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Returns for municipal bonds YTD in 2012 represents third strongest start to a year since 1990 (2.31% YTD as of 1/31/2012)†. Investors are rushing back to municipals as evidenced by strong inflows of $6 billion in January. A combination of factors are boosting investor demand: a lower supply of muni bonds given the tepid new issuance calendar, and renewed acceptance of munis as a harbor of credit quality and liquidity. Also, persistent headlines on Europe’s troubles continue to pressure investors to seek safety in U.S. Treasuries, which in turn supports municipal bond returns.
Authored by James Colby
The continuation of strong cash flows, elevating municipal asset levels for investment platforms has led to a resumption of positive performance for virtually all sectors of the muni market in January. The Barclays Capital Municipal Bond Index posted a 2.31% gain for the month, and the Barclays Capital High Yield Municipal Bond Index was up by 3.68%. This illustrates both the strong search and demand for yield, as well as the renewed confidence in an asset class which was shunned just a year earlier.
The municipal bond market has been on a seven-week march to all-time
low rates (yields), as the chart below shows. Given the voracious
appetite that investors have had for munis, I would have expected that
the natural order would be for the market to take a pause — even to
back-up a bit as investors reassess relative value. Traders have begun
to refer to bonds trading at NOSEBLEED prices, suggestive of a market moving too high, too fast.
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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.
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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