• Muni Nation

    After The Dust Settles

    Jim Colby, Portfolio Manager
    October 26, 2012

    Even after the election decides the next leadership team, as well as the framework or "platform" on which political initiatives will likely drive expectations, I believe market fundamentals will continue to frame current opportunities in the municipal bond market:

    • The Federal Reserve is expected to keep rates low for months to come.
    • To date, there have been 46 consecutive weeks of positive inflows into municipal bond ETFs and mutual funds, reaching approximately $45 billion.
    • The ratio of investment-grade municipal bond yields to 10-year U.S. Treasury yields, while moving to, if not through, 100%, in my opinion, still presents municipals as an attractive value on a taxable-equivalent basis.
    • Major bank portfolio buying has augmented strength on the demand side, which, I believe, is stimulated in part by unattractive lending alternatives and higher deposit requirements of Basel III and Dodd-Frank agreements.
    • Although yield spreads have contracted, I believe there is still room for further positive moves if the current trend of spread-narrowing continues for (1) high-yield municipals to investment-grade municipals, as well as for (2) low investment-grade municipals (BAA) to highest investment-grade municipals (AAA).
    • A dwindling of reported defaults in the municipal marketplace appears to have buttressed investors' confidence in municipal credit quality in the short-term.

    Now through December will be a time for planning a 2013 strategy. I believe we can count on investors settling on choices for allocating their resources or rebalancing their portfolios — after the dust settles.


    Morningstar Muni Category Flows YTD: $45.4 Billion
    Morningstar Chart
    Source: Morningstar as of September 30, 2012

    Comparative Yields on a Tax-Equivalent Basis
    Comparative Yields on a Tax-Equivalent Basis Chart
    Source: Bloomberg as of 10/22/2012. For illustrative purposes only. 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.

    *Tax-equivalent yield is used by investors to compare yields on taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). Taxable-equivalent yield represents the yield a taxable bond would have to earn in order to match — after taxes — the yield available on a tax-exempt municipal bond. Taxable-Equivalent Yield = Tax Free Municipal Bond Yield/(1-Tax Rate). Tax-equivalent yield was calculated based on federal income tax rates. State, local and alterative minimum taxes have not been considered in the analysis. Yields are based on yield to worst, which is the lowest yield that a buyer can expect among the reasonable alternatives, such as yield to maturity, yield to call and yield to refunding.




    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 in 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 that MUNI NATION® represents the opinions of the author and these opinions may change at any time and from time to time. 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.

    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. 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 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

    Van Eck Securities Corporation, Distributor
    666 Third Avenue
    New York, NY 10017