Van Eck Global - Since 1955


Dancing On The Head Of A Pin - Thursday, 06/28/2012

Often we look for macro issues and trends to help define direction and opportunity in the municipal bond market as a whole. However, there is an element of potential opportunity in the narrower realm of the pre-refunded municipal bond segment. As of June 25, 2012, these bonds offered higher yields compared to those of tax-free money market funds, 1.05% versus 0.02% respectively.1

Pre-refunded municipal bonds are munis that have been refinanced by the issuers, with all future payments secured by U.S. Treasury bonds held in escrow. Therefore, their implied credit quality is considered, by some, to be the equivalent of the underlying Treasuries. According to Municipal Market Advisors (MMA), the recent scarcity of 2-5 year pre-refunded municipal bonds may take investors out a little further on the curve, raising demand in an already supply challenged market.2 For example, the number of securities in the Index tracked by the Market Vectors Pre-Refunded Municipal Index ETF (NYSE Arca: PRB) has shrunk by 885 issues since June 2009. MMA believes this reduction in available bonds may point to further price gains in longer dated, pre-refunded positions and they continue to give the sector "a buy" recommendation.2

Yes, this is a small niche area of municipals, but if one is looking for tax-exempt income with the perceived safety of Treasuries, I believe PRB may provide access in this less well-known part of the market. In my opinion, dancing on the head of this pin may be less daunting for the conservative investor than investing in other muni bond segments.


1Muni Yield Source: Six-Year pre-refunded bonds based on the MMD Municipal Yield Curve, June 25, 2012. Money Market Yield Source: iMoneyNet Money Fund Report, June 22, 2012.
2MMA Weekly Outlook June 25, 2012.
 

 jim_colby_signature 

 

 

Important Disclosure 

Van Eck Associates Corporation 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 that MUNI NATION is written by Jim Colby and represents his opinions, and these opinions 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-Van Eck Global 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 Van Eck Global. © 2014 Van Eck Securities Corporation. 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 the Fund. An index’s performance is not illustrative of the 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.

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. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR | 888.658.8287. Please read the prospectus and summary prospectus carefully before investing.  

Not FDIC Insured — No Bank Guarantee — May Lose Value 

Van Eck Securities Corporation, Distributor
335 Madison Avenue, 19th Floor
New York, NY 10017
888.MKT.VCTR | 888.658.8287