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Strong Technicals Vs. Weak Headlines - Friday, 03/30/2012

  • Muni demand-supply technicals are favorable
  • The market shrugs off downbeat headlines
  • High-yield munis continue to offer potential value

On both Wednesday (3/28) and Thursday (3/29), municipal prices regained lost ground, especially in the intermediate part of the curve. Why? 1) New issue supply fell by nearly 50% week over week; 2) Bernanke's testimony implied more Fed stimulus to support employment; and 3) Data showed no meaningful improvement in the housing sector.

Price activity suggests that today's muni yields and relative valuations appear attractive, although we suspect that professional traders drove the trend. Muni technicals are favorable, given that demand is catching up with supply, and the 10-20 year yield on municipal bonds* now stands at 107% of Treasuries.

Despite a few downbeat headlines — e.g., the state of Michigan threatening to takeover cash-strapped Detroit and Chapter 9 saber-rattling in Providence, RI — munis continue to trade smoothly overall. It appears that the market is viewing the headlines calmly, as isolated events that are not likely to spread contagion to other sectors or regions.

As measured by Barcap Indices1, investment-grade munis remain in positive territory year-to-date, with high-yield munis performing even better. (See performance breakout below.) High-yield munis currently are trading about 100 basis points above their long-term average spread to investment-grade indices, and, in our opinion, they continue to represent value.  

 

Yield 

 Index 

March
Month-to-Date through 3/26/2012
 

 Year-to-Date through 3/26/2012 

Barcap Muni1 

-0.81%

1.59%

Barcap HY Muni1 

0.64%

5.21%


*As measured by the Barclays Capital Municipal Bond index.
1The Barclays Capital 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 Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year.
 

 

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Please note that MUNI NATIONs that are 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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