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1Q 2014 Munis: Value for Muni Investors


Themes in Municipal Bond Markets for 2014


JIM COLBY: This is one of those terrific times of year when strategists and portfolio managers get to make projections for the coming year. Important themes for muni investors to consider for 2014 are clearly tapering and the expectation of rising interest rates.  What can an investor do with that information?  Consider that although downgrades exceeded upgrades in 2013 by a small magnitude in terms of overall valuation, the marketplace for municipal bonds I believe is on the ascent.  Rockefeller Institute's recent publication describes improvements in underlying economies.  Hiring is increasing at the local municipal level, and it is expected that upgrades and downgrades issued by Moody's, S&P, and Fitch will probably level out with some equilibrium throughout 2014. That's quite a departure from the prior two years.


Important themes for municipal investors in 2014 are: being aware of the inherent stability in credit quality within municipal bond markets and realizing that tapering is on the table and interest rates are likely to rise. It's still possible to carefully positioning portfolios for these coming events.


Muni ETF Outflows in 2013 and 2014 Outlook


COLBY: In the calendar year 2013, especially for the seven months beginning in May of 2013, the municipal bond fund marketplace experienced redemptions.  There were outflows to the magnitude of some $63 billion.  Do we expect that to occur and continue in 2014?  I think the answer is no.   Reasonably, we don't expect that pattern to continue.  We may have some residual outflows that continue to occur through the early months of 2014, but the reason for those outflows were based primarily on the expectation that tapering was going to force rates higher. The damage has been done.  My opinion is that once investment advisors and investors take stock of the fact that rates are higher, opportunities are there for reentry, for repositioning cash that comes to portfolios by way of coupon payments, maturities, and bond costs.  There are good reasons to find investment opportunities in the municipal marketplace.  My expectation is that outflows will subside, the pressure on the secondary market will abate, and new issuance is not expected to overwhelm the marketplace. These factors bode pretty well for a decent second half of 2014.


Value for Muni Investors


Everybody wants to know where the value is.  Where are the good opportunities for 2014?  Coming off a tough performance year in 2013, it's a fair question.  I would answer this way: there are ways to position oneself with fixed income in a broad asset allocation model to potentially generate important income for investment portfolios.  Municipals in particular still offer a very compelling advantage on a taxable-equivalent basis compared to other asset classes.  The real opportunity, I would say, is in the 10-year and shorter end of the yield curve.  Why?  Because you achieve less interest-rate sensitivity going forward in the long run.  On a taxable equivalent basis, the reduced volatility and the superior returns relative to other asset classes, in my opinion, really merits attention.


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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com


Municipal bonds are subject to risks related to litigation, legislation, political changes, local business or economic conditions, conditions in underlying sectors, bankruptcy or other changes in the financial condition of the issuer, and/or the discontinuance of the taxation supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. The Fund may also be subject to credit risk, interest rate risk, call risk, lease obligations, tax risk, and risks associated with non-investment grade securities. The market for municipal bonds may be less liquid than for taxable bonds. There is no guarantee that the Fund’s income will be exempt from federal or state income taxes. Federal or state changes in income or alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. For a more complete description of these and other risks, please refer to each Fund’s prospectus.


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