Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
The municipal bond market, as measured by the Barclays Municipal Bond Index, eked out a small gain for the month of July, and in my view, this is significant. The forces of what has been a strong U.S. stock market so far this year, and continued evidence of some economic improvements, have interrupted what had been a strong first six months of the year for municipal bonds, generally turning investors toward taxable bonds. Still, the volatility of some equity markets, which appeared to be brought about by elements of the conflicts in Gaza, Ukraine, and Iraq, combined with the default (again) by Argentina, could potentially leave investors favoring municipal bonds.
The saga of Puerto Rico has dominated both the headlines and secondary market trading in recent months, but in general has not dampened interest in the broad market overall. What has remained in place is the equation of demand consuming limited supply. Also the ratio of municipal yields to treasury yields — an important indication of potential value — seems to be pointing to possible opportunity in investment-grade muni bonds, from intermediate maturities to the long end of the curve. It's here that the ratios have again reached 100% as of July 30.
After redemptions in early June fostered a round of selling, tobacco bonds have posted stronger returns than investment-grade bonds in July, with limited new issue supply supporting price action throughout all sectors. The spreads of high-yield municipals to investment grade continue to signal a potential value opportunity. As of July 29, the Barclays High Yield Municipal Bond Index spread was 454 basis points to the Barclays Municipal Bond (investment-grade) Index, still 170 basis points above the long-term average beginning in 2004.
In addition, the Barclays High Yield Municipal Bond Index is yielding 127% of the Barclays U.S. Corporate High Yield Index as of July 30. From these two comparisons alone, it is hard to ignore the potential for opportunity in municipal bonds. The argument for a crossover trade from high-yield corporates to high-yield municipals can be made, when considered on a taxable-equivalent basis.
Index Yield and Duration Profile as of 7/31/14
Source: FactSet as of 7/31/14. Index performance is not illustrative of Market Vectors ETF performance. Fund performance is available at www.marketvectorsetfs.com.
High-Yield Corps Index: The Barclays U.S. 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. High Yield Muni Index: The Barclays Municipal Custom High Yield Composite Index covers high yield rated (75%) and BBB rated (25%) municipal bonds with a nominal maturity of 1+ years. 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.
Taxable-equivalent yield represents the yield a taxable bond would have to earn in order to match, after federal taxes, the yield available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes, as well as to federal taxes on gains, and may be subject to alternative minimum tax. The chart displays the yields of municipal bond indices on a tax-equivalent and duration basis and compares such yields to other asset classes as represented by the indices defined above. Municipal bonds are exempt from federal taxes and often state and local taxes. Corporate bonds are subject to federal, state, and local taxes. Prices of bonds change in response to factors such as interest rates and issuer's credit worthiness, among others. Duration is represented by duration to worst. Historical information is not indicative of future results; current data may differ from data quoted.
IMPORTANT MUNI NATION® DISCLOSURE
Van Eck Global 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-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.
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.
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: 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
Munis: Summer of Discontent
Munis: No Summer Doldrums
Munis: Value in Municipal Closed-End Funds?
Munis: Halftime Perspective
Munis: Puerto Rico at a Crossroads
Munis: Infrastructure, All Talk?
Munis: 2Q'15 - No June Swoon But Finish Strong?
Munis: Talking Points on Chicago Downgrade
Munis: Update on the Commonwealth
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.