• Muni Nation

    Dancing On The Head Of A Pin

    Jim Colby, Portfolio Manager
    June 28, 2012

    Often we look for macro issues and trends to help define direction and opportunity in the municipal bond market as a whole. However, there is an element of potential opportunity in the narrower realm of the pre-refunded municipal bond segment. As of June 25, 2012, these bonds offered higher yields compared to those of tax-free money market funds, 1.05% versus 0.02% respectively.1

    Pre-refunded municipal bonds are munis that have been refinanced by the issuers, with all future payments secured by U.S. Treasury bonds held in escrow. Therefore, their implied credit quality is considered, by some, to be the equivalent of the underlying Treasuries. According to Municipal Market Advisors (MMA), the recent scarcity of 2-5 year pre-refunded municipal bonds may take investors out a little further on the curve, raising demand in an already supply challenged market.2 For example, the number of securities in the Index tracked by the VanEck Vectors Pre-Refunded Municipal Index ETF (NYSE Arca: PRB) has shrunk by 885 issues since June 2009. MMA believes this reduction in available bonds may point to further price gains in longer dated, pre-refunded positions and they continue to give the sector "a buy" recommendation.2

    Yes, this is a small niche area of municipals, but if one is looking for tax-exempt income with the perceived safety of Treasuries, I believe PRB may provide access in this less well-known part of the market. In my opinion, dancing on the head of this pin may be less daunting for the conservative investor than investing in other muni bond segments.

    1Muni Yield Source: Six-Year pre-refunded bonds based on the MMD Municipal Yield Curve, June 25, 2012. Money Market Yield Source: iMoneyNet Money Fund Report, June 22, 2012.
    2MMA Weekly Outlook June 25, 2012.




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