Van Eck Global - Since 1955

Intervention - Tuesday, 07/23/2013

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?

U.S. 10-Year Treasury Yield Image

Source: FactSet as of July 19, 2013.

Two weeks ago, I observed that opportunistic investors (e.g., non-traditional and hedge fund) stepped into the breach and provided added liquidity for individual bonds that were burdensome to dealers’ balance sheets. As has happened in the past two periods of strained liquidity (2008 and 2010), these investors captured great values which, in my view, were in part represented by some of the deep discounts shown by the intraday marks on the muni ETFs. I view this "intervention" strategy as having been born out of the introduction of Build America Bonds, which I believe brought many more portfolio eyes to focus on the municipal bond market and on its unique qualities as a destination for valuable tactical trades during times of stress. Bernanke's testimony notwithstanding, I am hoping for a period of calm and consolidation so the muni bond fund community can re-establish a credible reinvestment strategy.




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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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