1861 Capital Management
1861 Capital Management and Municipal Bonds
The municipal market is a complex market and requires expertise. It has been said that the Treasury market has the yield curve, the mortgage market adds optionality, the corporate market adds credit, and the municipal market adds politics to all these other considerations. The municipal market is very driven by supply and demand, which can be driven by legislation. Many taxable portfolio managers have lost money “crossing-over” to the municipal market without a thorough understanding of this market. Generally, taxable portfolio managers do not pay attention to taxation in their trading nor to the coupon on their bonds. Understanding the structure (i.e. coupon, maturity, call) is critical to portfolio construction. Municipal bond arbitrage is an investment strategy. Generally speaking it involves a owning a long maturity investment grade municipal bond portfolio that is leveraged at short term tax exempt rates. Most municipal bond arbitrage practitioners offset this "long" “cash and carry” with a hedge or short position where the municipal arbitrage manager enters into a long dated fixed rate interest rate swap (for example LIBOR) and receives floating LIBOR. Municipal arbitrage managers, including managers like 1861 Capital Management, will use different amount of economic leverage and use different yield betas and hedge ratios in their portfolio construction. Most municipal arbitrage managers, including managers like 1861 Capital Management use tender option bond (“TOB”) financing as a means to achieve the economic leverage. Investors in municipal bond arbitrage strategies should understand the different risks associated with the strategy. The risks are significant and include, among many others, impact of using financial leverage, tax reform, cross market risk, basis risk, counter party risk, or any risk associated with the municipal market or financial markets generally which create volatility. This list is by no means conclusive. Investors in municipal arbitrage strategies can lose some or all of their principal. Municipal bond arbitrage is a hedge fund strategy. It should not be compared to owning a long only municipal bond. Investors in municipal bond arbitrage should also consult their tax advisor for any guidance as tax outcomes can differ.
Some key years in our country's development, 1776, 1787, 1861. Capital, in ecomomics, is distinct from natural assets in that it must itself be created by human effort to be a factor in production. That is the essense of capital, as opposed to durable goods, which may be created by man, but are not a factor in production.
In 1861, capital in the U.S. became in short supply, and President Lincoln backed initial income tax to fund the Civil War and the completion of the Capitol Building.
1861 Capital Monthly Supply Note – December 2010
Over December, 30-year Treasury bond rates rose by 23 basis points and 30-year MMD rates rose 40 basis points to 4.68%. Long-term new issue supply was $42 billion, an increase of about 14% from last December. Taxable issuance was about half of overall issuance as issuers rushed to bring Build America Bonds (BABs) to market before year end. BAB issuance was about $117.3 billion in 2010, up from $64.2 billion in 2009.
An extension of the BAB program was not included in the year-end tax agreement, so as of January 1, 2011, there is no more issuance of BABs. Although there is still support and the program may be reinstated in coming months, the impact of the end of the program was felt in December. With no more BABs issued in lieu of tax-exempt munis, the volume of tax-exempt munis in 2011 will likely be sharply higher. A SIFMA survey of opinions on 2011 tax-exempt volume said that participants expected volume to increase about $75 billion from 2010 levels.