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...

15
Agenda November 14, 2014 MUNICIPAL MARKET UPDATE STRICTLY PRIVATE AND CONFIDENTIAL

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...

Page 1: 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 N F I D E N T I A L.

November 14, 2014

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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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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

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Un

ited

Sta

tes

Ch

ina

Jap

an

Ge

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ny

Fra

nce

Un

ited

Kin

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om

Bra

zil

Ru

ssian

Fe

de

ratio

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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

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No

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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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