High-Quality, Tax-Efficient Fixed Income Management

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SNW delivers high-quality, personalized, tax-efficient fixed income portfolio management through separately managed accounts. Consistency, low volatility, and risk-adjusted outperformance are hallmarks of the SNW approach, as is a commitment to partnership and client service.

Broad Investment Capabilities
SNW offers a full investment-grade fixed income solution that is actively managed and low cost. Impact investment options allow clients to align their missions with their portfolios.

  • Four investment-grade strategies can be personalized to meet tax, volatility, liquidity and impact objectives.
  • Unique ability to account for an individual investor’s state of residence.
  • Focus on generating after-tax income/total returns.
  • Portfolios managed with a goal of low relative volatility and risk-adjusted outperformance.

An Experienced Team
SNW’s veteran team of portfolio managers, analysts and traders operate within a collaborative environment.

  • Seasoned eight-member investment team averaging 16 years of investment experience.
  • Two senior portfolio managers oversee all aspects of investment process, including credit analysis, trading and risk management.
  • Investment culture encourages all team members to contribute investment ideas.

A Focus on Exceptional Client Support
The team’s collaborative investment culture relies on constant communication between team members. This communication focus extends to interactions with advisors.

  • Client service team is available via phone and email for account servicing needs.
  • Quarterly reports keep investors up to date on their portfolios.
  • Portfolio managers publish frequent thought leadership and quarterly market outlooks.

Jobs Report – The Trend Continues

Over the past couple of years, employment data in the U.S., which is reported monthly, has been remarkably consistent. Employers add jobs at a fairly rapid clip, the unemployment rate remains low and wage growth is tepid. The steadiness of the data is consistent with the slow and steady economic recovery that has taken place since the financial crisis. This has allowed the Federal Reserve to be very judicious with their pace of monetary policy tightening, meaning, they can raise rates at a gradual pace without fear of an overheating labor market or overheating inflation. Good for bond investors, good for stock investors, good for everyone.

This story received a jolt in January when wage growth was reported to have risen by 0.3% month/month and 2.9% year/year, the fastest pace since 2009. Investors interpreted this to mean that labor markets were tightening at an accelerating pace, which would inevitably drive inflation higher. Market reaction was volatile, as both bonds and stocks sold-off in anticipation of the Federal Reserve needing to raise rates at a more rapid clip than they, or market participants, were anticipating. The common analogy for this is known as “taking away the punchbowl,” which can portend negative price action for bond investors, for stock investors, for everyone.

Last month’s data, which was released last Friday, should alleviate concern however as the numbers normalized to a more standard pace. Employers added 313k jobs during February, the unemployment rate was reported at 4.2% and wage growth was 0.1% versus January and 2.6% versus a year ago. Stocks rose and bonds fell slightly on the news. We’ll see how the Fed reacts to the report in their upcoming meeting on the 21st. Not only will we hear from newly appointed Fed Chair Jerome Powell in a post-meeting press conference, we will also see projections on the number of rate hikes the Fed anticipates making this year, and even more importantly, next year. So for now, everyone can sit tight, and wait to see not only how the data evolves, but also how the Fed reacts.

Source: Bloomberg

Unintended Consequences – Short Corporate Bank Bonds Modestly Widen

Sometimes it is hard to predict the consequences of your actions. For example, when Thomas Austin of Winchelsea, Australia let loose a couple of dozen imported rabbits on his farm in 1859, no one could foresee they would breed so quickly and cause so much destruction across Australia.

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Unintended consequences also happen in the corporate bond market. Tax law changes can unintentionally lead to wider short-term bank bond spreads! Let’s follow this down the rabbit hole.

In February we saw the corporate market widen by 10 basis points, which we would describe as modest. Short corporate bank paper was impacted slightly more. At one point during the month, 2-year bank paper widened 15 bps. While this was certainly noticeable, in context it was not a large move. The “A” rated corporate index has tightened more than 80 bps since early in 2016.

Thanks to year-end tax reform, corporations who were parking large amounts of cash overseas are starting to bring some of it back. Many corporations, like Apple, Cisco and Google have large overseas cash holdings, some of which is held in corporate bonds. These three large tech companies alone hold over $200 billion in corporate debt, often including high quality, short dated and liquid bank debt. Some money has started to come back, as wider spreads would suggest, but we do not expect a wall of cash or materially wider bank spreads. Plans for cash repatriation are a long-term work in progress and there is no rush to repatriate. The need and timing for cash is very company specific and depends on: their tax situation, the need to repay debt, buyback and dividend policy, as well as the need to fund general corporate purposes.

To be fair, we don’t want to attribute all of the corporate and bank bond widening to tax law changes. We do believe some of the overall widening in the markets should also be attributable to more expensive hedges (as a result of higher short-term interest rates), which can make U.S. corporate bonds less attractive to foreign buyers. Fewer buyers, on the margin, can help push spreads a little wider. 

Unlike rabbits overrunning Australia, this story has a happy ending. Whenever high quality low duration paper widens a few basis points due to temporary technical issues, we become a better buyer. More yield on safe investments is always appreciated, unlike a horde of rabbits.

Sources: Bloomberg, BofAML, The Financial Times

Muni Issuers Look to Gain More Debt Flexibility after Losing the Ability to Issue Advance Refunding Bonds

A significant impact on the municipal bond market from the recently enacted tax overhaul package has been the elimination of tax-exempt advance refundings for issuers of muni bonds. The prohibition against advance refundings has taken away a tool to reduce interest costs for issuers, who are now looking for options to increase their fiscal flexibility. Muni refundings have fallen by over 74% in the two months since the advance refunding prohibition.

Until January 1, issuers were able to take advantage of lower interest rates even though they may have had to wait a number of years until the original bonds could be redeemed. Proceeds from the advance refunding bonds would be deposited into an escrow account, and interest from the invested securities would pay the debt service on the original bonds until the bonds were callable. In contrast, the proceeds from current refunding bonds, which may still be issued on a tax-exempt basis, would be used to redeem the original bonds within 90 days of the issuance of the refunding bonds.

Two prime alternatives to advance refundings are issuing bonds with shorter call dates and issuing variable rate demand obligations (VRDOs) instead of fixed rate bonds. Typically, fixed rate muni bonds are issued with 10-year calls, which stipulate that bonds cannot be refunded in advance of their maturities for the first 10 years of their life. Under the old rules, investors would have call protection for 10 years, but issuers could still take advantage of lower rates by issuing advance refunding bonds. Now, without the advance refunding tool, some issuers are looking to increase their flexibility by reducing the call period from 10 to 5 years.

The state of Wisconsin dipped its toe into the market last week by issuing bonds with 5-year calls. While it appears that Wisconsin has not had to pay a yield premium to gain more refunding flexibility, a bigger test for bonds with shorter calls will happen this week when the State of California is scheduled to issue about $2.1 billion of GO bonds. We expect that the state will market some bonds with 5-year calls.

Representatives of the California State Treasurer’s Office have indicated that they are also reviewing opportunities to issue VRDOs, which currently make up less than 6% of the state’s outstanding GO debt. VRDOs provide issuers with opportunities to take advantage of lower short-term rates and the flexibility to lock into fixed rates at a later date without triggering an advance refunding. There may also be more investor acceptance for VRDOs, as rates are at a high enough level to be attractive, while fixed rate bonds with short calls may face resistance from institutional investors.

Sources:  Bloomberg News, California State Treasurer

Bank Stress Test – Keeping Watch

Maybe it’s just me, but the Winter Olympics seem more interesting this year. Great skiing, hockey and bobsledding, all happening near one of the most dangerous borders in the world. While athletes and spectators are watching the competition, just a few miles away soldiers are keeping watch on over the DMZ.

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Meanwhile, back in the U.S. the Federal Reserve is keeping a close watch on the banking industry, as highlighted in the February 1st release of new and tougher scenarios for the Dodd- Frank Act Stress Test (DFAST). 

The banking industry stress test is perhaps the best piece of regulation that came out of the financial crisis. This test forces all major banks to prove they can withstand a severe recession without their capital falling to dangerously low levels. The goal is to have no more large bank failures - ever. The stress test is highly detailed, rigorously applied and consistent across the industry. And these tests are getting even tougher over time!

DFAST has three scenarios: baseline, adverse and severely adverse. Of course, severely adverse is the most difficult scenario, and it really has some teeth. Broadly, the scenario assumes a major global recession accompanied by consistently high long-term interest rates. That is, in this scenario long-term rates do not fall, but stay the same. As a consequence, losses on fixed income assets are even higher than would be expected in a normal recession. Going deeper, U.S. GDP begins to decline sharply and eventually falls 7½ percent, the unemployment rate increases almost 6 percentage points to 10 percent, equity prices fall 65 percent and are accompanied by a surge in equity market volatility, and real estate prices see large declines with house prices and commercial real estate prices falling 30 percent and 40 percent, respectively. Finally, spreads on investment-grade corporate bonds balloon to 575 bps by the start of 2019. The Fed is looking tougher than soldiers on the DMZ!

It is good to know the Federal Reserve is planning for the worst when it comes to bank safety and soundness. This is one of the reasons we like bank fixed income investments at this time. In our opinion bank bonds are safe, liquid and still relatively cheap due to their abundance - and the Fed is standing watch. If only we could win a few more medals!

Sources: The Federal Reserve, Bloomberg, The Financial Times