ING IM PowerPoint Presentation Template

1
Institutional Buyers Buy-side Perspectives on
the Muni Market
December 4, 2006
National Association of State TreasurersNew
Orleans
Presented by Bob Schonbrunn SVP ING Investment
Management
Manager commentary is for informational purposes
only and should not be considered a
recommendation or advice. This material may not
be reproduced in whole or part without the prior
written permission of ING Investment Management.
www.inginvestment.com
2
Traditional Municipal Bond Investing

• Investment Process
• Duration positioning
• Yield curve positioning
• Sector allocation
• Issue analysis and selection

3
Decision Making Process

• Investment committee
• Analysts input
• Portfolio manager implementation
• Risk management

4
Issue structures that appeal to traditional buyers

• Wide range to accommodate changing investment
  outlook
• Higher yields versus insured
• Special situations or story bonds

5
How states can help traditional buyers

• Sound fiscal policy
• Transparency
• No gimmicks
• Good communication

6
Municipal Bond Arbitrage

• Investment Process
• Arbitrage is complex and uses many different
  strategies
• The most prevalent strategy is to buy long
  term-bonds and create short-term floating rate
  instruments
• Credit risk and duration risk are largely
  eliminated
• Steeper yield curves create higher returns
• Arb buyers look for large generic issues with
  high quality and long durations

7
Why Municipal Bonds are Attractive Arbitrage
Vehicles

• Munis are very high quality
• minimal credit risk
• State G.O.s seen as sovereign debt
• Munis usually have a steeper yield curve than
  taxable issues
• Huge global liquidity seeking higher returns

8
Impact of Arbitrage on the Municipal Bond Market

• Flatter yield curve

Source First Albany
9
Municipal Yields as a percent of Treasury yields

• AAA-rated Municipal General Obligations vs. U.S.
  Treasuries

10
Municipal Yields as a percent of Treasury yields

• AAA-rated Municipal General Obligations vs. U.S.
  Treasuries

11
Impact of Arbitrage on Municipal Bond Market

• Flatter yield curve
• Muni yields as a percentage of taxable yields
  have declined recently
• Arbitrages crowd out traditional buyers in the
  new issue market
• Huge amount of municipal bonds in non-traditional
  hands

12
Actionable Ideas

• Arbs have recognized low default risk in
  municipal bond market.
• Sound financial management by municipalities
• Issuers may engage in dialog with the rating
  agencies to rationalize the rating scale versus
  taxable debt
• Recognition of higher credit levels for munis
  should result in lower costs
• Issuers and traditional investors should try to
  anticipate and take advantage of arbitrage
  activity
• Issuers and investors aware of buy/sell triggers
  for arbs can time entry and exit points to their
  advantage
• Issuers may be able to lower costs by
  circumventing arbs
• If financially feasible issue more floating rate
  directly
• Positive-sloped yield curve means lower cost at
  short-end
• Eliminating arb middleman should allow lower
  costs