James Colby has more than 30 years of fixed income experience. Portfolio Manager of Municipal Bond ETFs at VanEck, he is known for his perspective on the U.S. municipal bond marketplace.
In the aftermath of Hurricane Sandy, more than just the massive property destruction has been revealed to municipal participants as needing dire attention. National and local infrastructures have been weakened and are at the mercy of natural disasters that now seem to be occurring more regularly. From power supply and transportation to drinking water, Sandy exposed most of the projects and programs that constitute "public purpose" and define municipal finance as damaged and in need of repair.
After Wednesday's announcement of the resignation of the chief operating officer of the Long Island Power Authority, New York Governor Andrew Cuomo commented, "I believe LIPA has been beyond repair for a long, long time. I don't believe you can fix it. I believe it needs to be overhauled and you need a new system." This is only the beginning of what I believe promises to be a contentious period for governors and regional managers alike. In the Mid-Atlantic, where over 8 million customers throughout 21 states lost power, there will be a need for restoring infrastructure. In my opinion, traditional tax-exempt financing supplemented with proceeds from insurance and federal grants will likely fund reconstruction.
If that sounds like business as usual, think again. This nation's economy still appears to be teetering on the edge. Unemployment is currently at 7.9%, business formation and investment are low, the fiscal cliff looms and Washington lawmakers are toying with reducing, if not eliminating, the tax-free advantage of municipal bonds. At a time when municipalities need every opportunity to continue to access the capital markets, the possibility of higher financing hangs overhead.
I see the municipal market at a crossroads. Order is needed but confusion seems close at hand. Yields are at or close to all-time lows just when confidence in the process needs affirmation rather than undermining. With year-to-date returns above 7%, municipal bonds generally have performed better than expected. Now is not the time to pull the plug. And, if recent flows into municipals are any indication, investors have not yet lost the desire for this asset class.
Source: FactSet, as of 11/14/12. Based on yield-to-worst of the Barclays
Municipal Bond Index.
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. Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
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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 a fund. An index’s performance is not illustrative of a 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.
Diversification does not assure a profit or protect against loss.
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 a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
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New York, NY 10017
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Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.