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Positive Finish For Munis - Friday, 03/23/2012

  • Demand is rising
  • ETFs are driver of muni fund flows
  • Muni ETFs are gaining traction

 

After suffering under the recent pressure of significant new-issue supply, the muni market recovered its footing and ended this week with a positive finish. Demand is being driven by arbitrageurs ("arbs"), who are attracted to the intermediate part of the yield curve, where the ratio of high-grade muni to Treasury yields is above 110%. Near term, muni new-issue supply is expected to ebb somewhat, which should help to support prices heading into the Easter/Passover break.

One set of "enhanced" data has caught my eye. It comes from J.P. Morgan (JPM), which, as far as I know, is the first dealer to refine its flow-of-funds reporting to show contributions from exchange-traded funds (ETFs). Significantly, JPM now assigns ETFs their own category, whereas in the past, ETFs were grouped with muni bond mutual funds. For the week of 3/21/12, JPM reported that all municipal bond funds had a net inflow of $88 million and "approximately 50% ($44mn) was from ETFs."

This is significant data because it confirms our observation that muni ETFs are continuing to gain traction with investors and financial advisors. It also may indicate a gradual shift in investment preference, from actively managed muni bond funds into indexed, exchange-traded ETFs. MUNI NATION will keep an eye on this data and help you interpret the demand trend.

 

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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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