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Month-to-date, and really it is over the last eight business days, munis have sold off in dramatic fashion (now, drama in muniland is far from what is experienced in equities or treasuries). The Barclays Municipal Bond Index is down 1.66% and even the High Yield Index is down 1.08%. The representative Aaa yield curve – MMD – has risen by over 40 basis points in that time in a move that likely has many dealers shaken and investors confused.
Authored by James Colby
For all the professionals who embraced the strong market performance of municipal bonds year-to-date, I attribute the sudden break in the positive trend to the confluence of the following events leading to what could be called a "muni perfect storm":
I believe that 2013 promises to stand in contrast to the linear upward moves for municipal bonds in 2012. There appears to be conflicting expectations about new issue supply, so my conservative view is to say that volume has the potential to be +/- 10% of that of 2012. Much depends on a solution out of Washington concerning taxes, entitlements and federal support for state and local government programs.
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Please note that the information herein represents the opinion of Jim Colby and these opinions may change at any time and from time to time. 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. © 2014 Van Eck Securities Corporation. MUNI NATION is a trademark of Van Eck Associates Corporation.
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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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