• Muni Nation

    Opportunity In Plain Sight

    Jim Colby, Portfolio Manager
    September 14, 2012

    Municipal bond yields have sunk to near historic lows. Sector and quality spreads continue to narrow. To date, municipal bond performance is on pace with that of last year's. In my opinion, this has been driven by returning confidence in municipal credit quality and demand continuing to overwhelm supply.

    So where can an investor harvest returns while the Fed keeps rates low?

    Near term, I see long bonds as an opportunity where few investors have dared venture. Municipal bond mutual funds once grew on the back of long-term funds, which sought to capture the maximum yields available from issuers raising capital in the markets. Deals were crafted to include "term bonds" in great quantities with maturities of 30-40 years.

    With greater volatility creeping into the muni space and a flattening of the yield curve, which dramatically narrowed the yield advantage of long bonds, a shift of demand and then issuance may have removed focus from the 30-year segment. As noted recently by Bloomberg, financings generally now offer maturities of 20 years and less, catering to a demand shift to lower duration bonds.

    I believe this shift has kept the curve steep between 15-30 years, and created a near-term opportunity. As evidenced by the 9.27% year-to-date total return of the Barclays Long Municipal Bond Index,* only high-yield municipals delivered greater performance so far this year.

    Yes, a modest amount of long-term bonds is brought to market, but until a supply/demand shift reverses the current pattern, I believe it behooves investors seeking yield and return to consider longer-term municipal bonds.

    *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 Long Municipal Bond Index is a sub-set of this broader index.




    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