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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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.
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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.
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