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.
I begin this commentary with the fundamentals. Performance for municipal bonds since the start of 2014 has been strong thus far. Year-to-date (YTD), municipals have returned 6.18% as measured by the Barclays Municipal Bond Index and 8.20% for the Barclays High Yield Municipal Bond Index. In my opinion, the broad muni market has demonstrated resiliency, with the exception of June, when supply was strong and selling of tobacco and Puerto Rico bonds depressed the market. So far this year, municipal high-yield bonds appear to have continued to deliver potential value, posting comparable yields to corporate high-yield bonds, with yield ratios in excess of 119% on July 31, as illustrated below. This data point could be driving the "crossover trade" from taxable high yield to municipal high yield. As we move through the eighth month of the year, the thirty-day visible supply of $8.1 billion in new bonds1 may potentially fail to cover the demand that could be generated by $41.8 billion of coupons, calls, and maturities flowing into client accounts through August2.
Ratio of Barclays High Yield Municipal Bond Index
to the Barclays Corporate High Yield Index Yield to Worst3
Source: Barclays Research as of 7/31/14.
There is some positive news on the municipal credit side. Moody's reported on July 29 that they upgraded more debt than they downgraded for the first time in six years. Significantly, New York and California earned upgrades to Aa1 and Aa34, respectively. These states are the two largest issuers of municipal bonds.
Finally, the faltering economic fortune of Puerto Rico continues to make headlines, sometimes in dramatic form. With the enactment of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which allows certain government owned entities to restructure their debt, the clock is ticking down to a moment when various market participants may be anticipating some action. As much as the selling of certain credits has created an air of desperation, liquidity is seemingly present, and according to SIFMA data, billions of dollars in bonds have changed hands in the secondary market through the end of July. What is even more significant to me, however, is that the broad municipal bond market has been far less affected than one might have expected. The positive returns that the Barclays muni benchmark indices posted in July might suggest the market has moved beyond the headlines.
The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays Corporate High Yield Index covers 50 of the most liquid and tradable U.S. dollar-denominated, non-investment grade corporate bonds for sale in the U.S.
1Source: Bond Buyer as of 8/7/14. The 30-day visible supply is compiled daily from The Bond Buyer's Competitive and Negotiated Bond Offerings calendars. It reflects the dollar volume of bonds expected to reach the market in the next 30 days. Issues maturing in 13 months or more are included.
2The coupons, calls, and maturities data was provided by Siebert Brandford Shank and Co., LLC.
3Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
4Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. There are nine symbols that are used by Moody's to designate least credit risk to that denoting greatest credit risk: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. Ratings from Ba1 to Caa3 are below investment grade or speculative grade.
All of the Market Vectors municipal bond ETFs can potentially hold debt issued by the Commonwealth of Puerto Rico. At the time of this posting, only the Market Vectors High-Yield Municipal Index ETF and the Market Vectors Short High-Yield Municipal Index ETF held Puerto Rico debt. (Click the preceding hyperlinks to view geographic weightings.) This means the Funds would be susceptible to additional risks associated with investment in Puerto Rico.
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: 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?
Munis: A Better Road for Tomorrow
Munis: Value Seen in Muni Bond Closed-End Funds
Munis: Video Viewpoint with Colby
Munis: Back to Fundamentals
Munis: Stirred, Not Shaken
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.