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See a Fork in the Road?

May 17, 2024

Read Time 2 MIN

Barclays sees stable municipal yields due to supply, while BofA predicts lower rates from Quantitative Tapering and economic softening.

Yogi Berra said, “pick it up”. Common sense asks, “Why is it there?”. In this instance, the fork in the road represents a current dichotomy of opinion: how will our fixed-income markets, specifically the municipal market, perform this summer?

Research commentaries from Barclays and Bank America Merrill Lynch (“BofA”) effectively present their differing opinions on the direction the market will take over the next three months.

Barclays suggests that the burgeoning supply dynamics will continue throughout the summer, effectively capping the downward movement of yields in the muni space.1 Although June and July are typically months where many bonds mature and coupon payments are made, evidence of uneven flows in previous weeks supports the notion that absent a reversal in guidance from the Federal Reserve (“Fed”) and a move to lower rates, a rally is unlikely.

BofA securities, however, build its outlook on technical observations which include2:

  • The announced start of Quantitative Tapering in June will reduce the monthly runoff of Treasuries holdings, leading to a bull steepening of the curve. Any move by Treasuries to lower yields will pull municipals along with it.
  • Perceived weakening implied in the economic data released in April, possibly pointing to a softening of the labor market, would underpin a Fed decision to consider moving rates lower – sooner.
  • Continued demand from seasonal reinvestment (maturities and coupon payments) and the normal improvement in the buy/sell ratios at quarter end will likely be supported by the continuing inflows seen, especially in the SMA platforms. Hence, a summer rally.

These two views certainly have their merits. But still trying to understand the Fork? It would seem to us that capturing tax-exempt flow in an exchange-traded fund (“ETF”), such as the VanEck Intermediate Muni ETF (ITM), might be a good parking spot until evidence points you in which direction to go.

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Important Disclosure and Definitions

1 BofA Securities Municipals Weekly, Macro conditions and Market Technicals Equals Multi-Month Muni Rally. Industry Overview, May 3, 2024.

2 Barclays FICC Municipal Research, May 10, 2024.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Duration: Estimates how much the value of a bond portfolio would be affected by a change in prevailing interest rates. The longer a portfolio’s duration, the more sensitive it is to changes in interest rates.

Index performance is not representative of fund performance. Indices are not securities in which investments can be made. It is not possible to invest directly in an index.

An investment in the VanEck Intermediate Muni ETF (ITM) may be subject to risks which include, among others, municipal securities, credit, interest rate, call, California, New York, special tax bond, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and industry concentration risks, all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Funds 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, a wholly owned subsidiary of Van Eck Associates Corporation.

Important Disclosure and Definitions

1 BofA Securities Municipals Weekly, Macro conditions and Market Technicals Equals Multi-Month Muni Rally. Industry Overview, May 3, 2024.

2 Barclays FICC Municipal Research, May 10, 2024.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Duration: Estimates how much the value of a bond portfolio would be affected by a change in prevailing interest rates. The longer a portfolio’s duration, the more sensitive it is to changes in interest rates.

Index performance is not representative of fund performance. Indices are not securities in which investments can be made. It is not possible to invest directly in an index.

An investment in the VanEck Intermediate Muni ETF (ITM) may be subject to risks which include, among others, municipal securities, credit, interest rate, call, California, New York, special tax bond, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and industry concentration risks, all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Funds 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, a wholly owned subsidiary of Van Eck Associates Corporation.