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The Trend Is Your Friend - Friday, 05/04/2012

In contrast to what, historically, has been normal for the end of April, municipal performance ended the month on a very positive note. The Barclays Capital Municipal Bond Index1 was ahead by 1.15%2 and the Barclays Capital High Yield Municipal Bond Index1 nearly doubled that at 2.23%2. As I have pointed out in prior posts, the technicals driving demand are all favorable. Municipal fund flows have been a positive $18.2 billion YTD, and new issuance — although up from a year ago — has barely been keeping pace with demand. Cash flow from maturities and called bonds, according to street source Siebert Brandford Shank & Co., is estimated to be higher this May by nearly $3 billion over last year. Average monthly reinvestment into municipal bonds in 2011 was $22 billion, but it is already $1 billion higher in 2012.

Although market strategists continue to tout "intermediates" in the 8–12 year range as the prime area of opportunity, high-yield muni bonds have seen steady inflows, further driving performance and pushing yields lower up to this point. A positive report from tobacco producers (less negative sales and distribution results) has led to a broad-based rally in the tobacco sector in high yield. Between 3/31/12 and 4/30/12, the yield of the Barclays Capital High Yield Tobacco Index1 fell from 7.34% to 7.09%.

Big Picture View

My conclusion in looking at two important elements of economic activity for the individual states listed below is that broad recovery remains uncertain and continued vigilance of credit must temper the optimism generated by positive returns. I think that diversified portfolio structures may potentially offer the proper "hedge" required by investors.

1-Year Change in Home Prices (as of 2/29/12) 


 Change (%) 











Source: Federal Housing Agency 

4Q'11 – 4Q'10 Change in Sales-Tax Revenues 


 Change (%) 











Source: Federation of Tax Administrators 

1The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Capital High Yield Tobacco Index is a subset of the broader Barclays Capital High Yield Municipal Bond Index.

2Time period: April 1 - 30, 2012





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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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