Personal Income by State; Texas Should be Watched; Negative Arb Chills Refundings

Categories: Commentary, Uncategorized |

December 22, 2014

This week we touch on recently published statistics for Personal Income by State; highlight the risks to Texas economy from recent oil price decline; and discuss “Negative Arb”, one of the inputs into long term municipal supply.

National Personal Income Increases, But States Vary

Last week the BEA released updated information on State Quarterly Personal Income.  While the consensus (in the markets and at the Fed) is that the economy is beginning to experience healthy growth, the BEA data shows tremendous dispersion across the country.   The pace of national income growth is important to the Fed’s “lift-off” schedule.  The pace of income growth in a particular States is important as a key variable in its tax revenue growth, a key contributor to State fiscal health.


Source: BEA, DIVER Analytics-Map Module

Decline in Oil Prices Makes Texas a Focus State

While Texas’ Personal Income Growth was the strongest in the country during the 3rd quarter, the vulnerability of its economy to lower oil prices makes it one of our current states to watch.

Texas County DIVER Geo Score

(November ‘14)

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Source: DIVER Analytics-Map Module

The “oil counties” in West Texas around Midland have had some of the strongest economies in the nation.

While Texas’s economy is more diversified than other oil states and in many cases the break-even levels of oil prices are lower for its facilities than in other states, it is likely than the resilience of Texas’ economy and its finances will be tested if oil prices remain in this range.

Improvement in “Negative Arb” Not Likely to Boost Supply

SIFMA recently released its new issue long term supply projections for 2015.  The consensus of those polled by SIFMA is that long-term supply for 2015 will be unchanged at $275b and the ratio of new money to refunding supply will be roughly the same at 45%.

Several variables impact the amount of  (advance) refunding issuance over time:  level of rates; credit spreads; issuers’ propensity to harvest “savings”; and also the so-called “Negative Arb”.

The Negative Arb is a spread between long-term municipal bond rates and short-term Treasury rates.  This spread mimics the economic transaction executed by an issuer when advance refunding a bond issue:  borrowing at the long-term municipal bond rate and reinvesting at a short Treasury rate.  The drivers of the level of Negative Arb are the shape of the yield curves (flatter is better); the ratio between municipal bond and Treasury rates (lower is better); and municipal bond credit spreads (tighter is better).

Municipal Advanced Refunding “Negative Arb”

(Spread in bp Between Bond Buyer Revenue Index and Five Year Treasury)

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Source:  Bond Buyer, Yahoo Finance, DIVER Data Solutions

In the chart above we use the spread between the Bond Buyer 25 Bond Revenue Index and the five-year Treasury as a proxy for Negative Arb.  While the spread has improved from very low levels during 2008, 2009, and 2010 (meaning refundings are more attractive), the chart illustrates that the attractiveness of advance refundings is still less than during the dry period of 2002, 2003, and 2004.

Upcoming NFMA Advanced Seminar to Address Pensions and Other City Issues

In January, the NFMA will be hosting an Advanced Seminar which will focus on America’s Urban Agenda and Its Impact Upon the Municipal Bond Market.

We are excited to moderate a panel on Unfunded Pension Liabilities, with a particular focus on the issue at the City level.  While the State issues have been widely covered, there are City issues, which deserve more attention.  We are lucky to have very knowledgeable speakers on our panel:  The Hon, Chuck Reed, Mayor of San Jose and Richard Ciccarone, President and CEO of Merritt Research Services, LLC.   Both have been on the front lines of addressing challenged City pensions:  Mayor Reed in San Jose and Richard in Chicago.

Additional sessions will focus on other City specific issues:  Urban Economic Revival, Sustainability, Transportation, Affordable Care Act, and the Urban/Suburban Conundrum.

Publishing Schedule

We will not be publishing Commentary next week (12/29). We will resume our regular publishing schedule on January 5 with a review of December DIVER Geo Scores and other topical issues.

Have a great week,


Mike Craft
Managing Director, Credit, Lumesis, Inc.


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