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The discounts at which municipal bond closed-end funds are currently trading are deeper now than when they briefly plumbed fresh lows back in early August 2011. They have continued to widen inexorably since early March of this year. The weighted average discount of the underlying municipal bond closed-end funds in the Market Vectors CEF Municipal Income ETF (XMPT) was -9.95% on December 2, 2013. This is the widest it has been since XMPT’s inception on July 12, 2011.
Authored by James Colby
Less than six weeks remain in 2013. To paraphrase the Chinese proverb, we have certainly lived through a year of interesting times. That being said, some savvy municipal bond market investors have not been deterred from taking advantage of a tax-loss harvest opportunity that has not been readily available in municipal bonds since the end of the last decade. This strategy involves using realized losses to offset capital gains elsewhere in your portfolio.
At the end of October, we were on a downward trend in municipal bond new issuance, and the AAA municipal bond yield curve, on average, dropped 13 basis points, enough to push the return for the Barclays Municipal Bond Index to 0.79% for the month (as of October 31, 2013). On the demand side, a significant contributor had been "risk-off" trading, particularly in a variety of Puerto Rico names.
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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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