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 some respects, this edition of MUNI NATION might be looked upon as a sequel to one of my recent posts. What I want to build on further is the theme I've been noticing ― optimism over the U.S. economy ― and what I believe it might mean for municipal bond creditworthiness.
Total nonfarm payroll1 employment rose by 217,000 in May 2014, and the unemployment rate remained unchanged at 6.3% for the month, following a decline of 0.4% in April. This is better than the recession levels of three and four years ago. While housing has offered mixed results, perhaps due in part to the brutal winter experienced by a large part of the country, inflation as measured by the Consumer Price Index2 (CPI), has remained relatively low at 2.0% (unadjusted for the 12 months ended May 2014)3 .
Source: Bureau of Labor Statistics, Current Employment Statistics Survey as of May 2014.
Source: Bureau of Labor Statistics, Consumer Price Index as of May 2014.
With modest U.S. growth expectations going forward, the outlook for creditworthiness in the muni market could be one tinged with some optimism. With activity and spending on the rise, the health of local economies may improve. Indeed, as suggested on June 6, 2014 by Michael Hanson, U.S. economist for Bank of America Merrill Lynch (BAML), 10 of the 12 national economic strength indicators he follows have been showing signs of improvement.
Philip Fischer, a municipal strategist (also of BAML), offers an analysis showing a figure for state and local tax revenues 2.7 times that of our national gross domestic product (GDP) for the period ended May 2014. The analysis also suggests that, as the nation's economy has grown, the economic activity at the local level has grown at nearly three times the national rate. If the pattern repeats, then we may begin to see the rising tide of broad-based improvement in employment and consumption which may be a contributor to stabilization in the finances of certain issuers of municipal bonds that are dependent upon a healthy tax base in real estate and local merchandizing.
1Nonfarm payroll is a statistic researched, recorded, and reported by the U.S. Bureau of Labor Statistics intended to represent the total number of paid U.S. workers of any business, excluding the following employees: general government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals, and farm employees. This monthly report also includes estimates on the average work week and the average weekly earnings of all nonfarm employees.
2CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.
3Source: U.S. Bureau of Labor Statistics as of May 2014.
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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. Please read the prospectus and summary prospectus carefully before investing.
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This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
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.