- Interest rates rose in April for both taxable and tax-exempt bonds, with tax-exempt municipal bonds rising an average of 11 basis points compared to a 13 basis point rise for taxable U.S. Treasuries. - While rates have increased this year, municipal bonds remain attractive compared to more volatile U.S. Treasuries and continue to offer yields above 85% of Treasuries on a 10, 20, and 30 year basis. - Refundings have driven strong municipal bond issuance in 2015, with over $144 billion issued through April, a 58% increase over the same period last year, though bond fund outflows in mid-April weakened demand.

1. In this month’s issue, we discuss the following headlines:
 Interest rates are rising, although still favorable on a year-over-year basis.
 Volatility in U.S. Treasuries continue to make municipals attractive to investors.
 Refundings continue to come to market, despite increased levels of negative arbitrage.
 Large issues keeping coupons in the 5 – 5.25% range.
Interest Rates Are Rising; U.S. Treasuries Are More
Volatile Than Municipals
Both taxable and tax-exempt interest rates increased
throughout April, most significantly during the final week
of the month. Taxable U.S. Treasuries (including the 10, 20
and 30 year) rose an average of 13 basis points (0.13%).
The tax-exempt Municipal Market Data (“MMD”) scale rose
an average of 11 basis points (0.11%). As shown in Exhibit
1 to the right, the majority of movement occurred in the
mid- to long-end of the yield curve.
Exhibit 2 compares changes in select MMD and U.S.
Treasuries points over the past 12 months. The 5-year
MMD has remained fairly flat overall. The 10, 20 and 30
year MMD rates have increased since the beginning of the
year, but are down on a year-over-year basis. U.S.
Treasuries, however, have experienced much more
significant movement. The 5 and 10 year U.S. Treasury
rates have both declined since the beginning of the year.
On a year-over-year basis, however, U.S. Treasury rates
have plummeted – nearly doubling the decline versus the
MMD.
This rate see-saw can primarily be attributed to an often
mixed bag of economic numbers and the Fed’s statement
signaling that any rate increase will occur no earlier than
September. Baird Chief Investment Strategist Bruce Bittles
noted, “while the Fed may be looking for an opportunity to
raise rates (September now seems like the earliest they
could move), we are not sure that the incoming economic
data or the global macro backdrop will support such a
move. With downward pressure on inflation being seen
around the world, the argument for pre-emptive action
from the Fed is weakened.”
As we are now into May, will we see rates decline –
continuing the see-saw effect? While this may seem a
fairly remote possibility (as of this publication date), with
the exception of 2013, the average MMD has generally
declined each year through April and May (see Exhibit 3).
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Yield(%)
Exhibit 1. The tax-exemptyield curve increased by an
average of0.11% during thelast week ofApril
4/27/2015
4/30/2015
(80)
(60)
(40)
(20)
0
20
40
MMD TSY MMD TSY MMD TSY MMD TSY
5 YR 10 YR 20 YR 30 YR
BasisPoints
Exhibit 2. Yieldcurvechangefrom 4/30/15
(in basis points)
1-Apr-15 2-Jan-15 30-Apr-14
(50)
(40)
(30)
(20)
(10)
-
10
20
2010 2011 2012 2013 2014
BasisPoints
Exhibit 3. April to May AverageMMDMovement
(in basis points)
5 10 20 30
Monthly Municipal Market Update
Robert W. Baird & Co. Public Finance
May 2015
MMD and U.S. Treasury rates have increased in2015, but stillremain low compared to 2014
levels. U.S. Treasuries, however, won the“hardest hit” award, plummeting by up to 73 basis
points (0.73%) versus April 2014 levels.
For each maturity from 2024 – 2045, MMD
yields rose between 12 and 15 basis points
(0.12 – 0.15%) – a substantial increase in only
a few short days.

2. Municipal Bonds Remain An Attractive Investment
As discussed earlier and as illustrated in Exhibits 4 and 5, volatile is the best way to describe long-term rates over the past 16
months. Both MMD and U.S. Treasury rates have experienced major swings, particularly at the long-end of the yield curve. The
low to high range for select MMD points are quite significant:
 10-year MMD: 1.72% low; 2.79% high – a 107 basis point swing
 20-year MMD: 2.35% low; 3.89% high – a 154 basis point swing
 30-year MMD: 2.50% low; 4.20% high – a 170 basis point swing
U.S. Treasuries experienced similar swings.
The percentage of municipalsto U.S. Treasuries has remained above 85% for the 10,20 and 30 year maturities, making municipals
an attractive investment due to their tax-free status (see Exhibits 6 and 7). Additionally, with higher tax rates on investment
income in effect as of last year, the 85% bar typically used as a “break-even” may need to be lower, which will keep municipals in
demand by investors.
Refundings Drive Issuance to Over $144 Billion; Up 58%
Year-To-Date
Supply remained strong in April with issuance reaching $37.8
billion, the highest April issuance since 2008. As in prior
months, refundings remain the driving force of debt issuance,
comprising over 70% of year-to-date volume according to
Ipreo MuniAnalytics. Demand, however, has been pressured
(see Exhibit 8), with municipal bond fund outflows
interrupting 38 consecutive weeks of inflows on the weeks of
April 8th and the 15th. This was not surprising, however, due
to the April 15th tax deadline and low bond redemptions
($12.8 billion estimate vs. $23.7 billion monthly average),
ultimately resulting in fewer investors in the market. Looking
ahead, municipal bonds are entering one of if not their
strongest seasons. The summer months have traditionally
seen both significant issuance volume and available cash to
invest given high levels of bond redemptions (an estimated
$60 billion in May and June) and a slowdown in the equities
market.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
MMDYield(%)
Exhibit 4. MMD rates (high and lows)
(2014 -April 30, 2015)
Current AVG
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1 YR 2 YR 3 YR 5 YR 7 YR 10 YR 20 YR 30 YR
U.S.TreasuryYield(%)
Exhibit 5. U.S. Treasury rates(high and lows)
(2014 -April 30, 2015)
Current AVG
April 30th
Ratio, 103%
10 YR AVG,
93%
60%
80%
100%
120%
140%
160%
180%
200%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Exhibit 6. 10 YR muni toU.S. Treasury ratio
(2006 -April 30, 2015)
60%
70%
80%
90%
100%
110%
120%
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
Exhibit 7. Muni to U.S. Treasury ratios
(2014 - April 30, 2015)
5 YR 10 YR
20 YR 30 YR
-5
0
5
10
15
20
25
30
35
40
45
$Billions
Exhibit 8. Muni issuancevs. muni bond flows
Issuance
Bond Flows
Demand weakened in April as supply
continued to hit year over year highs.

3. Advance Refundings and Their Escrows
As noted earlier, issuers in 2015 have been taking advantage
of favorable interest rates and undertaken current and/or
advance refundings of existing debt. Unlike prior years,
advance refundings comprise a significant percentage of
refundings year-to-date: $48 billion – just $15 million shy of
the total advance refundings completed in all of 2014 and
greater than 2010 and 2011 year-end volume according to
Ipreo MuniAnalytics (see Exhibit 9).
One factor that affects advance refundings is negative
arbitrage, the different between the maximum allowable
yield of the investments in the escrow (the arbitrage yield)
and the actual yield of those investments. On one hand, low
interest rates are a positive for issuers looking to refund
existing debt; on the other hand, low interest rates also hurt
advance refunding escrows.
In Exhibit 10 to the right, we have compared the difference
between The Bond Buyer’s Revenue Bond Index (as proxy for
the arbitrage yield) to the 5-year U.S. Treasury (as proxy for
the escrow investment) from 1995 to the present. As the
difference approaches zero, negative arbitrage is minimized
and advance refundings are more attractive.
As the graph indicates, although negative arbitrage is well off
lows during the 2009-era financial crisis, it is still far worse
than before the crisis (i.e., from 1995 – 2007). That said,
despite savings lost to negative arbitrage, issuers still choose
to undertake advance refundings and lock in available debt
service savings.
Large issues keeping coupons in the 5 – 5.25% range
Large issues made up over 20% of overall municipal issuance
in the first four months of 2015: six issues each over $1
billion and 28 over $500 million. The graph in Exhibit 11
illustrates the size of municipal transactions year-to-date
according to Ipreo MuniAnalytics.
Sizeable financings tend to attract institutional buyers, who
demand higher coupons, particularly as protection against a
future higher interest rate environment. Heavy issuance in
recent months has also left deals competing for investors’
attention. Given these factors, 60% of new issue tax-exempt
bonds year-to-date have carried 5 – 5.25% coupons.
Final Thoughts
As mentioned earlier, municipal bonds are entering their strongest season. They are a more favorable asset-class this
year versus previous years as positive economic trends, increasing tax revenues and an improving housing market
enhance municipal bonds’ credit quality (i.e., making them a “lower risk” investment). This favorability, combined with
the weakness and volatility of the U.S. Treasury market, has kept demand high for municipals – at least for now.
COLUMBUS,
OHIO
614.629.6950
DENVER,
COLORADO
303.270.6330
HOUSTON,
TEXAS
832.871.5291
LANSING,
MICHIGAN
517.371.2483
MILWAUKEE,
WISCONSIN
414.765.3827
MAHTOMEDI,
MINNESOTA
612.499.3066
NAPERVILLE,
ILLINOIS
630.778.9100
PHILADELPHIA,
PENNSYLVANIA
610.594.7080
ST. CHARLES,
ILLINOIS
630.584.4994
TRAVERSE CITY,
MICHIGAN
800.793.6379
WINSTON-SALEM,
NORTH CAROLINA
336.631.5835
Baird Public Finance
$36 $30
$84
$58 $63
$48
$99
$73
$98
$76
$79
$30
$14
$17
$35
$23
$41
$19
0
50
100
150
200
250
2010 2011 2012 2013 2014 As of
4/30/2015
$Billions
Exhibit 9. Advance refundings have made up nearly
50% of all refundings priced in 2015
AR Volume CR Volume AR/CR Volume
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Exhibit 10. 5 YR U.S. Treasury spread to
Bond Buyer 25 Bond RevenueIndex
Advance
Refundings MORE
attractive
6
28
286
315
1,095
2,273
Greater than $1 Billion
Less than or equal to $1 Billion;
Greater than $500 Million
Less than or equal to $500 Million;
Greater than $100 Million
Less than or equal to $100 Million;
Greater than $50 Million
Less than or equal to $50 Million;
Greater than $10 Million
Less than or equal to $10 Million
Exhibit 11. 2015 Bond issuance breakdown
by number of issues
Advance
Refundings LESS
attractive

4. SOURCES: Department ofUS Treasury Website; Thomson Reuters MMD; theBond Buyer; Baird Fixed Income Commentary (Tom Wammack); US Fixed Income
Markets Weekly,JP Morgan; Baird Weekly MarketNotes (BruceBittles,ChiefInvestment Strategist), BairdMunicipal Bond Market Weekly (David Violette,Fixed
Income Analyst); “Treasury SLGS Data Illustrates Shift inMarketComposition;” (DIVER, April20, 2015); IpreoMuniAnalytics
Note: Bond Volumeexcludes short-term notes andprivateplacements.
IMPORTANT DISCLOSURES
Baird may fromtimeto timehave a proprietary positionin the debtobligations oftheissuers mentioned in thereport. This report is for information purposes only
and in no eventshould itbe construed as a solicitationor offerto purchaseor sell a security. Theinformation presented herein is taken from sources believed to be
reliable, butwe donotguaranteetheaccuracy orcompleteness. Any issue namedor rates mentionedareused for illustrativepurposes only and may not represent
specificfeatures or securities availableata giventime.The valueofand incomefrom investments may vary becauseofchanges in interest rates, foreign exchange
rates, securities prices, market indexes, operational or financial conditions ofthe issuers, or other factors. Past performa nce is not a guarantee on future
performance. Preliminary OfficialStatements, Final Official Statements,or Prospectuses for new issues ifmentioned herein are available upon request. For more
information regarding municipalsecurities, visit emma.msrb.org. This reportdoes notproviderecipients with information or advice that is sufficient onwhichto base
an investmentdecision. This report does nottakeinto account thespecific investment objectives, financial situation,or needofanyparticular client and may not be
suitablefor all types of investors.Recipients shouldconsider the contents ofthis reportas a singlefactorin making an investmentdecision. Additional fundamental
and other analyses would berequiredto makeaninvestmentdecision about any individualsecurity identified inthis report. For investment advice specific to your
situation, or for additional information, please contact your Robert W. Baird Financial Advisor and/or your tax or legal advisor.
Copyright 2015RobertW. Baird & Co. Incorporated.
If you no longer wish to receiveemails from Baird, reply to emailwith "REMOVE ME" inthesubject line.