A Silver Lining
- Tuesday, 11/05/2013
At the end of October, we were on a downward trend in municipal bond new issuance, and the AAA municipal bond yield curve, on average, dropped 13 basis points, enough to push the return for the Barclays Municipal Bond Index to 0.79% for the month (as of October 31, 2013). On the demand side, a significant contributor had been "risk-off" trading, particularly in a variety of Puerto Rico names.
The return for the Barclays Puerto Rico Municipal Bond Index was positive for the month at 1.03%, however, its year-to-date return was -14.73%. (Both figures are as of October 31, 2013.) This directional turn influenced the following paraphrased comment from Citibank: Municipal bond ETFs have begun to trade at slight premiums to or near net asset value (NAV), which in the past, has preceded municipal bond fund inflows by 3-4 weeks.
Source: Bloomberg as of October 31, 2013.
The long end of the AAA municipal bond yield curve continues to trade over 110% to the 30-Year U.S. Treasury Bond. Common consensus on interest rates is that the Federal Reserve will hold off on tapering until sometime next year, and once tapering occurs, long-term interest rates will move higher. For now, ratios appear richer in the short end of the yield curve; however, if supply dwindles further in the coming weeks, I expect to see continued downward movement in yields. Furthermore, despite seeing continued outflows, some municipal bond ETFs have begun to trade closer to their NAVs compared with the wide discounts of the past few months. This may lessen potential fears investors have about re-entering the market.
The Barclays 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 Puerto Rico Municipal Bond Index is considered representative of the broad market for investment-grade, tax-exempt bonds issued in Puerto Rico, with a maturity of at least one year.
The Market Vectors High-Yield, Long, Intermediate and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks including economic, political, regulatory, or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.