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U.S. Fixed Income and Municipal Bonds

Video Transcript

Van Eck Outlook:  Muni Performance Heading into 2015


TOM BUTCHER: Hello and welcome to Van Eck Outlook.  I'm Tom Butcher, your host. I'm here today with Jim Colby, Portfolio Manager and Senior Municipal Strategist at Van Eck Global.  Jim has been involved in the municipal industry for more than 30 years. The focus of today's discussion is municipal bond performance going into 2015. Jim, hello.


JIM COLBY: Tom, thank you.


BUTCHER: Here we are in the fourth quarter and, surprisingly, municipals have performed well in 2014. What do you believe are the essential drivers of performance during a year when little was expected from this asset class?


COLBY: Municipal performance in 2014 was indeed a surprise because at the beginning of this year I did not predict the type of performance that municipals have had year-to-date. There has been one overriding theme that has driven performance right from the very get-go in 2014 and that has been the supply-demand imbalance. By that I mean that the demand for municipal bonds, which is measured by coupons, maturities, and bond call reinvestment, has completely overwhelmed the supply of new issuance in the municipal marketplace. This imbalance may run through the rest of this year and has been the primary driver of positive performance in the asset class.


BUTCHER: Thank you.  Are there changes in the wind or events that might be game changers for municipals going forward?


COLBY: We've heard from the Federal Reserve recently on its outlook. Interest rates are going to remain low for the foreseeable future – that's the Federal Reserve’s language, not mine.  However, I continue to see the supply imbalance continuing throughout the remainder of 2014 and perhaps into the first quarter of 2015. Based on the dealers that I've surveyed and the bankers to whom I’ve spoken, there is little uptick in new issuance to upset this balance. Of course, events can happen and we’ve had principle downgrades of the Commonwealth of Puerto Rico. Two years ago we had downgrades of the tobacco securitization asset class. Such events can upset the balance somewhat, but I think the tailwinds are still very positive for municipal bonds. The next big event may be the mid-term elections. We'll have to wait and see what impact they have on the asset class.


BUTCHER: Thank you. Returning to Puerto Rico, it’s a substantial issuer of municipal bonds, as you say, and has grabbed headlines throughout the year. How have some of the issues surrounding the Commonwealth affected or impacted the municipal market as a whole?


COLBY: Puerto Rico is by most measures the third largest issuer of municipal bonds, at something close to $70 billion. Puerto Rico has the benefit of being triple tax exempt and therefore finds its way into multiple portfolios across the country. Every portfolio manager and RIA has probably used Puerto Rico bonds in the past for client portfolios. Now that Puerto Rico bonds reside in the below-investment-grade category, the dynamic has changed. The fortunes of Puerto Rico as a Commonwealth and as an economy are such that there are great uncertainties as to whether these trends will survive in the current economic malaise that affects the United States and most of the rest of the world. Without the support of a growing economy, Puerto Rico is going to be challenged to meet its debt obligations and maintain the status of a significant issuer in the marketplace. I think that this will continue to be a significant headline issue in the municipal asset class for quite some time to come.


BUTCHER: Thank you very much, Jim. It's goodbye from us here at Van Eck Outlook.


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IMPORTANT DISCLOSURE


 

All of the Market Vectors municipal bond ETFs can potentially hold debt issued by the Commonwealth of Puerto Rico. At the time of this filming, only the Market Vectors High-Yield Municipal Index ETF and the Market Vectors Short High-Yield Municipal Index ETF, held Puerto Rico debt. This means the Funds would be susceptible to additional risks associated with investment in Puerto Rico.


Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. There are nine symbols that are used by Moody’s to designate least credit risk to that denoting greatest credit risk: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. Ratings from Ba1 to Caa3 are below investment grade or speculative grade.


The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com


Municipal bonds are subject to risks related to litigation, legislation, political changes, local business or economic conditions, conditions in underlying sectors, bankruptcy or other changes in the financial condition of the issuer, and/or the discontinuance of the taxation 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. The Fund may also be subject to credit risk, interest rate risk, call risk, lease obligations, tax risk, and risks associated with non-investment grade securities. The market for municipal bonds may be less liquid than for taxable bonds. There is no guarantee that the Fund’s income will be exempt from federal or state income taxes. Federal or state changes in income or alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. For a more complete description of these and other risks, please refer to each Fund’s prospectus.


A portion of the Funds’ dividends may be subject to federal, state, or local income taxes or may be subject to the federal alternative minimum tax. Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.


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.  Please read the prospectus and summary prospectus carefully before investing.


Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.


The “Net Asset Value” (NAV) of a Market Vectors Exchange Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF’s intraday trading value. Market Vectors ETF investors should not expect to buy or sell shares at NAV.


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 Securities Corporation. © 2014 Van Eck Global.


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