03/20/2020

New Podcast: Recent Muni Market Volatility

We sat down with Portfolio Manager, Tony Tanner, CFA®, on March 17th to get his insight on the ongoing volatility in the municipal bond market and how the current conditions compare to prior periods of instability. Tony began his buy-side career managing two flag-ship single-state municipal bond funds in the early 1990s, and he has managed through a variety of volatile municipal bond markets, including the bond bear markets of 1994, 1999, 2008 & 2016. The podcast is linked below, and the full transcript is available here.

Manager Commentary

03/20/2020

Length 20:25

Tony Tanner

Portfolio Manager
Aquila Tax-Free Trust of Arizona

Please carefully read the Fund prospectus here. Before investing in one of the Aquila Group of Funds, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial professional, or by calling 800-437-1020.

Please see the most recent quarter-end performance for the Aquila Tax-Free Trust or Arizona here. Most recent month-to-date performance is on this site. Performance data represents past performance, but does not guarantee future results. Investment return and principal value will fluctuate; shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the data presented. Class A shares have a maximum sales charge of 4.00%; Class A MOP (maximum offering price) returns reflect deduction of the maximum 4.00% sales charge; Class A NAV returns do not reflect deduction of the sales charge and would be lower if that charge were reflected. A full description of share classes may be found in the prospectus.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.

03/18/2020

A Perspective on Recent Muni Market Volatility

by Anthony Tanner, CFA®

The municipal bond market experienced one of its most disruptive and volatile market periods in recent memory during the week of March 9, 2020. After steadily moving higher for past 15 months as the Federal Reserve initiated a new easing policy, municipal bond prices declined sharply last week in response to increased economic disruption brought about by the rapidly evolving coronavirus pandemic.

The volatility in municipal bond prices and municipal bond fund mutual funds last week was indeed both abrupt in its speed and significant in magnitude. However, such municipal bond market behavior has in fact occurred on several occasions in the past thirty years. In the context of these prior periods, the price and trading activity in the municipal market last week reflected the very “normal” manner in which the municipal bond market has behaved in “abnormal times”.

Also in the context of the overall municipal bond market, the intermediate maturity and investment grade mandate, in which all Aquila municipal bond fund portfolios are structured, helped deliver less fluctuation than that of long term bonds last week.

Unusual – But Not Unprecedented

On March 12, 2020, the Net Asset Value of the Aquila Tax-Free Trust of Arizona’s (ATFTA) Class A Share declined 2%. This compared to long term bond funds who suffered Net Asset Value (NAV) declines of as much as 3%, and large actively traded national municipal bond Exchange Traded Funds (ETFs) which dropped 5% that day. This greater degree of downside stability reflected the benefits of both the intermediate mandate and very broadly diversified portfolios that are the foundations of our locally managed municipal bond funds. You may find the Fund’s latest performance here.

This magnitude of one-day price fluctuation was not unprecedented though. On Tuesday April 4, 1994 intermediate and long term municipal bond NAVs also declined 3%-4%. I had the opportunity to experience this market turmoil firsthand while co-managing two investment grade, single-state bond funds with short term and long term maturity mandates at the time. On that day, coming off an extended Easter holiday weekend, the Federal Reserve made a surprise increase in the discount rate as part of a significant monetary tightening they had started at the beginning of 1994.

By the end of that Tuesday, the 10-year US Treasury bond yield increased 39 basis points from 6.75% to 7.14%, and the 30-year US Treasury bond yield spike 32 basis points, from 7.10% – 7.42%. The Bloomberg Barclays AAA 10-year Maturity Index yield rose a more modest 25 basis points. This sudden spike in yields along with very thin trading activity in a volatile market translated into the sharp NAV declines of that day. The Class A Share of ATFTA declined 19 cents that day, fairly commensurate with the unusually large one day declines experienced last week. One difference in these two periods is that last week’s volatility was induced by significant economic stress, rather than Federal Reserve policy and the long term direction of benchmark interest rates. Last week also shared common themes with the height of municipal market volatility that occurred near the end of 2008 during the great recession.

Over a three-week period from the week of November 18th to December 15th in 2008, the NAV of ATFTA declined 4.4% as the shadow of corporate bankruptcies and bailouts weighed on the municipal bond market. Long-term funds suffered even sharper declines of as much 7%. Again, we believe an intermediate maturity focus and portfolio breadth helped to mitigate a good degree of the downside risk of this period.

What was mostly unusual about this period was that US Treasury bond yields moved significantly lower throughout this period as the Federal Reserve aggressively moved to inject liquidity into the market. For example, 10-year US Treasury bond yields declined from 3.77% to 2.51% even as comparable AAA municipal bond yields increased 32 basis points to 4.44%. The polar opposite behavior of these markets was even more pronounced in the long end of the yield curve. Benchmark 30-year US Treasury yield declined from 4.23% to 2.95%, while the Bloomberg Barclays AAA 30-year Maturity Index yield increased 63 basis points to 5.77%.

The Return of Genuine Relative Value

This window of volatility behavior near the end of 2008 was similar to what the muni market experienced last week, as the increase in municipal bond yields were double those of benchmark US Treasury bonds. This resulted in a significant underperformance of the municipal bond market that has left municipal bond yields at compelling valuations which are reminiscent of those in December 2008.

As of this writing, Bloomberg Barclays Fair Value 10-year and 30-year AAA municipal bond index yields equal 210% and 173% of comparable maturity US Treasury bonds. In December 2008, those same yield ratios were 177% and 196% respectively. For real market perspective, look at the yields offered in a $709 million Salt River Power Authority Bond issue that came to market the week of January 12, 2009:

The Search for Value is Not a Predictive Exercise

It is important to put municipal bond price volatility, elevated municipal bond yields, and tax exempt/taxable yield ratios in their proper perspective. In prior thought leadership papers, we have pointed out the importance of components of return in fixed income investing. In particular, it is important to keep in mind that the lion’s share of long run total return in municipal bond investing is derived from the income. The corollary is that over the long run, price changes contribute a small amount towards, and only detract a small amount from, total return.

Total Return Breakdown of the

Bloomberg Barclays Municipal Bond Index Since Inception

Over the very short run (like a very volatile week in March of 2020, or day in April 1994) prices changes can overwhelm income. This is even more true today than in the much higher interest rate landscape of the 1990s and 2000s. Which makes evaluating and staying committed to a well thought out asset allocation plan vital. Doing so enables investors and advisors alike to focus on whether the fixed income tool in an asset allocation plan can provide an attractive level of income after taxes that protects purchasing power, while mitigating a large degree of volatility across the fixed income and equity universe.

Given current stock market volatility and the wild swings in taxable bond prices of the past week, conservative and consistently managed municipal bond portfolios appear to now offer enhanced long run value. Such value is not a guarantee against further fluctuation or price declines, but rather an indicator of the degree to which municipal bonds may be able to assist in the achievement of overall asset allocation objectives.

Over the next several weeks, we look forward to sharing further insights into a few of the market dynamics that are unique to the municipal bond asset class, how they shape municipal bond price fluctuations, and the opportunities they present that a local management perspective can capitalize on for shareholders. Read more “A Perspective on Recent Muni Market Volatility” ›

10/16/2019

Colorado’s November Ballot – School Bonds

by Vasilios Gerasopoulos

On November 5, 2019, Colorado voters will decide on approximately $1.2 billion of K-12 municipal issuance and mill levy overrides in 20 local elections, as well as Proposition CC, a statewide ballot measure that would end the cap on state tax revenue as required by the Taxpayer’s Bill of Rights (TABOR). TABOR is a constitutional limit to the amount of revenue that Colorado and local governments are able to retain and spend or save. Excess revenue collected over the TABOR limit must be refunded to taxpayers unless voters authorize retention of the excess amount.

Historically, the State has experienced difficulty passing funding for K-12 public schools and transportation projects. As a result, the State is requesting voters approve Proposition CC, which permits excess revenue to be distributed to public schools, higher education, roads, bridges and transit beginning in fiscal year 2019-20.This strategy has recently been successful at the local level, with Colorado cities exercising similar strategies to spend TABOR funds. If the measure passes, the increases in funding may benefit our holdings of public school, higher education and transportation bonds. However, TABOR funding is unpredictable and, therefore, difficult to budget. The Colorado Legislative Council Staff projects revenue exceeding the TABOR limit will be $428.5 million in 2019, $264.3 million in 2020 and $142.9 million in 2021.

Unlike at the State level, Colorado voters have historically shown a willingness to approve local bond issues. These measures are used to finance new schools and other capital improvements throughout the state. School district bond issues on the November ballot range in size from approximately $2.5 million to as much as $395 million. Depending upon voter sentiment, this election could potentially provide the Aquila Tax-Free Fund of Colorado with a broad opportunity to invest in a variety of projects as bonds are sold later this year and into 2020.

06/19/2019

Sandy Rufenacht on Money Life with Chuck Jaffe

by Aquila Distributors LLC

On June 6, 2019, Sandy Rufenacht, co-portfolio manager of Aquila Three Peaks High Income Fund and Aquila Three Peaks Opportunity Growth Fund, was interviewed on Money Life by Chuck Jaffe.

Sandy Rufenacht
Co-Portfolio Manager

During their conversation, Sandy touched on the impact politics can have on bond markets particularly during an election cycle, changes in the rate environment, shifting valuations along the credit-quality curve, and much more.

We hope you enjoy the interview.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available from your financial advisor, and when you call 800-437-1020 or visit www.aquilafunds.com.

05/24/2019

Oregon Local Bond Measure Election Analysis

by Aquila Distributors LLC

By Timothy Iltz, Co-Portfolio Manager Aquila Tax-Free Trust of Oregon

Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management

Earlier this week, Oregon residents approved almost $180 million of general obligation bonds, substantially less than the $940 million approved last May. Although results have yet to be certified, and therefore are still preliminary, the bonds approved by this election are in high demand as investors seek high quality tax-exempt investment alternatives. There are four scheduled election dates in Oregon each year: the 2nd Tuesday in March; the 3rd Tuesday in May; the 3rd Tuesday in September; and the 1st Tuesday after the first Monday in November. In November 2008, Oregon voters approved Ballot Measure 56, which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November. As a result, the May election has become an important election to follow for new bond measures.

By election measure, 75% of the bond issues were approved; however, 72% of the total requested par amount was approved by voters. Oregon typically sees more ballot measures during general elections, which are held in November of even-numbered years. Accordingly, the current election falls flat versus the 2018 November general election, which approved a healthy $1.4 billion of new supply.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Election results were lower than last year for several reasons. The primary reason is the large election-dominating measures have already passed. In November, Metro passed its $650 million housing bond issue, Eugene School District passed its $319 million general obligation bond, last May Salem-Keizer School District passed a $619 million bond, Corvallis School District passed a $199 million bond. By comparison, the largest measure presented to voters this week was the $82 million bond for Central Point School District (Jackson County School District No. 6). Furthermore, unlike previous elections the Portland metropolitan area was relatively unrepresented, except for the Lake Oswego parks bond.

However, what this election did see was a variety of measures that are often more difficult to pass, such as the Lake Oswego bonds for parks and recreation. Projects like this are often viewed by voters as less important than schools or essential services, such as water and sewer, and are therefore often rejected by voters in favor of more essential projects. Although Lake Oswego’s bonds are passing, Redmond presented a similar issue to voters, which was only able to capture 45% of votes. Santiam School District has never successfully passed a general obligation bond measure and last asked voters for a bond in 2008 when it requested $14.5 million, which voters rejected by 61%. This election saw Santiam School District passing by 52%.

Furthermore, a significant marketing point for several of the schools issues was the Oregon School Capital Improvement Matching program, which is a grant program offered by the Oregon Department of Education, supporting communities that pass general obligation bonds for school improvements. An example from this election is Elkton School District, which asked voters to approve a $3 million bond, which if approved, will be matched by an additional $3 million from the State. Measures such as this present a good value to property taxpayers, since half of the project is funded by the matching grant. Elkton’s measure is currently passing, with 62% of votes approving the measure.

Overall, this election will provide a significant source of additional supply to the bond market and many of these issues may become portfolio holdings. The year has been off to a slow start, and while this election will help alleviate some of the supply concerns, we expect that issuance will be lower this year than last year.

05/22/2019

Municipal Market Complexity and New Issue Investing

by Aquila Distributors LLC

One of the challenges municipal bond investors face when navigating the municipal bond market on their own, is accessing bonds in the new issue market. The advent of retail order periods for some larger issues has improved retail access. However, both the inherent structure of new municipal bond issues, and the origination process itself, create challenges for retail investors hoping to place small orders for new issues.

Compared to new issues in the corporate bond market, new issues in the municipal bond market are much smaller, and the quantities of bonds available in each maturity can be very limited. This is because municipal bond issues are more akin to a long-term “loan” with a mortgage amortization structure. Each maturity in a municipal bond issue, in essence, is similar to the principal portion of an annual mortgage payment. Much like a loan, the annual debt service (principal and interest payments) is designed to be somewhat consistent over time, as with a home loan or car loan. The result is that municipal bond issues are comprised primarily of a series of consecutive “serial” maturities, in addition to, potentially 1 to 3 longer “term” maturities.
Read more “Municipal Market Complexity and New Issue Investing” ›

03/21/2019

Understanding Interest Rate Risk in Bond Funds

by Aquila Distributors LLC

After almost a decade of extremely accommodative monetary policy from the Federal Reserve, with a zero-bound Fed Funds target rate, the Fed began increasing rates in December of 2015, and since then, rates have increased 10 times by a total of 225 basis points. Fed Chair Powell indicated after the March Federal Open Market Committee meeting that we will not see additional rate increases in 2019, but understanding interest rate risk remains an important aspect of investing in bond funds.

A common misconception of investing in bond funds is that when interest rates rise, bonds fall out of favor. While the inverse relationship between interest rates and bond prices does exist, there are many factors to consider when making a decision about current and future bond holdings – and whether to hold individual bonds or invest in a bond mutual fund.

Duration

A bond fund’s duration, specifically modified duration, is an indicator of how sensitive the net asset value is to a change in interest rates. Duration provides investors with another aspect of comparison between bonds with different maturities and coupon rates. Simply stated, for every 1% change in interest rates, positive or negative, the price of a bond fund will inversely decline or increase by its modified duration. For example, if a fund’s modified duration is 5 years, the net asset value could be expected to rise 5% for every 1% decline in interest rates, and fall by 5% for every 1% increase in interest rates. Bond funds with longer average maturities and lower average coupons have a longer duration, and therefore generally experience a higher degree of price fluctuation, while bond funds with shorter average maturities and higher average coupons have a shorter duration and generally experience a lesser degree of price fluctuation.

Price Returns and Total Returns

The good news is that performance of bond funds is not solely tied to the incremental changes in interest rates. Bond fund total returns are generated from two sources; interest payments on bonds (paid as fund distributions) and changes in bond prices. While interest rates rise, active portfolio managers have opportunities to purchase bonds at higher yields, and over time, a portfolio’s income may off-set a decline in the value of individual bonds, mitigating the impact of that decline on a Fund’s total return.

Since its inception in 1980, approximately 98.7% of the Bloomberg Barclays Municipal Bond Index total return has been generated by income.

Active Bond Fund Management

Periods of rising rates can be challenging for investors who purchase individual bonds or funds aligned with a bond index. Active bond fund managers have the ability to take strategic steps in an effort to mitigate, to some degree, the impact of market volatility. With the ability to actively manage fund holdings over time, these managers may implement a number of strategies in order to adjust fund holdings based on market expectations. Fund holdings may be altered by quality rating in an effort to manage credit risk – a risk which may increase along with rising rates. Holdings may also be altered by maturity date and coupon, thereby adjusting portfolio duration, or the sensitivity of the portfolio to movements in rates. Reducing portfolio duration would reduce sensitivity to a change in rates.
Read more “Understanding Interest Rate Risk in Bond Funds” ›

06/14/2017

Active and Passive Management: A Blended Approach

by Aquila Distributors LLC

Building Blocks A heightened focus regarding fees and investor protection has generated an increased number of headlines around the decades-old debate between active and passive fund management. Historically, investors have viewed the two theories of management as one-verses-the-other, and many investors have been known to fluctuate between the two based on which style is in favor; in recent years, the trend has tilted toward passive management. Lower volatility, monetary policy and economic recovery have made it more difficult for active managers to consistently beat their benchmarks. However, history tells us that when passive management becomes oversaturated, the pendulum often swings back toward active. While we don’t anticipate a major shift away from passive, there are attractive aspects of active management that should be considered – and we believe that a combination of both styles creates a strong and timeless portfolio.

The shift to passive fund management

Investing in passive mutual funds is unquestionably a way to reduce investment fees that can drag on fund performance while maintaining exposure to a wide variety of investment styles. Fee-conscious investors, Financial Advisors and Broker Dealers are all embracing the idea of balancing less active portfolio management and research against the potential of earning benchmark returns from simply tracking the overall market.

Passive funds are particularly attractive in areas where markets are extremely efficient, where information is readily available, and where the ability to uncover opportunities to beat the market is rare. Take the U.S. large-capitalization segment for example; only 5% of portfolio managers in that segment who beat their index for three consecutive years also beat their index the following three years, according to S&P Dow Jones Indices*. Passive funds can also be an attractive tax-efficient investment; particularly those that track more narrowly focused benchmarks.

Overall, the mutual fund industry has benefited from the increase in the number of passive funds. Low-cost providers have driven down the cost of active funds, while sharpening the focus of active managers on performance and fund expenses.

Do investors still benefit from active management?

We think so. While passive funds may be attractive from a fee and tax-efficient standpoint, they do have drawbacks. Markets have inefficiencies, which passive managers cannot exploit. Managers following an index lack the ability to make adjustments based on market conditions and research discoveries. For instance, active managers can judge when to raise cash levels, in order to reduce potential downside exposure, when markets react to external events. Active managers also have the ability to weight holdings according to where they see value, while most passive approaches are weighted to align with the chosen index, for instance by market capitalization – giving more exposure to well-established companies that may have less growth potential.

06/24/2016

Brexit – Day One

by Aquila Distributors LLC

Global financial markets were turbulent during the first day of trading following the United Kingdom vote to leave the European Union.

Amid the market uncertainty, investors moved assets to the safety of U.S. government bonds, pushing prices higher and yields lower. Yield on the 10-year Treasury note dropped to an intra-day low of 1.419% (near its record low yield of 1.404%), but by the end of the day, the yield on the 10-year Treasury was 1.575%; down from 1.745% on the previous day.

Thomson Reuters Municipal Market Data reported that municipal bond yields reached all-time lows, with the benchmark 30-year AAA dropping to 2.08%. Total return on the Barclays 10-Year Municipal Index was 0.82% for June 24^th with a yield to worst of 1.57% versus 1.70% on June 23^rd.

During periods of market turbulence, a ‘flight to quality’ on the part of investors has resulted in buying US Treasuries and, to a lesser degree, municipal bonds. That demand typically drives prices higher and yields lower. Although the Federal Reserve had previously indicated that another rate increase was possible in 2016, it now appears that any increase could be postponed until late 2016 or sometime in 2017. Read more “Brexit – Day One” ›

08/04/2015

Aquila Municipal Bond Funds Continue to Avoid Puerto Rico Debt

by Aquila Distributors LLC

Each of the municipal bond funds offered in the Aquila Group of Funds adheres to an investment strategy focused on investment grade bonds as a means of managing credit risk, and an intermediate average portfolio maturity as a means of managing interest rate risk. In keeping with our emphasis on high-quality holdings, the seven state-specific municipal bond funds offered by Aquila have no Puerto Rico holdings, whereas Morningstar has reported that over 20% of US Bond Funds had roughly an $11.3 billion total exposure to Puerto Rico debt as of 3/31/15; down from two-thirds of funds having exposure a year ago.

On Monday June 29th, Puerto Rico’s Governor Alejandro Garcia Padilla announced that the territory’s approximately $73 billion in municipal debt is unpayable and called for concessions from creditors. Moody’s downgraded Puerto Rico’s general obligation debt into junk territory with a negative outlook on July 1, 2015, which was the seventh downgrade in five years.

On the Aquila Group of Funds website, you will find information regarding the investment strategies and full portfolio holdings of each state-specific municipal bond fund. The investment objectives, risks, charges, expenses, and other information will be found in the Fund prospectus. Information on the Fund holdings will be found in the Fact Sheet, Annual and Semi-Annual reports, and the Portfolio Holdings report. We encourage you to review this information, and to visit the web site frequently for updates on each fund, and our perspectives on the markets.

Aquila Group of Funds

Market & economic outlook

New Podcast: Recent Muni Market Volatility

Manager Commentary

Tony Tanner

A Perspective on Recent Muni Market Volatility

Colorado’s November Ballot – School Bonds

Sandy Rufenacht on Money Life with Chuck Jaffe

Oregon Local Bond Measure Election Analysis

By Timothy Iltz, Co-Portfolio Manager Aquila Tax-Free Trust of Oregon

Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management

Municipal Market Complexity and New Issue Investing

Understanding Interest Rate Risk in Bond Funds

Active and Passive Management: A Blended Approach

Brexit – Day One

Aquila Municipal Bond Funds Continue to Avoid Puerto Rico Debt

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