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.
As we continue to ride the 2014 performance wave in the municipal bond market, a colleague suggested that I address one important cause of 2013's poor performance: defaults.
I believe the price decline and outflows from municipal bond mutual funds, separate accounts, and ETFs were caused in part by the City of Detroit's Chapter 9 filing, downgrades of Puerto Rico, and downgrades of various other key issuers. However, according to the May 2014 update to the Moody's annual study, "U.S. Municipal Bond Default and Recoveries 1970-2013," I believe the municipal marketplace has been remarkably resilient.
Consider the following, according to Moody's:1
Furthermore, according to the study, "Municipal issuer downgrades have outpaced upgrades over any 12-month period for every monthly cohort since 2009." This suggests to me the struggle our general economy has endured since the financial crisis of 2008. However, on the bright side, Moody's notes, "Such deterioration in credit quality seems to have stabilized since mid-2012." The analysis is done in the context of only issues they rate, and therefore, the assertion that there have been only 30 defaults (among rated issuers) since 2008 understates the true amount, which would include those issuers without ratings.
To look deeper, I turn to Municipal Market Advisors' (MMA's) default study, which, although only four years old, reveals a declining pattern of downgrades and defaults, and also covers issuers who are not rated by any of the services. MMA states in the February 2014 edition of "Municipal Insights," "It appears fewer issuers with ongoing impairments are falling into default now; many of the most vulnerable bond-financed projects have already defaulted; current economic challenges are somewhat less severe than in prior years; and/or capital market solutions are now more available."
MMA's study indicates that the number of defaulting issuers it has identified has declined from 107 in 2012, to 64 in 2013, and to 19 through the end of May 2014. This is evidence, I believe, of a potentially confidence-building trend for the asset class.
All of the above is but one element of consideration for municipal asset allocators, but, in my opinion, the municipal bond fund flows seem supportive of the recent emergence of interest from investors.
1Study universe covers only issuers and issues rated by Moody's Investors Service.
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: Expect More from Your Munis
Munis: Supply Dynamics
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?
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.