Van Eck Global - Since 1955


A Perfect Storm - Tuesday, 12/18/2012

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":

  • Despite the continued strong inflows of cash, the recent surge in new issue supply overwhelmed dealers who appear to be paring back their inventory for the yearend.
  • Aggressive selling of several hundred million (par value) of tobacco settlement bonds pressured traders early last week.
  • Thursday's downgrade of Puerto Rico muni debt by Moody's to just one notch above high-yield status triggered a wave of selling and pushed prices generally lower (yields higher).
  • Lack of clarity surrounding the Washington debate over the fiscal cliff has left observers fearing that, one way or the other, the tax-free coupons of municipal bonds are likely in jeopardy.


Munis gave up more ground again on Monday as more selling emerged from a cross section of investment portfolios. (See graph below.) Some seemed intent on off-loading more Puerto Rico issues, while others appear to have used the current market weakness as an excuse to step aside while the "compromise dance" continues on in Washington. Several well-known strategists have furthered the notion that the benefit from the tax-free coupon of municipals may either disappear or be aggregated into a "cap" on certain deductions (28% being the line that has been drawn in the sand). I see little likelihood that prior ownership and income will be grandfathered through new legislation, because the cash needs are dire and the result of capping only new issuance would likely result in insufficient tax revenue in the near term.
 

Municipal Bids-Wanted Hit Highest Level Since January 2011*
Simple Moving Average
 

Municipal Bids-Wanted Hit Highest Level Since January 2011 Image

Source: Bloomberg. The J.P. Morgan MBWDPAR Index represents the total dollar amount of wanted items on Bloomberg's buyside bids wanted system.
*Bid Wanted is the process by which an investor or broker-dealer actively solicits bids on a position of securities from the marketplace.
 


 jim_colby_signature 

 

 

Important Disclosure 

Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

Please note that MUNI NATION is written by Jim Colby and represents 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. © 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.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR | 888.658.8287. Please read the prospectus and summary prospectus carefully before investing.  

Not FDIC Insured — No Bank Guarantee — May Lose Value 

Van Eck Securities Corporation, Distributor
335 Madison Avenue, 19th Floor
New York, NY 10017
888.MKT.VCTR | 888.658.8287