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Let's give credit where credit is due: recently, Forbes published an article that to some might seem like the kind of article that sits on the shelf until there is a slow news day and the editor is looking for a filler piece. In fact, this article raises a number of important points that, in my opinion, all touch upon the national economic recovery and just may be the locus of the revival of small business and wealth creation.
Authored by James Colby
Looming under the somewhat Byzantine headline name, Sequestration, are automatic cuts to government spending that may include planned reimbursements to state and local issuers of Build America Bonds (BABs). BABs are taxable municipal bonds, authorized as a stimulus program under the 2009 American Recovery and Reinvestment Act. The federal government promised rebates to the issuers equal to 35% of their interest costs as an incentive to raise capital for "shovel ready" projects. Many market participants considered it to be a highly successful program.
With the political ripples of the "cliff" and inauguration finally reaching the edge of the pond, the markets appear to be once again fully engaged in the dissection of domestic economic releases, earnings and European monetary drama. The elements that I believe sparked a year-end selloff have now receded, allowing municipals to push forward with a month-to-date gain of 0.62% as of January 25, 2013. New flows into municipals, along with cash from calls, maturities and coupon payments are again positive, overwhelming a meager January supply: a formula that is prevalent in most years, coined the "January Effect."
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Please note that MUNI NATIONs that are written by Jim Colby represent his opinions and these opinions may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation.
All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.
Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.
Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes 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. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
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