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Municipal Bond Market Outlook for 4Q'12 - Friday, 10/12/2012

Muni index performance has generally been good this year.

  • Falling yields have contributed to positive returns year-to-date.
  • Through September, municipal mutual funds and ETFs have witnessed 43 consecutive weeks of positive cash inflows.
  • Only recently has supply begun to accelerate and approach the more normalized patterns of the past 10 years.
  • I believe the continued value proposition embedded in municipal yields — nominally higher than those of treasuries — has attracted both individual and institutional buyers.
  • Re-investable cash in the form of "called away" bonds, coupons and maturities has propelled performance through the end of the third quarter and is, in my opinion, likely to continue to drive demand in the fourth quarter.

I believe we can expect continued good performance but with the following two caveats: (1) political risk in the form of potential changes to, or elimination of, the tax-exempt nature of municipal interest, and (2) credit deterioration resulting from weak underlying economics. Either could have an adverse impact on the market.


 

Municipal Bond Index Performance*

 Index 

MTD 

QTD 

YTD 

Barclays Municipal Bond

0.60%

2.32%

6.06%

Barclays Municipal High Yield Bond

0.81%

3.87%

13.89%

Barclays Municipal High Yield Long Bond

0.52%

5.21%

18.49%

Barclays Municipal High Yield Tobacco Bond

1.25%

7.17%

21.66%

Source: Bloomberg as of 9/28/12

 

Triple-A MMD Yield Changes YTD**

 Maturity 

12/30/2011 

9/28/2012 

Change (bps) 

5 Yr (2017)

0.85%

0.62%

-23

10 Yr (2022)

1.83%

1.70%

-13

15 Yr (2027)

2.68%

2.11%

-57

20 Yr (2032)

3.18%

2.42%

-76

25 Yr (2037)

3.50%

2.78%

-72

30 Yr (2042)

3.55%

2.85%

-70

Source: MMD YTD as of 9/30/12

 

Annual Muni Issuance Since 2000 as of 9/28/12
Muni Chart
Source: Thomson Financial; *BofA Merrill Lynch Global Research forecast through end of 2012.


*The Barclays 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 Municipal High Yield Bond Index is considered representative of the broad market for below investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Municipal High Yield Long Bond Index and Barclays Municipal High Yield Tobacco Bond Index are a sub-set of this broader index.

**MMD provides a broad range of benchmark data and technical/fundamental analysis to the municipal market. Their analytical services offer a unique perspective on the municipal bond market, highlighting key areas of value and opportunity.


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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 NATIONs 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. © 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.

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