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If You’re Worried About Banks, Invest Here Instead

Investors Alley
If You’re Worried About Banks, Invest Here Instead
During the current period of intense market volatility, some investors have grown…



Investors Alley
If You’re Worried About Banks, Invest Here Instead

During the current period of intense market volatility, some investors have grown fearful. For these concerned investors, municipal bonds, aka “munis,” are worth a look. Munis are issued by state and local governments, and generally pay tax-exempt interest at the federal and potentially state levels.

Municipal bonds have played a vital role in building the framework of America’s modern infrastructure, and were a major source of financing for canals, roads, and railroads during the country’s westward expansion in the 1800s.

Today, the proceeds from municipal debt continue to fund a wide range of state and local infrastructure projects, including schools, hospitals, universities, airports, bridges, and highways, as well as water and sewer systems.

Here’s all you need to know, and how to buy them…

Munis 101

Municipal bonds are often thought of as tax-exempt vehicles that are appropriate only for investors who fall into higher tax brackets. However, municipal bonds can offer potential advantages to investors of all income brackets.

In general, municipal bonds fall into one of two categories: general obligation and revenue. The main difference between the two is the source of revenue that secures their principal and interest payments. Here are the specifics from the Invesco Primer on municipal bonds…

General obligation bonds are secured at the state level by the state government’s pledge to use all legally available resources to repay the bond. At the local level, general obligation bonds are backed by an ad valorem tax pledge that can be either “limited” or “unlimited.” The agreed-upon definitions of these terms that appear in ordinances across municipalities are:

  •  Limited tax: Secured by a pledge to levy taxes annually “within the constitutional and statutory limitations provided by law”
  • Unlimited tax: Secured by a pledge to levy taxes annually “without limitation as to rate or amount” to ensure sufficient revenues for debt service

Other than states, issuers of general obligation bonds include cities, counties, and school districts.

Revenue bonds are secured by a specific source of revenue earmarked for repayment of the revenue bond.

  • Enterprise revenue bonds are typically issued by water and sewer authorities, electric utilities, airports, toll roads, hospitals, universities, and other not-for-profit entities.
  • Tax revenue bonds are backed by dedicated tax streams, such as sales taxes, utility taxes, or excise taxes.

Muni bonds come with a large tax break for taxpayers. Without this, there are few reasons to hold them. How much is the tax break worth? As Invesco explains in their basic Muni primer, to work out the Tax Equivalent Yield (TEY) you have to do a bit of math:

Given that different investors pay different marginal rates of tax federal income tax, the tax equivalent yields that you receive from the same bond will be different. In simple terms, the higher your marginal tax rate, the higher your TEY.

There are several reasons why looking into the $4 trillion municipal bond market may make sense now.

Why Buy Munis?

One reason munis make sense for many investors is that many issuers have a monopoly over their services and don’t face competition like corporations do.

An even better reason is that issuers are often backed by durable revenue sources such as taxes. As a result, defaults tend to be rare, even during recessionary periods. For example, during the financial crisis of 2007–2009, only 12 rated issuers defaulted, compared with 414 corporate bonds of similar credit quality.

Currently, many muni issuers are financially strong. That’s due to substantial pandemic-related support from the federal government as well as recently surging tax revenues as the economy has recovered from the pandemic.

In fact, the balances of rainy-day funds—money states set aside to use during unexpected deficits—are at near-record levels. Even Illinois, the lowest-rated state in the muni market had a rainy-day fund balance of more than $600 million in 2022, compared with just $4.15 million in 2020.

Also keep in mind that, in general, muni bonds have strong credit ratings—usually higher than corporate bones. Nearly 70% of the Bloomberg Municipal Bond Index is rated in the two highest categories, compared with just 8% of those in the Bloomberg Corporate Bond Index.

And then, of course, we come to yields.

Raymond James’s Municipal Bond Investor Weekly shows that the yield on 10-year Single-A-rated Munis trades below U.S. Treasuries, but the Tax Equivalent Yield of 10-year Single-A-rated Muni trades at the equivalent U.S. Treasury yield plus 126 basis points.

Here is some of the commentary from the March 20 issue of Municipal Bond Investor Weekly:

All this [market] uncertainty has caused a flight to quality as investors shift out of risky assets and into bonds. As investors pour into high quality bonds, municipal bond prices have rallied sending yields lower. 10-year muni yields are ~25 basis points lower, but this pales in comparison to Treasury yields which are ~53 basis points lower from March 7-17, 2023. Longer maturities followed a similar path with 20-year muni yields lower by 16 basis points compared to Treasuries, down 32 basis points.…Taking a longer view, 10 and 20-year maturity municipal bond yields are at or close to their historical highs not seen since 2018. The past year has been marked with volatility and, while off their recent highs, 20-year muni yields are approximately 100 basis points higher than a year ago and 10-year yields are approximately 30 basis points higher.

How to Buy Munis

Your best bet may be to buy individual munis tailored to your specific financial situation. All the major brokerages have bond specialists that can do this for you.

However, there are municipal bond mutual funds and ETFs that you can buy online in your brokerage account. Here are a few examples…

The largest muni bond ETF is the iShares National Muni Bond ETF (MUB). It is up about 1% year-to-date and has a 30-day SEC yield of 3.15%. The expense ratio is a tiny 0.07%.

There are also closed-end funds that focus on munis—and often on specific states and that often have a higher yield.

The largest national muni closed end fund is the Nuveen Municipal Value Fund (NUV). It is up about 0.50% year-to-date and has a distribution rate of 3.85%. However, its expense ratio is higher at 0.50%.

The biggest of such funds focused on a single state is the Nuveen California Quality Municipal Income Fund (NAC). Many of the larger states have a closed fund dedicated to them, so make sure to check on the internet for a list.

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If You’re Worried About Banks, Invest Here Instead
Tony Daltorio

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How much more financial pressure can Australian mortgagees take?

Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another….



Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another. Inflation has risen steadily since the beginning of 2022 despite the determined efforts of Reserve Bank of Australia (RBA) to bring it back towards its target range of 2-3 per cent.

In less than 1 year and 11 interest rate rises later, official interest rates have risen from 0.10 per cent to 3.85 per cent but inflation remains stubbornly high at 7 per cent. Interest rates have never risen this fast before nor from such a historically low level either.

As previously outlined in an earlier blog entry on Commonwealth Bank (ASX:CBA), the big four banks of Australia have just under 80 per cent of the residential property mortgage loan market. In “normal” economic times of rising interest rates, banks should be natural beneficiaries of these conditions. However, these are not normal times.

The business model of banks has generally stayed the same for centuries, i.e. borrow money from one source at a low interest rate and lend it to a customer at a higher rate. Today, the Australian banks generally get their funding from wholesale and retail sources. However, the banks were offered a one-off funding source from the RBA called the Term Funding Facility (TFF) during the COVID-19 period to support the economy. This started in April 2020, priced at an unprecedented low fixed rate of 0.10 per cent for 3 years with the last drawdown accepted in June 2021 for a total of $188 billion. Fast forward to today and the first drawdowns from this temporary facility have already started to roll-off which means that these fund sources need to be replaced with one of considerably more expensive sources, namely wholesale funding or retail deposits. As a result of this change in funding, bank CEOs have unanimously declared that net interest margins, and hence its effect on bank earnings, have peaked for this cycle despite speculation that interest rates may still rise later in the year.

Prior to the start of the roll-off of TFF drawdowns, the entire Australian banking industry engaged in cutthroat competition for new and refinancing mortgage loans in a bid to maintain or grow market share. In the aftermath of the bank reporting season, two of the big four banks have stated they are no longer pursuing market share at any price, with CBA and National Australia Bank (ASX:NAB) announcing they will scrap their refinancing cashback offers after 1 June and 30 June respectively.

Turning our attention back to the average Australian, the big bank mortgage customers have been remarkably resilient. The Australian dream of owning the house you live in is still alive for now, with owners willing to endure significant lifestyle changes in a bid to keep up with mortgage payments. The big banks have reflected this phenomenon with a reduction in individual loan provisions and only a modest increase in collective loan provisions.

Time will tell how much more financial pressure Australian mortgagees can take, especially with the RBA still undecided on the future trajectory of interest rates. What has been agreed on by the big banks, is that things are not going to get easier. At least not in the short-term.

The Montgomery Funds own shares in the Commonwealth Bank of Australia and National Australia Bank. This article was prepared 29 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

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U.S. Breakeven Inflation Comments

I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.Background note: the breakeven inflation rate is …



I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.

Background note: the breakeven inflation rate is the inflation rate that results in an inflation-linked bond — TIPS in the U.S. market — having the same total return as a conventional bond. If we assume that there are no risk premia, then it can be interpreted as “what the market is pricing in for inflation.” I have a free online primer here, as well as a book on the subject.

(As an aside, I often run into people who argue that “breakeven inflation has nothing to do with inflation/inflation forecasts.” I discuss this topic in greater depth in my book, but the premise that inflation breakevens have nothing to do with inflation only makes sense from a very short term trading perspective — long-term valuation is based on the breakeven rate versus realised inflation.)

The top panel shows the 10-year breakeven inflation rate. Although it scooted upwards after the pandemic, it is below where is was pre-Financial Crisis, and roughly in line with the immediate post-crisis period. (Breakevens fell at the end of the 2010s due to persistent misses of the inflation target to the downside.) Despite all the barrels of virtual ink being dumped on the topic of inflation, there is pretty much no inflation risk premium in pricing.

The bottom panel shows forward breakeven inflation: the 5-year rate starting 5 years in the future. (The 10-year breakeven inflation rate is (roughly) the average of the 5-year spot rate — not shown — and that forward rate.) It is actually lower than its “usual” level pre-2014, and did not really budge after recovering from its post-recession dip. (My uninformed guess is that the forward rate was depressed because inflation bulls bid up the front breakevens — because they were the most affected by an inflation shock — while inflation bears would have focussed more on long-dated breakevens, with the forward being mechanically depressed as a result.)

Since I am not offering investment advice, all I can observe is the following.

  • Since it looks like one would need a magnifying glass to find an inflation risk premium, TIPS do seem like a “non-expensive” inflation hedge. (I use “non-expensive” since they do not look cheap.) Might be less painful than short duration positions (if one were inclined to do that).

  • Breakeven volatility is way more boring than I would have expected based on the recent movements in inflation. The undershoot during the recession was not too surprising given negative oil prices and expectations of another lost decade, but the response to the inflation spike was restrained.

  • The “message for the economy” is that market pricing suggests that either inflation reverts on its own, or the Fed is expected to break something bigger than a few hapless regional banks if inflation does not in fact revert.

Otherwise, I am preparing for a video panel on MMT at the Canadian Economics Association 2023 Conference on Tuesday. (One needs to pay the conference fee to see the panel.) I have also been puttering around with my inflation book. I have a couple draft sections that I might put up in the coming days/weeks.

Email subscription: Go to 

(c) Brian Romanchuk 2023

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“What’s More Tragic Is Capitalism”: BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

"What’s More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years…



"What's More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years ago, I wrote columns about companies pouring money into Black Lives Matter to establish their bona fides as “antiracist” corporations. The money continued to flow despite serious questions raised about BLM’s management and accounting. Democratic prosecutors like New York Attorney General Letitia James showed little interest in these allegations even as James sought to disband the National Rifle Association (NRA) over similar allegations. At the same time, Black Lives Matter co-founder Patrisse Cullors cashed in with companies like Warner Bros. eager to give her massive contracts to signal their own reformed status. It now appears that BLM is facing bankruptcy after burning through tens of millions and Warner Bros. cut ties with Cullors after the contract produced no — zero — new programming.

Some states belatedly investigated BLM as founders like Cullors seemed to scatter to the winds.

Gone are tens of millions of dollars, including millions spent on luxury mansions and windfalls for close associates of BLM leaders.

The usual suspects gathered around the activists like former Clinton campaign general counsel Marc Elias, who later removed himself from his “key role” as the scandals grew.

When questions were raised about the lack of accounting and questionable spending, BLM attacked critics as “white supremacists.”

Warner Bros. was one of the companies eager to grab its own piece of Cullors to signal its own anti-racist virtues.  It gave Cullors a lucrative contract to guide the company in the creation of both scripted and non-scripted content, focusing on reparations and other forms of social justice. It launched a publicity campaign for everyone to know that it established a “wide-ranging content partnership” with Cullors who would now help guide the massive corporation’s new programming. Calling Cullors “one of the most influential thought leaders in American public life,” Warner Bros. announced that she was going to create a wide array of new programming, including “but not limited to live-action scripted drama and comedy series; longform/event series; unscripted docuseries; animated programming for co-viewing among kids, young adults and families; and original digital content.”

Some are now wondering if Warner Bros. ever intended for this contract to produce anything other than a public relations pitch or whether Cullors took the money and ran without producing even a trailer for an actual product. Indeed, both explanations may be true.

Paying money to Cullors was likely viewed as a type of insurance to protect the company from accusations of racial insensitive. After all, the company was giving creative powers to a person who had no prior experience or demonstrated talent in the area. Yet, Cullors would be developing programming for one of the largest media and entertainment companies in the world.

One can hardly blame Cullors despite criticizism by some on the left for going on a buying spree of luxury properties.

After all, Cullors was previously open about her lack of interest in working with “capitalist” elements. Nevertheless, BLM was run like a Trotskyite study group as the media and corporations poured in support and revenue.

It was glaringly ironic to see companies like Warner Bros. falling over each other to grab their own front person as the group continued boycotts of white-owned businesses. Indeed, if you did not want to be on the wrong end of one of those boycotts, you needed to get Cullors on your payroll.

Much has now changed as companies like Bud Light have been rocked by boycotts over what some view as heavy handed virtue signaling campaigns.

It was quite a change for Cullors and her BLM co-founder, who previously proclaimed “[we] are trained Marxists. We are super versed on, sort of, ideological theories.” She denounced capitalism as worse than COVID-19. Yet, companies like Lululemon rushed to find their own “social justice warrior” while selling leggings for $120 apiece.

When some began to raise questions about Cullors buying luxury homes, Facebook and Twitter censored them.

With increasing concerns over the loss of millions, Cullors eventually stepped down as executive director of the Black Lives Matter Global Network Foundation, as others resigned.  At the same time, the New York Post was revealing that BLM Global Network transferred $6.3 million to Cullors’ spouse, Janaya Khan, and other Canadian activists to purchase a mansion in Toronto in 2021.

According to The Washington Examiner, BLM PAC and a Los Angeles-based jail reform group paid Cullors $20,000 a month. It also spent nearly $26,000 on meetings at a luxury Malibu beach resort in 2019. Reform LA Jails, chaired by Cullors, received $1.4 million, of which $205,000 went to the consulting firm owned by Cullors and her spouse, according to New York magazine.

Once again, while figures like James have spent huge amounts of money and effort to disband the NRA over such accounting and spending controversies, there has been only limited efforts directed against BLM in New York and most states.

Cullors once declared that “while the COVID-19 illness is tragic, what’s more tragic is capitalism.” These companies seem to be trying to prove her point. Yet, at least for Cullors, Warner Bros. fulfilled its slogan that this is all “The stuff that dreams are made of.”

Tyler Durden Sun, 05/28/2023 - 16:00

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