Muni Investment Opportunities in the Current Environment
TOM BUTCHER: What are the advantages of investing in municipal bonds in the current environment?
JIM COLBY: There’s a great deal of uncertainty and volatility in the overall marketplace right now. Equities are up one day, down the next. Corporations have been impacted significantly by the drop in energy and current oil prices. Alongside all of this is the municipal bond market, which, given its historically strong credit quality and low volatility, will hopefully continue to deliver strong after-tax returns to investors.
The municipal marketplace is one that offers a variety of potential opportunities for investors, whether investors are looking to manage their interest rate risk or achieve higher returns in terms of yield. It may even be overlooked by investors who are departing from other traditional asset classes and looking for a place to put their money. I think the municipal marketplace serves as an asset class that will likely please investors once they have an opportunity to look at it and its potential benefits.
BUTCHER: Thank you. Do you see any specific opportunities today?
COLBY: I think there are two fairly distinct opportunities for investors to consider. One is based on interest rates and interest rate outlooks. The other is based on risk that investors might be willing to assume on a credit basis.
From an interest rate perspective, the history of the municipal yield curve, particularly the intermediate part of it, suggests that over time the steepness of the curve offers an opportunity to gain incremental returns as an investment moves from longer maturities to shorter maturities. We have a product with ticker symbol ITM (Market Vectors AMT-Free Intermediate Municipal Index ETF) that captures that steepness and investment opportunity without taking on a great deal of interest rate risk, which one would normally see and expect from the 30-year part of the yield curve.
The other opportunity is in high yield. Municipal high yield, because it is broadly diversified, doesn't have the distinct and deep exposure to energy that other asset classes may have, particularly in the corporate high yield marketplace. Municipal high yield’s broader diversification still delivers high yield and the taxable equivalent is favorable relative to the corporate market and other asset classes.
Intermediate investment grade and municipal high yield are the two opportunities that I would suggest investors take a look at.
BUTCHER: Wonderful. Thank you very much.
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