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While some may feel like August's "dog days" may already be descriptive of the next few weeks, I sense an undertone of market uneasiness which seems to me to want to push interest rates even higher (see yield curve graph below). A few observations:
Authored by James Colby
Despite recent events in Detroit, I believe the famously coined term "green shoots" is an apt descriptor for the municipal bond market at this present time. Having been scorched by the wildfire correction that engulfed the fixed-income markets since the end of April, as evidenced by the sharp rise in interest rates (represented in the graph below), there now seems to be indication of a broadening of support for munis from the retail/registered investment advisor community. I have seen inquiries coming from dealers looking for bonds across the spectrum — indeed a welcome sight. The question remains: When does this become an embedded strategy that brings assets back to mutual funds and ETFs?
Van Eck Global, as the sponsor of Market Vectors municipal bond exchange-traded funds (ETFs), naturally has serious concerns following the filing of the petition by the City of Detroit seeking protection under Chapter 9 of the bankruptcy code. What implications do I think are to be drawn?
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Please note that MUNI NATIONs written by Jim Colby represent his opinions 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.
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