Munis: A View from the Eighth Month
JIM COLBY: We're going to call this segment, “A View from the Eighth Month;” it’s a summary of what has happened year-to-date in the municipal marketplace. The fundamentals that are important to pay attention to continue to be positive for the municipal marketplace. Supply and demand are still very favorable for municipals. As of the month of August, coupon and maturity cash coming into the marketplace for reinvestment total some $28 billion, while new issue supply, as measured by the municipal market data, comes to one third of that at about $7-8 billion available for investment purposes. That data point alone suggests a potential opportunity for performance to continue in the municipal marketplace. Fundamentals have taken us year-to-date to several very positive numbers. Municipal performance as measured by the Barclays Municipal Bond Index is up over 6.8% year-to-date. The Barclays High Yield Municipal Bond Index is up over 8.2% year-to-date. The numbers that I just gave you relative to the fundamentals and the opportunity set suggest that continued good performance may be available in the municipal space, in my view.
COLBY: Another feature that accrues to the general strong performance of municipals year-to-date and perhaps also in years to come is embedded in a report recently issued by Moody's Investors Service. The report suggests that the ratio of municipal credit rating downgrades to upgrades continues to narrow. That means that fundamentals at the local level are generally improving. Credit quality has improved. One point that's worth noting in that report by Moody's is that both the states of New York and California, the two largest issuers of municipal bonds in our industry, received upgrades this past quarter: California to Aa3 and New York State to Aa1. That in itself buoys overall credit quality in the municipal space.
COLBY: As everyone knows Puerto Rico has been significantly in the headlines for quite some time. I wouldn't say that Puerto Rico has had no impact upon the municipal marketplace, but certainly performance relative to the indexes that I mentioned earlier in this segment suggests that Puerto Rico has not had a damaging impact upon the broad municipal marketplace. Its problems have been largely contained within the context of the investors who invest or continue to support investing in Puerto Rico issuance and credit. The problems that Puerto Rico may face going forward are considerable. They're economic, political, and legal. Still, Puerto Rico remains an important element in the municipal marketplace and will likely have an impact upon investors and investment through the remainder of this year no matter what happens. The important thing to remember is the broad municipal marketplace, which is some $3.7 trillion in overall valuation, remains largely unaffected by the events that are taking place in the commonwealth of Puerto Rico.
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The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years.
All of the Market Vectors municipal bond ETFs can potentially hold debt issued by the Commonwealth of Puerto Rico. At the time of this filming, only the Market Vectors High-Yield Municipal Index ETF and the Market Vectors Short High-Yield Municipal Index ETF, held Puerto Rico debt. This means the Funds would be susceptible to additional risks associated with investment in Puerto Rico.
Gradations 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.
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