Municipal Bonds: A Market in Transition
TOM BUTCHER: Hello and welcome to Van Eck Outlook. I'm your host, Tom Butcher. I have with me today Jim Colby, Portfolio Manager and Senior Municipal Strategist at Van Eck Global. Jim is a seasoned veteran of the industry, having been involved with the muni market for over 30 years. Today our focus is municipal bonds as we enter the second quarter of 2015. It is a market in transition. Jim, welcome.
JIM COLBY: Tom, thank you.
BUTCHER: Thanks for joining us. A few weeks back we heard the most recent Federal Reserve comments, which suggested that raising rates are still a little ways off. What does this mean for the muni market?
COLBY: Tom, what it really means for tax-exempt investors is that there's a reprieve from the discourse and the worry over rising rates and what changes that might mean to portfolio strategy. Embedded in the Fed's comments was a continuing concern about the economic landscape and what impact imposing higher rates would have. Investors can take some solace in the fact that we perhaps have ahead of us a quarter or two during which rates will likely remain where they are; the markets should remain relatively stable until the next signal from the Federal Reserve. That is the backdrop against which we might evaluate the relative value of opportunities inherent in the municipal marketplace.
BUTCHER: Thank you. While investors might take some solace, do you see any potential event in 2015 that might derail a continuation of attractive yields and/or potential performance?
COLBY: As is typical in Washington, there are many events that might occur. We've seen nothing but a stalemated legislative body over the last two or three years that has largely failed to move forward on important fiscal policies. Were a development such as Congress changing tax laws, funding the highway trust fund, or infusing of more dollars into the system to take place, there would likely be an impact on the economy and the marketplace. Those are a few of the things that might occur. All eyes are going to be on the Federal Reserve. As is typical in Washington, there are many events that might occur. We've seen nothing but a stalemated legislative body over the last two or three years that has largely failed to move forward on important fiscal policies. Were a development such as Congress changing tax laws, funding the highway trust fund, or infusing of more dollars into the system to take place, there would likely be an impact on the economy and the marketplace. Those are a few of the things that might occur. All eyes are going to be on the Federal Reserve.
COLBY: I don't only mean domestically, incidentally. Global markets will be paying attention to what the Fed says at the next meeting. It is coming up in June and will send another set of signals to which the markets will react accordingly.
BUTCHER: Bearing all that in mind, where do you currently see potential opportunities in terms of credit and/or curve positioning?
COLBY: From my vantage point, investors who feel they can bear some of the near-term risk of changes in the marketplace and who want to be conservative with regards to credit might consider looking to the investment-grade part of the municipal marketplace as well as the intermediate part of the curve. Here at Van Eck Global we define the intermediate part of the curve as 6 to 16 years because that's where the curve is the steepest, potentially offering the greatest opportunity for performance in a changing or dropping yield and rate environment. Nevertheless, the figures tell you that in that part of the curve it may be possible to earn 75% of all the yield that resides in the municipal marketplace, with maybe 30%–40% less duration or interest rate risk. That's one thing to keep in mind for the more conservative investor. Those who fear more impact to their portfolios as a result of rising rates might consider looking to the shorter end of the municipal yield curve. Perhaps they should consider municipal high yield too. The arguments for staying in the municipal asset class are the same arguments that we've made over the last twelve months: relative value, potential higher after-tax returns, and in the case of high-yield, lower default rates than one finds in other asset classes. I think the culmination of recent events in the Federal Reserve's decision to leave rates unchanged is offering municipal investors a reprieve, and they can go back and take a look at the potential opportunities that we've discussed in past sessions about investing in munis.
BUTCHER: Jim, thank you very much indeed. With Jim's very succinct description of a market in transition, we come to the end of this edition of Van Eck Outlook.
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