Oregon Local Bond Measure Election Analysis


In the May 2020 election, Oregon residents approved almost $340 million of general obligation bonds, substantially more than the $180 million approved in May 2019, Although results have yet to be certified, and therefore 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 second Tuesday in March, the third Tuesday in May, the third Tuesday in September, and the 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 In November 2008, Oregon voters approved Ballot Measure 56, which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November.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 64% of the bond issues were approved; however, 75% 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 2019 November general election, which approved a healthy $820 million of new supply.

Read more “Oregon Local Bond Measure Election Analysis”


We recognize recently retired Trustee, B. J. Kobayashi


B. J. Kobayashi retired from the board of Hawaiian Tax-Free Trust on March 31, 2020. He served as a member of the Aquila Group of Funds Compliance, Risk and Insurance Oversight Committee through December 31, 2019 and formerly served as Trustee of Pacific Capital Funds of Cash Assets Trust (three money-market funds in the Aquila Group of Funds) from 2009-2012. His fellow Trustees, the Aquila Group of Funds and the staff of Aquila Investment Management LLC have benefited greatly from his personal integrity, considerable experience and valuable business insight, and we recognize and appreciate Mr. Kobayashi’s judgment, perseverance and skill throughout his service as an independent Trustee.

On behalf of Aquila Group of Funds, we express our sincere appreciation and gratitude for Mr. Kobayashi’s contributions and for his dedication to the interests of the Trust’s shareholders.


Chris Johns Covers the Current Municipal Bond Market in Asset TV Masterclass


Chris Johns, portfolio manager of Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon, was a panelist in the May 2020 Asset TV Municipal Bond Masterclass. The discussion covered how the coronavirus pandemic, historic volatility and the Fed’s response is creating a unique market environment for municipal bonds. The panelists examined the impact on local and state issuers, different municipal sectors and credit strength.


Chris Johns is Senior Vice President, Managing Director and Portfolio Manager with Davidson Fixed Income Management, sub-adviser to Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon. Joining Mr. Johns on the panel were JR Reiger, Owner of the Reiger Report, and Grant Dewey, Head of Municipal Capital Markets at Build America Mutual.

The full program linked above provides CE Credit. We hope you find the program informative.

Shares of the Funds may only be sold by offering the Funds’ Prospectus. 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 on this site, from your financial adviser, and when you call 800-437-1020.


Aquila Tax-Free Trust of Oregon Special Shareholder Meeting to be held Virtually


In light of public health concerns regarding the ongoing COVID-19 pandemic, Aquila Tax-Free Trust of Oregon announced on April 24, 2020 that the Fund’s Special Meeting of Shareholders, to be held on May 29, 2020, will be held as a virtual meeting. Shareholders will not be able to attend the meeting in person. This change has been made out of an abundance of caution and is intended to support the health and well-being of shareholders. The March 2, 2020 record date for determining shareholders entitled to vote at the meeting remains unchanged. For more information, please review the Press Release and Proxy, which is available on this website.


S&P Considers Kentucky Adequately Positioned for COVID-19 Pressures


Standard and Poor’s Global Ratings recently announced they consider the state of Kentucky “adequately positioned” to handle economic pressures brought on by the COVID-19 pandemic.

In an effort to effectively address the state’s rapidly changing needs, the Kentucky Legislature, which normally releases a biennial budget, passed House Bill 352 on April 15th, adopting an $11.4 billion one-year executive branch budget. The fiscal 2021 budget reduced the revenue forecast by $130 million, but S&P cited that they firmly believe Kentucky has sufficient near term liquidity to manage pressures brought on by economic hardships related to the pandemic. The bill also fully funds the teachers and state employees’ pension plans. Fiscal year 2021 will mark the second year in a row that Kentucky has made full contributions to those plans.

If excessive pressure does weigh on the state’s finances due to the current crisis, Kentucky also has the ability to issue Tax and Revenue Anticipation Notes (TRANs) amounting to 75% of estimated revenues anticipated throughout the year.

The recently passed Coronavirus Aid, Relief and Economic Security Act (CARES) created a Coronavirus Relief Fund for state and local governments which is expected to allocate $1.732 billion to Kentucky. Of that amount, $1.6 billion will go to the state, and $134 million will go to the city of Louisville and Jefferson County, the only local government under the law to quality for relief based on the number of residents. Kentucky will also receive approximately $410 million through CARES’ Education Stabilization Fund, which will fund K – 12 education and colleges and universities.

At Aquila Group of Funds, we have been monitoring Kentucky’s economic and credit strength since 1987. We have been pleasantly surprised recently by the resilience of sectors feeling the most stress. For example, the Louisville Jefferson County Airports have over $105 million of unencumbered investments in government agencies, and their annual budget is $75 million. We expect they will be able to withstand a fairly long reduction in revenue. We are also watching private colleges, and believe that they can handle the financial pressure due to their healthy endowments. We believe, through our ongoing analysis, that the state is well positioned to weather this storm with the recently passed budget and emergency government funding.

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 advisor, or by calling 800-437-1020.


Municipal Bond Fund Shareholder Meeting Updates


Aquila Group of Funds has been hosting regular shareholder meetings for our seven municipal bond funds since each Fund’s inception. In light of the CDC’s advice to limit group gatherings to less than 50 people for the next 8 weeks, we are canceling our spring meetings planned for Aquila Churchill Tax-Free Fund of Kentucky, Aquila Narragansett Tax-Free Income Fund, Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon. Thank you for understanding while we navigate these difficult and changing impacts of COVID-19.


Municipals Versus Treasuries – A tale of two Cities


The recent price changes in the municipal bond market have potentially created an intriguing opportunity for investors; with municipal bonds selling at relatively enticing yields, even without considering the tax benefits. However, this market is likely to be short lived as investor behavior is stabilizing. In situations of this magnitude, credit research becomes more important than ever and as a result our Portfolio Managers continue to maintain close relationships with bond issuers.

Although municipal bonds tend to be more resilient to economic downturns due to their revenue sources, we consistently monitor portfolio holdings to evaluate their ability to withstand the potential for economic slowdown, and we believe that our portfolios have weathered the most recent market conditions just as we expected. Over the past few weeks, the municipal bond market has experienced a significant sell-off in state and local government debt, despite a climb in global bond prices, as investors struggled to come to terms with the volatile capital markets amidst the uncertainty of the COVID-19 pandemic.

The weakness in the municipal market was amplified by the strength in the Treasury market, resulting in attractive relative yields for municipal bonds. This dislocation is most apparent at the short-end of the yield curve, where 1-year municipal bonds are changing hands at 519% of the yield on Treasuries. This dislocation between municipal bonds and treasuries will not last forever (chart as of 3/20/20).

The strength in the Treasury market has largely been driven by the Fed which has reactivated monetary policies from the 2008 financial crisis in support of our weakening capital markets. The Federal Reserve has stated its intention to buy Treasury securities and agency mortgage-backed securities in “the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” The Fed initially announced its intention to purchase at least $700 billion in asset purchases, of which approximately half of the $500 billion allotment for Treasury purchases was consumed in the first week. It is important to note, that as of the date of this writing, there has yet to be government stimulus in the municipal bond market. On March 24, 2020 the Fed announced support to municipalities through expansion of the Money Market Mutual Fund Liquidity Facility to include variable rate demand notes (VRDNs) and bank CDs, with high-quality tax-exempt commercial paper now eligible for the Fed’s commercial paper facility. However, no other monetary stimulus has been extended to the muni market, which has resulted in the extreme differential of yields. In addition, the Fed will be assuming the role of a commercial bank with the introduction of a Main Street Business Lending Program for small and medium-sized businesses. Collectively, the actions by the Fed reinforce its “whatever it takes” approach and demonstrate broad based support of the capital markets.

Investors have inquired about the impact of the virus on airports, convention centers, hospitals and transit systems. While we agree that there is additional risk to many of the transit and hospitality related credits, our credit research is shifting toward the increasing reality of economic downturn and recession as a credit driver. Our concern is more for an increase in rating downgrades rather than defaults. There are certain credits and sectors, such as higher education and healthcare, where we expect to see limited distress. Furthermore, we expect to see weaker pension funding as pension plans struggle with return assumptions.

Aquila Group of Funds’ seven single-state municipal bond funds are structured defensively to withstand periods of uncertainty with a focus on high-quality holdings and limited duration risk. We continue to see the municipal bond asset class as a viable consideration for investors seeking high-quality, tax-exempt income.


The percentage of portfolio holdings rated AA or higher includes pre-refunded bonds. Fund Characteristics are as of 2/28/20.

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 advisor, or by calling 800-437-1020.

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.

Yield refers to the earnings generated and realized on an investment over a specific period of time. Yield is expressed as a percentage based on the invested amount, current market value, or face value of the security, and includes the interest earned or dividends received from holding a particular security.

Yield ratio represents the comparison of the expected yield of one bond to the expected yield of another. A yield ratio is important when deciding whether to invest in one bond or another. Generally, the higher yield is considered better.

Effective duration both measure the value of a security in response to a change in interest rates, and also takes into account the effect of embedded options.

Independent rating services (such as Standard & Poor’s, Moody’s and Fitch) assign ratings, which generally range from AAA (highest) to D (lowest), to indicate the credit worthiness of the underlying bonds in the portfolio. Where the independent rating services differ in the rating they assign to an issue, or do not provide a rating for an issue, the highest available rating is used in calculating allocations by rating. Pre-refunded/Escrowed bonds are issued for the purpose of retiring or redeeming an outstanding bond issue at a specified call date. Until the call date, the proceeds from the bond issuance are typically placed in a trust and invested in US Treasury bonds or state and local government securities. Non-rated bonds are holdings that have not been rated by a nationally recognized statistical rating organization.


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

Aquila Funds Podcast

Length 20:25

Share | Download | Transcript
Aquila Funds

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.


A Perspective on Recent Muni Market Volatility


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”


Aquila Group of Funds Remains Fully Operational


As the United States responds to the unprecedented COVID-19 outbreak, we want to assure you that Aquila Group of Funds is fully operational and committed to providing the exceptional customer service for which we are known. Following guidance from the Center for Disease Control and Prevention (CDC), we executed a remote working policy for all employees beginning March 16, 2020.

In addition to closely monitoring the latest developments, our leadership team is in continuous contact with our business partners, transfer agent, Fund advisors and Fund sub-advisors to ensure we have complete information and the knowledge needed to make effective decisions as we respond to the current threat. The safety and well-being of our employees, our shareholders and the financial professionals who depend on us are our main concern at this time, and we sincerely hope that everyone remains healthy as we all work to mitigate the spread of COVID-19.