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Game On - Thursday, 01/19/2012

  • Investors purchasing high volumes of investment grade bonds
  • Limited supply is boosting prices, and applying pressure on yields
  • 2011's positive performance trend continues in the New Year

Perhaps it was a combination of views expressed last week by the likes of PIMCO, Barron’s and The Wall Street Journal, touting the merits and benefits of the municipal bond market, but interest is clearly being expressed by buyers gobbling up investment grade bonds in spasms of transactions.  

Many municipal bond positions have already traded at levels of 5 -10 basis points lower in yield from opening offers (which translates into to higher prices).  Even more dramatically, some tobacco muni bonds*, which offer both block size and trading liquidity, have moved higher by 3 points ($3) in price, while losing 40 basis points in yield. GAME ON.

The message to insurance companies and some mutual funds from the general marketplace seems to be: Don’t wait for supply to show up. Buy now.  And, this week, they are.

The municipal bond market has continued to make gains day-over-day in January, as the coupon and maturity reinvestment opportunities are now fully an exercise of demand overwhelming supply.  As such, it seems to me that the outperformance of the muni bond market did not end with the 2011 calendar year. Year to date (as of 1/17/11), the general Barclays Capital Municipal Bond Index has already gained 1.63%, and Barclays Capital High Yield Municipal Bond Index is up 2.85%.

*Revenue bonds backed by annual payments made in perpetuity by domestic cigarette companies.

Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year; the Barclays Capital Municipal Bond High Yield Index is a subset of this major Index.  


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Please note that MUNI NATIONs that are written by Jim Colby represent 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. MUNI NATION is a trademark of Van Eck Associates Corporation.

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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.

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