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.
Beware the Ides of March Yes, yes, this Shakespearean reference is a little over the top but it has been readily observed by many authors that the month of March has often been a cruel one for participants in the municipal bond market. In this year — MMXIII — it just so happens that we have had, so far, a stellar 10% rise in the Dow in tandem with the dual crises of sequestration and Federal government funding (shutdown), creating headlines that I believe place doubt ahead of decision in the minds of fixed income investors. It is unique to have evidence suggesting, in my opinion, a certain annual and reliably repetitive market pattern. In a normal year, increased muni bond new issuance and reduced reinvestment flows might be all that is required to perpetuate this pattern of weak performance in March on the heels of a good month of February.
Source: Municipal Market Advisors as of 2/28/13. Historically, municipal reinvestments are lowest in March and April.
The Barclays Municipal Bond Index1 returned a positive 0.30% last month (February). As our friends at Municipal Market Advisors (MMA) point out, only five times since 1990 has price performance been positive in March. So, Quid Facere? (What to do?) It is important to remember that the months following this late winter pattern have the potential to produce positive returns because adjustments to yields may generate attractive price points for investors when they re-engage. Also, I believe it remains a central theme that the Fed will continue to target low rates in the near term, which caps the upward boundary for municipals just as it does for treasuries. The yield to worst of the Barclays Capital AMT-Free Intermediate Continuous Municipal Index2 was 2.31% as of 3/13/13. On a tax equivalent basis3 that is 3.21% for taxpayers in the 28% bracket and 3.82% for those in the top 39.6% bracket. For investors who recognize the value accruing to the tax-free nature of the coupon, the intermediate area of the municipal market is still generally regarded as — near term — an attractive position from which to grab income as well as return from a steep yield curve. Yes, beware the Ides of March, but be mindful of the opportunities.
1The Barclays Municipal Bond Index, which is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year. 2Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date. The Barclays Capital AMT-Free Intermediate Continuous Municipal Index is a market value weighted index designed to replicate the price movements of medium-duration bonds with a nominal maturity of 6-17 years. 3The tax-equivalent yield is used by investors to compare taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). It represents the yield a taxable bond would have to earn in order to match — after taxes — the yield available on a tax-exempt municipal bond.
IMPORTANT MUNI NATION® DISCLOSURE
This content 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 content. Nothing in this content 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.
VanEck does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.
Please note this post represents the views of the author and these views may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck. MUNI NATION is a trademark of Van Eck Associates Corporation.
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.
Van Eck Securities Corporation, Distributor
666 Third Avenue
New York, NY 10017
Munis: Flattening Yield Curve Supports Performance
Munis: Keep the Pedal to the Metal
Munis: The Compelling Case for Closed-End Municipal Bond Funds
Munis: Muni Market is Generally Healthy Despite Some Headlines
Munis: Muni ETFs in a Portfolio
Munis: Using Muni ETFs to Complement a Portfolio of Bonds
Munis: Utility and Sensibility
Munis: Tune into My Webcast
Munis: An Easy Way to Compare Muni Funds
Munis: Investment Opportunities in the Current Environment
Munis: March Madness?
Munis: Once Upon a Time
Munis: Municipals in 2016
Munis: Potential Puerto Rico Defaults and Reserve Draws
Munis: Go Long for Rising Rates: Just the Facts - Part 2
Munis: Why Duration Matters
Munis: Just the Facts - Part 1
Munis: “Fed” and Fed Up?
Munis: A Better Road for Tomorrow
Munis: Value Seen in Muni Bond Closed-End Funds
666 Third Avenue
New York, NY 10017
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.