Economic & Market Commentary

08.30.2017

Hurricane Harvey

Appleton Partners would like to express our sincere sympathy and ongoing concern for those affected by Hurricane Harvey.

While the full toll of Hurricane Harvey and the total assessment of loss, either in personal or physical terms, have not been fully realized, we would like to take this opportunity to address the potential impact on our clients’ municipal bond holdings in southeast Texas. Over the course of various natural disasters, there is a strong historical precedent that the value of municipal bond holdings has remained unimpaired. Debt service payments, typically through electronic processing, have continued to be paid even during times when operations are disrupted due to damage to buildings and infrastructure. Honoring debt obligations remains a top priority for governmental entities, as efficient access to the capital markets remains a critical element to begin or proceed through the rebuilding process. What we could see, however, is an immediate disruption in operations; think of, for example, a flooded toll road or an emergency room of a local hospital that has sustained severe damage. Nonetheless, many municipal entities have various liquidity reserves at their disposal to handle fluctuations in cash flow or even a short‐term interruption in operations. Local governments would certainly see an increase in costs related to sheltering evacuees, rescue efforts, and immediate clean‐up demands; but, we typically see states stepping in during such catastrophic events with financial aid and assistance until federal funds become available. Governmental entities already exhibiting financial strain or stressed operations before the storm could be disproportionately affected. We would expect that municipal entities with sufficient resources, solid management and access to capital will adequately manage their finances throughout the clean‐up and rebuilding of the Gulf Coast region of Texas. Following these natural occurrences, and especially in federally designated disaster areas, we have historically observed that the insurance proceeds, federal aid, state financial support, and private contributions have ultimately provided a boost to economic activity in the impacted local and regional areas due to the rebuilding efforts. Issuers within the municipal bond market have a long established track record of addressing and recovering from natural disasters with debt service and access to capital remaining a priority. We remain comfortable at this time with our credit exposure in the areas impacted by the storm. As part of our assessment of credit worthiness, we evaluate an entity’s management experience and practices, financial resources, and flexibility. We maintain diversified portfolios of municipal bonds to minimize the impact of any one significant event. We believe our credit evaluation and investments are with long‐standing, financially strong, and viable entities that have the necessary tools and resources to manage through the unexpected. We are continuing to watch events as they unfold and will assess any further impact the storm and subsequent recovery may have on credits held at Appleton. We will also take any necessary action to reduce exposures if we feel that it is warranted.

 

This commentary reflects the opinions of Appleton Partners based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.  While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.  Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients.  The reader should not assume that investments in the securities identified and discussed are, were or will be profitable.  Any securities identified were selected for illustrative purposes only, as a vehicle for demonstrating investment analysis and decision making.
"One of the unexpected challenges of managing fixed income portfolios is how much of the capital markets have an equity bias. From regulatory guidance to risk measurement conventions, much of the framework of the markets we trade in appears to have been written primarily with equities in mind..."
“This summer we started suggesting investors consider rethinking their bond portfolio duration. After abrupt selling pressure subsequently pushed longer yields up another 70 bps at the end of Q3 and into early October, more support for our view appears to have developed. If the argument was strong then, it is even more compelling now, with bond yields higher than they have been in nearly 20 years.”