Colby is a Senior Municipal Strategist with more than 30 years of fixed income experience, responsible for Market Vectors municipal bond investments.
Municipal bonds are "Main Street investments," with an estimated 73% of the $3.7 trillion in outstanding principal owned by households or mutual funds1. On the other hand, municipal bonds are traded in an over-the-counter (OTC) market where dealers create liquidity. Main Street depends on Wall Street, and vice versa, with both sides benefitting. Enter the Volcker Rule, named for former Fed Chairman Paul Volcker, and proposed in response to the devastating 2008 economic crisis. The Rule seeks, among other things, to limit proprietary portfolio trading by banks, especially activities of the speculative or rogue variety that could harm investors. Certain securities are exempt – U.S. Treasuries/Agencies and General Obligation municipals. However, thousands of revenue muni bonds that depend on dealer liquidity are not exempt, and are vulnerable to the Rule's unintended consequences.Muni proponents are objecting that the Rule goes too far and could create a loss of confidence in thinly traded issues. In a recent letter, Citigroup Global Markets stated: "If this (Rule) were to occur in an environment where dealers' abilities to provide liquidity were severely compromised by the Volcker Proposal, the effect of individuals liquidating into a distressed, illiquid market would be devastating for existing bondholders and issuers2."In response to the avalanche of dissent, Volcker Rule implementation has been pushed back from its summer deadline. For now, I believe that the symbiotic relationship between Main Street investors and muni dealers is working well, and markets are trading efficiently. I expect that Congress and financial regulators will listen to the rising chorus of voices and leave well enough alone.
_________________________1Reuters, 12/22/11 using data from the Federal Reserve Flow of Funds, December 2011. 2Letter from Citigroup Global Markets Inc. to federal regulators, 1/27/12.
Market Vectors High-Yield Municipal Index ETF
Market Vectors Intermediate Municipal Index ETF
Market Vectors Short High-Yield Municipal Index ETF
Market Vectors CEF Municipal Income ETF
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New York, NY 10017
ETF Fund shares are not individually redeemable and will be issued and redeemed at the NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
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