November 14, 2014 M U N I C I P A L M A R K E T U P D A T E S T R I C T L Y P R I V A T E A N D C O...
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Transcript of November 14, 2014 M U N I C I P A L M A R K E T U P D A T E S T R I C T L Y P R I V A T E A N D C O...
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November 14, 2014
M U N I C I P A L M A R K E T U P D A T E
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This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client’s affiliates, the “Client”) in order to assist the Client in evaluating, on a preliminary basis, the feasibility of possible transactions referenced herein. The materials have been provided to the Client for informational purposes only and may not be relied upon by the Client in evaluating the merits of pursuing transactions described herein. No assurance can be given that any transaction mentioned herein could in fact be executed.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. Any financial products discussed may fluctuate in price or value. This presentation does not constitute a commitment by any J.P. Morgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.
J.P. Morgan's presentation is delivered to you for the purpose of being engaged as an underwriter, not as an advisor, (including, without limitation, a Municipal Advisor (as such term is defined in Section 975(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act)) . The role of an underwriter and its relationship to an issuer of debt is not equivalent to the role of an independent financial advisor. The primary role of an underwriter is to purchase, or arrange for the purchase of, securities in an arm’s-length commercial transaction between the issuer and the underwriter. An underwriter has financial and other interests that differ from those of the issuer. If selected as your underwriter, J.P. Morgan will be acting as a principal and not as your agent or your fiduciary with respect to the offering of the securities or the process leading to issuance (whether or not J.P. Morgan or any affiliate has advised or is currently advising the Client on other matters). Any portion of this presentation which provides information on municipal financial products or the issuance of municipal securities is given in response to your questions or to demonstrate our experience in the municipal markets. We encourage you to consult with your own legal and financial advisors to the extent you deem appropriate in connection with the offering of the securities. If you have any questions concerning our intended role and relationship with you, we would be happy to discuss this with you further.
This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
This material is not a product of the Research Departments of J.P. Morgan Securities LLC ("JPMS") and is not a research report. Unless otherwise specifically stated, any views or opinions expressed herein are solely those of the authors listed, and may differ from the views and opinions expressed by JPMS's Research Departments or other departments or divisions of JPMS and its affiliates. Research reports and notes produced by the Research Departments of JPMS are available from your Registered Representative or at http://www.morganmarkets.com. JPMS’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject Client as consideration or inducement for the receipt of business or for compensation. JPMS also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.
J.P. Morgan makes no representations as to the legal, tax, credit, or accounting treatment of any transactions mentioned herein, or any other effects such transactions may have on you and your affiliates or any other parties to such transactions and their respective affiliates. You should consult with your own advisors as to such matters.
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This presentation does not carry any right of publication or disclosure, in whole or in part, to any other party, without the prior consent of J.P. Morgan. Additional information is available upon request.
J.P. Morgan is the marketing name for the investment banking activities of JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC (member, NYSE), J.P. Morgan Securities plc (authorized by the FSA and member, LSE) and their investment banking affiliates.
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M U
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Largest Countries & U.S. States by GDP (2012 $ Trillions)Largest Countries & U.S. States by GDP (2012 $ Trillions)
Largest nations relative to U.S. states
Ten of the largest U.S. states rank among the world’s biggest countries in terms of GDP
Eu
rop
ea
n U
nio
n
Un
ited
Sta
tes
Ch
ina
Jap
an
Ge
rma
ny
Fra
nce
Un
ited
Kin
gd
om
Bra
zil
Ru
ssian
Fe
de
ratio
n
Italy
Ca
liforn
ia
Ind
ia
Ca
na
da
Au
stralia
Te
xas
Sp
ain
Ne
w Y
ork
Me
xico
Ko
rea
, Re
p.
Ind
on
esia
Tu
rkey
Flo
rida
Ne
the
rlan
ds
Sa
ud
i Ara
bia
Illino
is
Sw
itzerla
nd
Pe
nn
sylvan
ia
Oh
io
Ne
w Je
rsey
No
rth C
aro
lina
Virg
inia
Ge
org
ia
14.115.7
8.4
6.0
3.42.6 2.4 2.3 2.0 2.0 2.0 1.8 1.8 1.5 1.4 1.3 1.2 1.2 1.1 0.9 0.8 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.5 0.4 0.4
#30 #31 #36 #37#11 #15 #17 #22 #25 #27 #38
Source: Bureau of Economic Analysis & International Monetary Fund for 2012
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Key market statisticsKey market statistics
Market characteristics
Market Market Size
# of Issuers
# of CUSIPs
% Direct Retail
Avg Daily Volume
Avg Daily # of Trades
Avg $ / Trade
Equities $50.0 T 5,700 10,000 35% $76.8 BN 9,800,000 $8,000
Corporate Bonds $7.7 T 5,000 20,000 10% $19.2 BN 37,000 $519,000
Municipal Bonds $3.7 T 46,000 1,100,000 51% $6.9 BN 38,000 $161,000
Source: EMMA, SIFMA, Bloomberg, NYSE/NASDAQ, TRACE, GAONote: Data reflects U.S. market only, bond data excludes money market activity
The municipal market can be characterized by a large number of securities coupled with a high level of retail participation
On average, individual municipal bonds trade once every 27 days, while an individual equity trades ~980 times per day
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There are many potential drivers for rate movements in the current market
Current tax-exempt yields have declined since the most recent sell-off in 2013Current tax-exempt yields have declined since the most recent sell-off in 2013
Source: Thomson Reuters Municipal Market Data, J.P. Morgan; as of 11/7/2014
Factors that could drive rates lower
Weaker US economic data
Renewal of US fiscal concerns
Dovish Fed commentary
Flight to quality sparked by geopolitical risks or potential pandemic
Factors that could drive rates higher
Rate hike(s)
Strengthening US economic data
Hawkish Fed commentary
Reduced foreign economic concerns
1994
1995
1996
1996
1997
1997
1998
1998
1999
2000
2000
2001
2001
2002
2003
2003
2004
2004
2005
2005
2006
2007
2007
2008
2008
2009
2010
2010
2011
2011
2012
2012
2013
2014
2014
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
5Y MMD 10Y MMD
30Y MMD
Credit Driven
Rate Driven
Contributing Factors To Rate MovementsContributing Factors To Rate Movements
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Market participants expect the initial Fed interest rate hike to occur in mid 2015
Fed Funds Target Rate Projections (year-end)Fed Funds Target Rate Projections (year-end)
Source: Federal Reserve Board, 9/17/2014
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%FOMC member votes
Longer run2014 2015 2016 2017
11/7/14 12/7/14 12/31/14 3/31/15 6/30/15 9/30/15
Current1m ahead Forecast
4Q14 Forecast 1Q15 Forecast 2Q15 Forecast 3Q15 Forecast
Fed Funds 0.09 0.10 0.10 0.15 0.30 0.55
3M LIBOR 0.23 0.25 0.25 0.45 0.65 0.90
2Y UST 0.50 0.55 0.65 0.90 1.10 1.40
5Y UST 1.59 1.60 1.80 2.05 2.25 2.50
10Y UST 2.31 2.35 2.45 2.60 2.75 2.95
30Y UST 3.05 3.10 3.15 3.30 3.40 3.50
10Y MMD 2.17 2.20 2.28 2.43 2.63 2.17
30Y MMD 3.07 3.10 3.15 3.25 3.42 3.07
JPM Interest Rate Forecast (%)JPM Interest Rate Forecast (%)
Interest rate hikes over two previous cycles show measured increases over a limited time period
Interest rate hikes over two previous cycles show measured increases over a limited time period
Feb 94 Aug 94 Feb 95300%
400%
500%
600%
700%
Federal funds target rate
1M LIBOR
Jun 04 Jun 05 Jun 06100%
200%
300%
400%
500%
600%
Source: J.P. Morgan
Fed hikes 3.0% over 12 months
Fed hikes 4.25% over 24 months
Source: Thomson Reuters Municipal Market Data; J.P. Morgan Research, US Fixed Income Weekly - Municipals, 11/7/2014, jpmm.com4
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Unexpected geopolitical and pandemic risks can initiate a flight to quality assets
Story Counts in BloombergStory Counts in Bloomberg
Source: Bloomberg
Jan
2013
Jan
2013
Feb 2
013
Mar
201
3
Mar
201
3
Apr 2
013
May
201
3
May
201
3
Jun
2013
Jun
2013
Jul 2
013
Aug 2
013
Aug 2
013
Sep 2
013
Oct 2
013
Oct 2
013
Nov 2
013
Dec 2
013
Dec 2
013
Jan
2014
Feb 2
014
Feb 2
014
Mar
201
4
Apr 2
014
Apr 2
014
May
201
4
Jun
2014
Jun
2014
Jul 2
014
Aug 2
014
Aug 2
014
Sep 2
014
Oct 2
014
Oct 2
014
0
200
400
600
800
1000
1200
1400
0
50
100
150
200
250
300
350
400
450
500"EBOLA" Story Count (Left) "CRIMEA" Story Count (Left) "ISIS" Story Count (Left)
"TAPER" Story Count (Right)
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30-year MMD has declined 113 bps from its year-to-date high of 4.20%
5-year UST and MMD yields are now close to their year-to-date averages
5-year UST and MMD yields are now close to their year-to-date averages
30-Year MMD and UST yields are 3.07% and 3.05%, respectively, and have declined considerably YTD
30-Year MMD and UST yields are 3.07% and 3.05%, respectively, and have declined considerably YTD
Source: J.P. Morgan, Thomson Reuters Municipal Market DataSource: J.P. Morgan, Thomson Reuters Municipal Market DataDashed lines represent YTD averages
0.90%
1.10%
1.30%
1.50%
1.70%
1.90% 5-year UST 5-year MMD
MMD avg UST avg
YTD avg: 1.17%
YTD avg: 1.63%
2.70%
2.90%
3.10%
3.30%
3.50%
3.70%
3.90%
4.10%
4.30% 30-year UST 30-year MMD
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2010 2011 2012 2013 2014 YTD 2014 FY Forecast*
281255
347295
240282
152
32
33
38
20
25
Tax-exempt Taxable
259
307
Given the decline in rates this year, refunding issuance remains a large portion of
new issuance, with overall supply concentrated in nearer term maturities
Year-to-date municipal issuance is $259 billionYear-to-date municipal issuance is $259 billion
Source: Thomson Reuters SDC; as of 11/7/2014*J.P. Morgan Research, Forecast as of 6/27/2014 (including private placements)
Source: Thomson Reuters SDC; as of 11/7/2014 (including private placements)
New money drives 2014 supplyNew money drives 2014 supply
$bn
2010 2011 2012 2013 2014 YTD
64%51%
39%48% 45%
23%
31%41%
33% 36%
13% 18% 20% 19% 19%
New Money Refunding Combination of New Money & Refunding
433
287
380
333
Source: Enterprise Security Master supplied by JJKenny, fixed rate municipal issuance as of 10/17/2014
Municipal supply remains concentrated in shorter-dated maturities
Municipal supply remains concentrated in shorter-dated maturities
1 to 5 6 to 10 11 to 15 16 to 20 21 to 25 26+0
10
20
30
40
50
60
70
80
90
Total par issued 2014 YTD
Years to Maturity
26
$bn
43
36
21
81
50
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EPeriods of negative net supply can create a positive technical environment for
municipal bonds
Source: Thomson Reuters SDC; Bloomberg; J.P. Morgan Research, U.S. Fixed Income Markets Weekly – Municipals, 11/7/2014, www.jpmm.com; Forecast as of 6/27/2014
J.P. Morgan Research expects net supply of -$39 billion in 2014J.P. Morgan Research expects net supply of -$39 billion in 2014
$bn
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-20
-15
-10
-5
0
5
10
15
20
25
302004 - 2008 (PreBAB) Avg 2012
2013 2014 Actual 2014 Forecast
$bnNew issue supply outpaces reinvestment capital 2011
Excess reinvestment capital relative to new issue supply
2014 net supply is forecast to be -$4.3 bn for No-vember and De-cember
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Source: Lipper FMI, iMoneyNet, as of 11/5/2014
Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14-7,000
-5,000
-3,000
-1,000
1,000
3,000
5,000
Weekly Fund Flows 4-Week Average Fund Flows
Intermediate term funds have received $11 billion of net investment in 2014Intermediate term funds have received $11 billion of net investment in 2014
Inflows into municipal bonds have totaled $15 billion YTD, a sharp contrast to the
outflows experienced in Fall 2013
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14-7,000
-5,000
-3,000
-1,000
1,000
3,000
5,000Weekly Fund Flows 4-Week Average Fund Flows
$mm
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Equity and taxable fixed income funds have experienced significant inflows YTD
2014 Cumulative Equity, Municipal, and Taxable Fund Flows2014 Cumulative Equity, Municipal, and Taxable Fund Flows
Source: Lipper FMI; iMoneyNet, as of 11/5/2014
0 4 8 12 16 20 24 28 32 36 40 44 48 52-40
0
40
80
120
160
200
2014 Equity Funds
2014 Taxable Fixed Income Funds
2014 All Municipal Funds
$bn
Cumulative Fund Flows
2014 Fund Flows Reporting Week
$181 bn
$72 bn
$15 bn
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Tax-exempt yields are historically low, and the curve has flattened…
MMD yields remain near their YTD lows with 30-year MMD at 3.07% MMD yields remain near their YTD lows with 30-year MMD at 3.07%
Source: Thomson Reuters Municipal Market Data, J.P. Morgan; as of 11/7/2014
0
1
2
3
4
5
6
7
8
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
Current 20y Range
2y Range YTD Low%
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1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 20140%
1%
2%
3%
4%
5%
6%
7%
8%
9%MMD SIFMA
…but volatility in rates may return as the market looks to Fed policy changes
1 Reflects market conditions as of 11/7/2014. The chart is made of weekly data points from 11/7/94.Municipal Market Data Index (MMD) “AAA” curve is written daily to represent a fair value offer-side of the highest –grade AAA rated state General obligation bonds, as determined by the MMD
analyst team. The Securities Industry and Financial Markets Association (SIFMA) Index is calculated by taking the weighted-average of the clearing rates for a pool of high-grade tax-exempt short-term issues
with weekly resets. The SIFMA Index is a widely used proxy for high-grade weekly bonds.
30-Yr AAA MMD versus SIFMA130-Yr AAA MMD versus SIFMA1
MMD SIFMA Spread
Current 3.07% 0.04% 3.03%
Average 4.70% 2.08% 2.62%
Minimum 2.47% 0.03% -2.80%
Maximum 6.95% 7.96% 4.96%
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Questions?
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