assistance to Federal and non-Fed-
“harden“ or fix their systems from cyberattacks. For instance eral entities”.
the State of Georgia issued USD 150mn of debt, allowing it to
replace its 17-year-old voting system. However Georgia is not The House has introduced H.R.3270 - Active Cyber Defense
alone; the State of Ohio issued USD 72mn last year and the Certainty Act. In this bill, Congress is recognizing “as a result
State of Pennsylvania is anticipating issuing USD 90mn of debt of the unique nature of cybercrime, it is very difficult for law
this year to pay for or subsidize the cost of election equipment. enforcement to respond to and prosecute cybercrime in a timely
manner, leading to the existing low level of deterrence and a
rapidly growing threat”. The bill, if passed, will permit private-
Several state and federal agencies are sector companies to retaliate against their attackers. Entities
responding to the cyberattack on 22 that use a cyber defense measure are required to notify the FBI.
Texas towns, including cybersecurity
Conclusions
experts at the FBI, the Federal Emergency • US municipal issuers at all levels of government are targets
Management Agency (FEMA), and the for cyberattacks. Many entities do not have the resources
or sophistication to enable them to stay a step ahead of cy-
Texas Military Department. bercriminals. Cyber insurance is available but as the num-
ber of attacks increases so does the cost of insurance. Thus
Help from federal and state legislation may be on the way
far, ransom demands have been modest in size, typically
Cyber threats seem to be multiplying daily as the world is more
between USD 50,000 and USD 75,000 but can be in the
connected to the internet as we increasingly rely on technol-
range from hundreds of thousands to millions of dollars.
ogy to operate our daily lives. Unfortunately, many cybercrimi-
nals operate out of jurisdictions which are beyond the reach of
• While recovering from a ransomware attack can be very
US law enforcement making stopping and prosecuting cyber-
costly, CIO is not aware of any cyberattacks that have
crimes more difficult.
caused a credit to be downgraded by the rating agen-
cies. Smaller governments with less financial flexibility are
Forty-three states introduced more than 250 bills related to cy-
at greater risk of downgrade. There is scant information
bersecurity in 2019. Of the cybersecurity bills, 44 have been en-
available on the amount of money that has been paid by
acted so far this year.4 A majority of the newly enacted laws are
municipalities. Some issuers have reported paying a ran-
aimed at strengthening security practices within government.
som to regain access to their systems. Others refuse to pay
The other enactments fall into several main categories such as:
the ransom and work to regain control of their systems.
elections security, workforce and cybersecurity education initia-
tives, cybersecurity commissions and study groups, and exemp-
• Cyberattacks are real and are occurring on a daily basis. Fight-
tions of cybersecurity information from public records laws.
ing these attacks will continue to drain resources from issuer
budgets competing with other issuer priorities; however, CIO
believes it is unlikely cyberattacks, by themselves, will cause
an issuer to permanently default, though a temporary inter-
ruption due to its systems being held for ransom may occur.
Municipal Market Guide SEPTEMBER 2019 9In the news
13 August – 13 September
California Illinois
The state’s general obligation (GO) bond rating was upgraded On 29 August, Judge Jack Davis denied a motion to hear a
from AA- to AA by Fitch on 12 August. The rating agency complaint that attempted to invalidate more than USD 14
assigned a stable outlook, citing improved fiscal management billion of state GO debt. The petition was filed by John Till-
and a strong economy. Moody’s and S&P maintain ratings of man, head of the Illinois Policy Institute, claiming that the
Aa3 (positive outlook) and AA- (stable outlook). series 2003 and 2017 bonds violated the state constitution
as they were a type of deficit financing. The court disagreed
S&P lowered its outlook on the Los Angeles Department of
with Tillman’s assertion, stating that it did not find reason-
Water and Power from stable to negative citing vulnerabilities
able grounds for the Complaint. The court concluded that
with regard to management, governance and internal controls.
further arguments on the matter would result in an unjusti-
LADWP was also in the news after the FBI executed a search
fied interference with the application of public funds. Tillman
warrant on 22 July surrounding an investigation of the utility
subsequently appealed the decision on 3 September to the
system’s settlement from a launch of a new billing system
Fourth District Appellate Court.
after inaccurate bills dating back to 2013.
Chicago Board of Education’s (BOE) general obligation
Colorado ratings were upgraded one notch by S&P and Fitch to BB-
(positive outlook) and BB (stable outlook), respectively. The
On 20 August, the Denver International Airport announced upgrades came ahead of the Board of Education’s USD 349
it was terminating its agreement with Great Hall Public-Private million refunding issuance providing the district with an es-
partnership (GHP) to redevelop Jeppesen Terminal including timated savings of USD 10 million to USD 15 million which
the Great Hall to enhance security, improve passenger flow were originally privately placed in 2008. The agencies cite re-
and improve concession areas. The project was initially funded building reserves and a structural balance as rationale for the
via a conduit borrower, Public Finance Authority (PFA), upgrade while noting that such improvements were mainly
who issued USD 189 million in municipal bonds in December due to increases in state aid revenue after the state revised
of 2017. Bond payments were secured by a loan agreement its state-wide funding formula.
between PFA and GHP. Denver, as owner of the airport,
terminated the contract for convenience, citing unexpected On 3 September, Chicago’s mayor Lori Lightfoot released
construction delays and cost overruns. The termination the city’s projected fiscal 2020 budget shortfall of USD
triggered an extraordinary redemption of outstanding bonds 838 million. Lightfoot is currently hosting four budget
at par. The bonds had been trading at a premium, leaving community town hall meetings seeking resident’s opin-
some investors to suffer the differential losses. ions on how to improve the city’s finances. The mayor is
expected to take the community’s feedback and recom-
Georgia mendations into consideration in addition to working with
her financial team to present the city’s budget proposal in
Georgia Power Co. announced that construction at Plant October which will attempt to close or reduce the current
Vogtle’s two nuclear reactors is almost 80 percent complete structural deficit.
with no further revisions to the forecasted total cost. Unit 3
and Unit 4 have commercial operational dates of November Mississippi
2021 and November 2022, respectively. The news comes
ahead of the Municipal Electric Authority of Georgia’s The Mississippi Supreme Court upheld a lower court’s ruling
(MEAG) USD 725 million bond sale to fund a portion of its that ad valorem taxes may be used for funding charter schools
ownership in the project. Prior construction delays and cost under the Mississippi Constitution.
increases over the last twelve months had caused anxiety
among some investors.
10 SEPTEMBER 2019 Municipal Market GuideIn the news
its plans to deposit USD 1.67 billion into the Economic Stimulus
New Jersey Fund (also known as the state’s rainy day fund or “ESF”) resulting
in an expected fiscal year-end 2020 balance of USD 7.8 billion.
After years of varying gradations of elevated lead levels found
in Newark’s drinking water, the city plans to issue USD 120
An estimated 22 local governments throughout the state fell
million in bonds via the Essex County Improvement Au-
victim to a targeted and coordinated ransomware attack. In-
thority. Monies will be used to install new lines to water
vestigators believe the hackers gained access to the propri-
mains over the next two to three years. The issuance comes
etary IT systems through a communications channel man-
after the city became concerned that the 40,000 water filters
aged by a private contractor. The hackers gained access to
it distributed last year were not reliably effective after the En-
numerous Texas localities networks across the state. The FBI,
vironmental Protection Agency (EPA) tested recent samples.
the Federal Emergency Management Agency (FEMA), and the
Texas Military Department are working with the affected local
New York governments as they work towards restoring their networks
and retrieving/recovering affected data. For more information
New York City’s Comptroller Scott Stringer released the City’s
on trends in cybersecurity and its potential effects on munici-
second-quarter economic update which included a 25 percent
palities, see the Spotlight article in this month’s publication.
year-over-year increase in personal income tax collections, an
additional 26,200 of private sector jobs and an increase of 3.4
The city of Houston has reached a settlement with the Environ-
percent to gross city product.
mental Protection Agency (EPA) to implement certain improve-
ments to its combined utility system related to its history of ex-
The Long Island Power Authority (LIPA) received one-
cessive sanitary sewer overflows. In addition, the city and the
notch upgrades from Moody’s, S&P and Fitch to A2, A, and A,
state have also agreed to pay USD 4.4 million in civil penalties,
respectively. All three agencies assigned stable outlooks, citing
which will be shared equally. Additionally, Houston has agreed
strong economic fundamentals for LIPA’s service area and
to invest USD 2 billion over the next 15 years towards system
improved financial performance. The upgrades came ahead
improvements to prevent future overflows and effluent viola-
of LIPA’s USD 502 million sale to fund capital improvement
tions. The agreement was entered into on 27 August and is sub-
projects.
ject to a 30 day comment period prior to final court approval.
Oklahoma
Washington
On 29 July, the University of Oklahoma notified Provident
Oklahoma Education Resources (POER) that it would not be The state’s GO ratings were upgraded by Moody’s to Aaa from
renewing its lease payments associated with the Oklahoma Aa1 on 23 August (stable outlook). Moody’s cited the signifi-
Development Finance Authority’s series 2017 bonds out- cant increases in financial reserves, exceptional growth and di-
standing in the amount of USD 240 million. Bonds proceeds versification of the economy, above average wealth levels and
constructed an onsite residential mixed-use facility and park- the state’s strong fiscal governance practices. This is the first
ing garage project. Debt service payments are secured by net upgrade since 1997 and the first time the state has achieved
project revenues subject to the university’s annual renewable Aaa ratings by Moody’s since its inaugural rating in 1981. S&P
commitment to lease the facilities. The projects low occupancy affirmed its AA+ rating and stable outlook on 28 August 2019.
rates caused the university to renege on its annual lease op-
tion stating that the costs did not justify the benefits to contin- West Virginia
ue leasing. UMB Bank, the trustee representing bondholders,
has hired a law firm to pursue litigation against the University. Ohio Valley University (OVU) defaulted on its Series
2007B, 2007C and 2007D bonds. The shortfall amounted
Texas to an aggregate USD 361,000 in payments. The University
is a private Christian College with an estimated enrollment
State Comptroller Glenn Hegar reported that the state ended of 500. OVU has approximately USD 15 million in debt out-
its 31 August 2019 fiscal year with 127.9 billion in revenues, 6.5 standing and is seeking to restructure the bonds according
percent higher than FY18. The Controller’s office announced to its regulatory filing.
Municipal Market Guide SEPTEMBER 2019 11Chartbook muni metrics
Figure A1 Figure A2
Visible supply and yields Municipal mutual fund flows
Yield in % (lhs); supply in USD millions (rhs) In USD millions
4.0 24,500 15,000
22,500
3.5 10,000
20,500 Fed li-off
18,500 5,000
3.0 16,500
14,500 0
2.5
12,500 –5,000
2.0 10,500 Historically low yields
8,500 –10,000
1.5 6,500 –15,000
4,500
1.0 2,500 –20,000
Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Jan-19 Sep-19
30-Day Visible Supply (rhs) Treasury 10 yr (lhs) Monthly Net New Cash Flow
AAA GO 10 yr (lhs)
Note: September flows are MTD, as of 4 September 2019
Source: Bloomberg, MMA, UBS, as of 12 September 2019 Source: Investment Company Institute, UBS, as of 12 September 2019
Figure A3 Figure A4
AAA Muni yields AAA yield curve change
In % In %
4 4
3 3
2 2
1 1
0 0
Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 0 5 10 15 20 25 30
AAA GO 5 yr AAA GO 30 yr 12/09/2019 12/09/2018
AAA GO 10 yr 12/08/2019
Source: MMD, UBS, as of 12 September 2019 Source: MMD, UBS, as of 12 September 2019
Figure A5 Figure A6
Credit quality spreads Total monthly municipal issuance
In bps In USD billions
200 70
60
150 50
40
100
30
20
50
10
0 0
Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
BAA GO 10 yr – AAA GO 10 yr AA GO 10 yr – AAA GO 10 yr Monthly Issuance 2017 Monthly Issuance 2019
A GO 10 yr – AAA GO 10 yr Monthly Issuance 2018
Source: MMD, UBS, as of 12 September 2019 Source: Bond Buyer, UBS, as of 13 September 2019
12 SEPTEMBER 2019 Municipal Market GuideChartbook muni metrics
Figure A7
One-year horizon total return assuming unchanged AAA yield curve
Total return (TR), in %
4.0
3.0
2.0
1.0
0.0
0 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
Favored maturity range AAA GO
1 year horizon TR w/ roll down
Source: MMD, UBS, as of 12 September 2019
Figure A8
Historical events’ impact on muni-to-Treasury (m/T) yield ratio (1986 through present)
m/T ratio, in %
Current:
200
89.82
Jefferson County, AL
180
files for bankruptcy
1995–1996 flat tax Global
160
proposal Tech financial
Tax Reform Act Global recession Euro debt
140 bubble crisis of
September 2001 crisis Rate Volatility
stock market crash Orange County CA burst 2008/2009
120 Asian crisis
October 1987 bankruptcy
stocks sell-off
100
1989
80
WorldCom bankruptcy Monoline insurer Threat to tax exemption
60
‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19
AAA GO 30 yr – Treasury 30 yr
Source: MMD, UBS, as of 12 September 2019
Municipal Market Guide SEPTEMBER 2019 13Chartbook relative value
Figure A9 Figure A10
AAA muni-to-Treasury yield ratios A muni GO versus A Industrial Corp. yield ratio
In % In %
110 90
85
100 80
75
90
70
65
80
60
70 55
Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19
10 yr 10 year
30 yr 30 year
Source: MMD, UBS, as of 12 September 2019 Source: MMD, Bloomberg, UBS, as of 12 September 2019
Figure A11 Figure A12
Industrial Corporate and BABs spreads Tax-exempt to BABs yield ratio
Option adjusted spreads, in bps In %
220 90
88
190 86
84
160
82
130 80
78
100
76
70 74
Sep-18 Dec-18 Mar-19 Jun-19 Sep-19
72
U.S Industrial Corp 10+yr OAS Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19
BABS Build America Bond Index OAS Tax-exempt Munis YTM to BABS YTM
Source: ICE BofAML, UBS, as of 12 September 2019 Source: ICE BofAML, UBS, as of 12 September 2019
Figure A13
10-year GO spreads for select states
State spreads, in bps
400
300
200
100
0
–100
Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
IL PA CA TX
NJ CT NY FL
Source: MMD, UBS, as of 12 September 2019
14 SEPTEMBER 2019 Municipal Market GuideEndnotes
Market view
1
UBS House View – Daily, US, Saudi oil facilities attacked, 16 September
2019.
2
J.P. Morgan Municipal Markets Weekly, 13 September 2019.
3
Municipal Market Guide, 12 July 2019.
4
Fixed Income Strategist, 6 September 2019.
Portfolio themes
1
Yields and spreads are based on the following S&P’s indices: Muni high
yield excluding Puerto Rico debt and National AMT-Free municipal
bond index as of 12 September 2019.
Spotlight
1
"Ransomware". 60 Minutes. CBS. 25/8/19. Television.
2
"Ransomware". 60 Minutes. CBS. 25/8/19. Television.
3
Special Counsel Robert S. Mueller, III, US Department of Justice,
Report On The Investigation Into Russian Interference In The 2016
Presidential Election, March 2019.
4
National Conference of State Legislatures, NCLS Executive Task Force
on Cybersecurity, Cybersecurity Task Force News, June-July 2019.
Municipal Market Guide SEPTEMBER 2019 15Required disclosures
UBS does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a con-
flict of interest that could affect the objectivity of UBS research reports.
For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a request to UBS CIO Wealth Man-
agement Research Business Management, 1285 Avenue of the Americas, 20th Floor, Avenue of the Americas, New York, NY 10019.
Analyst certification
Each research analyst primarily responsible for the content of this research ers; and (2) no part of his or her compensation was, is, or will be, directly
report, in whole or in part, certifies that with respect to each security or or indirectly, related to the specific recommendations or views expressed
issuer that the analyst covered in this report: (1) all of the views expressed by that research analyst in the research report.
accurately reflect his or her personal views about those securities or issu-
Statement of risk
Municipal bonds: Although historical default rates are very low, all munici- Prepayment Risk: Issuers may exercise their option to prepay principal ear-
pal bonds carry credit risk, with the degree of risk largely following the par- lier than scheduled, forcing the fund to reinvest in lower-yielding securities.
ticular bond‘s sector. Additionally, all municipal bonds feature valuation, Interest Rate Risk: Fixed-income securities will decline in value if market
return, and liquidity risk. Valuation tends to follow internal and external interest rates rise.
factors, including the level of interest rates, bond ratings, supply factors, Reinvestment Risk: If market interest rates decline, income earned from
and media reporting. These can be difficult or impossible to project accu- the fund’s portfolio may be reinvested at rates below that of the original
rately. Also, most municipal bonds are callable and/or subject to earlier than bond that generated the income.
expected redemption, which can reduce an investor’s total return. Because Liquidity Risk: This is the risk that the fund may not be able to sell securi-
of the large number of municipal issuers and credit structures, not all bonds ties in its portfolio at the time or price desired by the Fund.
can be easily or quickly sold on the open market. Below Investment Grade Risk: Investments rated below investment grade
(typically referred to as “junk”) are generally subject to greater price volatil-
Closed-end funds ity and illiquidity than higher rated investments.
Investment Risk: Performance results reflect past performance and is no Management risk: The risk that investment management decisions may
assurance that a fund will meet its investment objective. Market Risk: The not produce the desired results.
market value, net asset value (NAV) and distribution rate of a fund’s shares
will fluctuate with market conditions.
Leverage Risk: Each fund’s use of leverage (borrowing to increase invest-
ments) creates the possibility of higher volatility and greater risk for the
fund’s per share NAV, market price, distributions and returns.
Credit Risk: Refers to the possibility that the issuer of the bond will not be
able to make principal and interest payments (default).
UBS Closed-End Funds Ratings and Definitions
UBS Financial Services Rating Definition and criteria
Buy Higher stability of principal and higher stability of distribution
Hold Potential loss of principal, lower degree of distribution stability
Sell High potential for loss of principal and distribution risk
16 SEPTEMBER 2019 Municipal Market GuideRequired disclosures
Exchange Traded Funds (ETFs) Disclosure
For purposes of this report, ETFs include index-linked funds regulated under US-registered, open-ended index-linked funds are redeemable only in Cre-
the Investment Company Act of 1940 that trade on US securities exchanges ation Unit size aggregations through an Authorized Participant, and may not
under exemptive relief from the Securities and Exchange Commission. The be individually redeemed. Many ETFs are redeemable only on an “in-kind”
shares of all of the ETF issuers discussed in this Report are listed on U.S. basis. The public trading price of a redeemable lot of ETFs may be different
securities exchanges. The ETFs are either open-end, registered investment from their net asset value, and ETFs could trade at a premium or discount to
companies (including UITs) operating under an exemptive order from the the net asset value. UBS AG or its affiliates act as authorized participants for
SEC, or collective investment vehicles, formed as grantor trusts, limited many of the ETFs discussed in this report. In addition, UBS is a regular issuer
partnerships or similar structures that offer pass-through tax treatment to of traded financial instruments and privately issued financial products that
investors. The different structures provide different rights for investors. For may be linked to the ETFs mentioned in this Report. UBS regularly trades
example, ETFs registered under the Investment Company Act of 1940 must in ETFs. Through these and other activities, UBS may engage in transac-
stand ready at all times to redeem shares (albeit only in creation unit size) tions involving ETFs that are inconsistent with the strategies in this report.
whereas those ETFs that are not subject to registration under the Investment
Company Act of 1940 may suspend redemptions at any time. We refer to ETFs are subject to the same risks as the underlying securities and commis-
ETFs registered with the SEC under the Investment Company Act of 1940 sions may be charged on every trade, if applicable. This definition does not
as “40 Act ETFs” and to non-registered ETFs as “33 Act ETFs.” All of the imply that ETFs are endorsed by the Securities and Exchange Commission.
ETFs discussed in this Report track an index of financial instruments or pro- ETFs are sold by prospectus, which contains details about ETFs, including
vide exposure to a single commodity type. investment objectives, risks, charges and expenses. Clients should read the
prospectus and consider this information carefully before investing. Clients
may obtain more information about ETFs, including copies of prospectuses
or summary, from their UBS FS financial advisor.
Agency credit ratings
S&P Moody’s Fitch/IBCA Definitions
Investment grade
AAA Aaa AAA Issuers have exceptionally strong credit quality. AAA is the best credit quality.
AA+ Aa1 AA+
AA Aa2 AA Issuers have very strong credit quality.
AA- Aa3 AA-
A+ A1 A+
A A2 A Issuers have high credit quality.
A- A3 A-
BBB+ Baa1 BBB+
BBB Baa2 BBB Issuers have adequate credit quality, This is the lowest Investment Grade category.
BBB- Baa3 BBB-
Non-investment grade
BB+ Ba1 BB+
BB Ba2 BB Issuers have weak credit quality. This is the highest Speculative Grade category.
BB- Ba3 BB-
B+ B1 B+
B B2 B Issuers have very weak credit quality.
B- B3 B-
CCC+ Caa1 CCC+
CCC Caa2 CCC Issuers have extremely weak credit quality.
CCC- Caa3 CCC-
CC Ca CC+
CC Issuers have very high risk of default.
CC-
D C DDD Obligor failed to make payment on one or more of its financial commitments.
This is the lowest quality of the Speculative Grade category.
Municipal Market Guide SEPTEMBER 2019 17Disclaimer
UBS Chief Investment Office’s (“CIO”) investment views are prepared and ment returns thereon both in general or with reference to specific client’s
published by the Global Wealth Management business of UBS Switzerland circumstances and needs. We are of necessity unable to take into account
AG (regulated by FINMA in Switzerland) or its affiliates (“UBS”). the particular investment objectives, financial situation and needs of our
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risk of loss, and losses in excess of an initial investment may occur. Past or views contained herein are not intended to be, and do not con-
performance of an investment is no guarantee for its future performance. stitute, advice within the meaning of the Municipal Advisor Rule.
Additional information will be made available upon request. Some invest-
ments may be subject to sudden and large falls in value and on realization External Asset Managers / External Financial Consultants: In case
you may receive back less than you invested or may be required to pay this research or publication is provided to an External Asset Manager or
more. Changes in foreign exchange rates may have an adverse effect on an External Financial Consultant, UBS expressly prohibits that it is redistrib-
the price, value or income of an investment. The analyst(s) responsible for uted by the External Asset Manager or the External Financial Consultant
the preparation of this report may interact with trading desk personnel, and is made available to their clients and/or third parties. For country dis-
sales personnel and other constituencies for the purpose of gathering, closures, click here.
synthesizing and interpreting market information.
Version 04/2019. CIO82652744
Tax treatment depends on the individual circumstances and may be sub-
ject to change in the future. UBS does not provide legal or tax advice and © UBS 2019.The key symbol and UBS are among the registered and un-
makes no representations as to the tax treatment of assets or the invest- registered trademarks of UBS. All rights reserved.
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