• Muni Nation

    Turning The Page

    Jim Colby, Portfolio Manager
    February 06, 2014

    There is almost nothing more familiar to many generations, young and old, than the symbolic, if not physical, act that comes with the crossover into a new year. We are now into 2014 and (as has been noted by many in the municipal bond investment community) during the first half of January we saw a significant turnaround in the performance of municipal bond funds from what took place in November and December — indeed during the entire calendar year 2013. It leads one to wonder whether the market too is "turning the page."

    We are fortunate that the negative trends of the past eight months appear to have been broken, or at least interrupted, allowing us to reflect on real and inherent values in the muni market. To begin with, it would appear that credit quality is making a comeback as downgrades and credit analyses generally indicate that upgrades are anticipated to balance the scales in the coming year. Also, the Rockefeller Institute of Government reports that quarterly tax revenues at the state level have exceeded analysts' projections, suggesting, among other things, lessening pressure on leaders to raise taxes, and potentially opening the door to an uptick in hiring at the local level.

    Municipal bond index yields, for investors in the highest tax bracket on a taxable equivalent basis, were higher than most other fixed income benchmarks at the end of December 2013. I believe this could be a signal that the seeker of tax-free1 income may find quite attractive income as well as relative value in the municipal market place.

    Municipal Taxable Equivalent Yield vs. Taxable Fixed Income Chart 

    Source: Bloomberg. As of December 31, 2013.

    Also not to be overlooked is the variety of options open for short- and intermediate-term investors to reposition their municipal investments and potentially manage both interest rate sensitivity and credit exposure.

    I suggest that "turning the page" to 2014 can shine the spotlight on munis, which I believe have for many weeks been in the shadows and underappreciated.

    1There is no guarantee that the Fund's income will be exempt from federal or state income taxes or the alternative minimum tax.

    Index performance is not representative of VanEck Vectors ETF performance. Fund performance is available at www.vaneck.com/etfs.

    The graph is for illustrative purposes only.

    Taxable-equivalent yield represents the yield a taxable bond would have to earn in order to match — after federal taxes — the yield available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes as well as to federal taxes on gains and may be subject to alternative minimum tax. Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

    The chart displays the yields of the Barclays Municipal Bond Index and the Barclays High Yield Municipal Bond Index on a tax-equivalent yield basis and compares such yields to other indices. Fixed-income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal, corporate, agency and mortgage-backed bonds are not guaranteed by the full faith and credit of the United States and carry the credit risk of the issuer. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes, but subject to federal taxes. Other securities listed are subject to federal, state and local taxes. Prices of bonds change in response to factors such as interest rates and issuer's credit worthiness, among others.

    Historical information is not indicative of future results; current data may differ from data quoted. The listed indices are unmanaged and are not securities in which an investment can be made.

    U.S. Agency: The Barclays U.S. Agency Index is the Agencies component of the Barclays US Aggregate: Government-Related Index. U.S. Treasury: The Barclays U.S. Treasury Index is the U.S. Treasury component of the Barclays U.S. Government Index. The index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. Global Agg: The Barclays Global Aggregate Index is composed of the U.S. Aggregate, Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. It also includes a wide range of standard and customized sub-indices by liquidity constraint, sector, quality and maturity. U.S. Agg: The Barclays U.S. Aggregate Bond Index comprised of fixed-rate, publicly placed, dollar denominated, and non-convertible investment-grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity. Muni: Barclays Municipal Index is composed of investment-grade municipal bonds. Investment Grade Corps: The Barclays U.S. Corporate Index is the corporate component of the Barclays U.S. Credit index. The index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. EM Hard Currency: The Barclays Emerging Markets Hard Currency Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes USD, EUR, and GBP-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. U.S. Corp High Yield: The Barclays U.S. Corporate High-Yield Index covers 50 of the most liquid and tradable U.S. dollar-denominated, non investment-grade corporate bonds for sale in the U.S. EM Local: The Emerging Markets Local Currency Government Universal Index is the broadest Barclays benchmark tracking the performance of fixed-rate local currency Emerging Markets (EM) debt. High Yield Muni: Barclays Municipal High Yield Index is composed of below investment-grade municipal bonds.



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    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.

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