• Muni Nation

    Munis: Halftime Perspective

    Jim Colby, Portfolio Manager
    July 16, 2015
     

    We have crossed over into the second half of the 2015 calendar year and with that, it is an academic—but instructive—exercise to see where we have been and how we have performed. Because the thesis of this post is that investors are flush with cash from a variety of sources, I hope to make the point that they will have ample opportunity to deploy that cash into a muni market that is more welcoming than at the first of the year.

    Let's Review the Data  

    The total return for the Barclays Municipal Bond Index for the first six months of the year ending June 30 was 0.11% and for the Barlcays High Yield Municipal Bond Index it was -1.92%. Issuance of municipal bonds was higher by 3.30% year-over-year and outflows, as indicated by The Investment Company Institute (ICI), accelerated through the end of June, contributing to negative headlines and volatility in fixed income markets. Nevertheless, municipals managed a slight gain despite prevailing sentiment.

    The table below makes it clear that whether the rate rise was anticipatory of a Federal Reserve (“Fed”) move or in response to market conditions, investors will be rewarded for their patience with an opportunity to garner nearly 50% more yield from muni income products than was available at the start of the year.

     

    Investment Grade Municipal Yield Curve Changes

     

    Maturity 12/31/2014 6/30/2015 Change
    5 Year 1.32% 1.38% 6 basis points
    10 Year 2.04% 2.28% 24 basis points
    15 Year 2.33% 2.77% 44 basis points
    20 Year 2.58% 3.01% 43 basis points
    25 Year 2.77% 3.20% 43 basis points
    30 Year 2.86% 3.28% 42 basis points

    Source: Municipal Market Data (MMD) as of June 30, 2015.  

     

    By every measure ( see post from Thursday, 05/28/2015) I believe cash available for reinvestment in muni portfolios will continue to outstrip new issuance through the summer months (negative $5 billion-$10 billion), setting the stage for a potentially stronger finish, in which demand surpasses supply, to the calendar year-end. This scenario is not too dissimilar to that of 2013-2014, when good performance emerged at the end of the 2013 year.

    Finally, another backward-looking but positive longer term sign for the muni market: According to Smith’s Research & Gradings, the major agencies that rate municipal debt upgraded 447 issuers while downgrading 402 during the first six months of 2015. By comparison, in 2014 upgrades versus downgrades were 988 to 682, respectively. The inference drawn from these numbers is that the underlying economic environment is improving for those municipalities that issue debt. This is good news for investors who should be encouraged to know that credit quality continued to improve broadly across the spectrum of municipal bonds.

      jim_colby_signature  

     

    Post Disclosure

    The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The Barclays High Yield Municipal Bond Index is considered representative of the broad market for below investment grade, tax-exempt municipal bonds with a maturity of at least one year.

  • IMPORTANT MUNI NATION® DISCLOSURE  

    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 on 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 this represents the views of the author and these views 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-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. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.

    The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index.

    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.

    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
    800.826.2333