• Muni Nation

    April 2013

    by James Colby, Portfolio Manager

    Colby is a Senior Municipal Strategist with more than 30 years of fixed income experience, responsible for Market Vectors municipal bond investments.



    The $3.7 trillion municipal bond market resides largely in the domain of individual investors, whether through direct purchases or financial intermediaries. Monday was tax day — a day when investors can truly realize the benefits of municipal investments.

    Although returns have been subdued so far this year (0.93% for the Barclays Municipal Bond Index and 2.56% for the Barclays Municipal High Yield Bond Index1), those who invested in munis in 2012 were rewarded with strong performance (6.78% and 18.14% for the investment-grade and high-yield indexes, respectively).

    I believe the increase in the top income tax rate to 39.6% has created an additional benefit for income seekers who continue to commit to municipals. For those considering new allocations, however, there are some uncertainties, especially in the context of the latest budget proposal by the administration.

    What you should know:

    • Warnings have been issued from influential groups such as the National League of Cities about the detrimental effects of impairing the municipal market’s ability to provide states and municipalities with access to low-cost capital.
    • Capping the exemption would, in my opinion, harm more than the (very) wealthy. Studies from leading bank analysts reveal that municipal investors are a broader group of wage earners than previously thought; many fall well below the top tax bracket.
    • BofA Merrill Lynch research suggests that a 28% cap would raise only a small fraction of the exemption’s roughly $30 billion current "expenditure" while significantly raising borrowing costs for issuers.
    • I believe we are nearing the end of a "seasonal adjustment" which has seen issuance surge and demand ebb. The combination of headline concerns, income tax payments, and a large supply of new bonds may create a better buying opportunity in the coming weeks.

    So while Congress debates, in my opinion, opportunity could present itself in the near term.

    Munis Attractive at Ratios ≥ 100% of U.S. Treasuries2 


    Yield Ratios 

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    Ratio of U.S. Treasuries to AAA munis. Source: Bloomberg as of 4/15/13.

    1Returns as of 4/15/13. 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.

    2The municipal to Treasury ratio is a comparison of the current yield of municipal bonds to U.S. Treasuries indicating whether municipal bonds offer attractive yields compared to Treasury yields. If the ratio is below 100%, municipal bonds are yielding less than Treasuries; if the ratio is above 100%, municipal bonds are yielding more than Treasuries.