Muni Nation http://www.vaneck.com/Templates/Blog.aspx?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 7/22/2014 11:28:33 PM en-US All Eyes on Puerto Rico http://www.vaneck.com/muni-nation-blog/all-eyes-on-puerto-rico-07-11-14/ It would be wrong to underestimate the value and impact of the recent upheaval in the municipal bond market caused by the declining fortunes of the Commonwealth of Puerto Rico. I wanted, therefore, to address some of the issues in this edition of MUNI NATION. I believe the July 8, 2014 commentary from Municipal Market Advisors (MMA) is a good synopsis of the current environment. With their permission, I've included it below:

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Muni Nation 7/11/2014 12:27:49 PM It would be wrong to underestimate the value and impact of the recent upheaval in the municipal bond market caused by the declining fortunes of the Commonwealth of Puerto Rico. I wanted, therefore, to address some of the issues in this edition of MUNI NATION. I believe the July 8, 2014 commentary from Municipal Market Advisors (MMA) is a good synopsis of the current environment. With their permission, I've included it below:

"It would have been hard to imagine that the news out of Puerto Rico would have zero effect on the general market this month. That the Treasury market has been constructive and, in general, municipal rates have only weakened modestly, speaks to the positive technical backdrop currently in place (modest supply estimates over the next two weeks, large reinvest up to now, still mildly positive flow figures and the broader rate environment). . . . Still, Puerto Rico is having an impact:

As for the round-lot Puerto Rico [institutional] activity: several of the larger mutual fund complexes are seeing outflows and in varying cases selling. . . . It is important to point out that demand from taxable high-yield buyers exists and is likely stabilizing the current prices (after last week's adjustment).

As for odd-lot Puerto Rico [retail] activity: we understand that several retail brokerage networks have been inundated with sellers. It is unclear though if a consistent buyer for these offerings has emerged as anecdotally we understand the bids that have arrived have been cheap enough to push retail to hold for the time being. If they continue to go unfilled it should continue to widen the gap between the trade sizes and prices on the varying Puerto Rico credits."

I see Puerto Rico's debt restructuring legislation signed into law two weeks ago, combined with another wave of downgrades by Moody's, as reference points for the current market. I believe it is an inescapable truth that taxable buyers of Puerto Rico debt seem to be providing some important liquidity for this market.

Barclays Puerto Rico Municipal Bond Index YTD Total Return

Source: Barclays as of July 9, 2014.

The Barclays Puerto Rico Municipal Bond Index covers tax-exempt debt issued by the Commonwealth of Puerto Rico with a nominal maturity of one or more years.


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A Rising Tide? http://www.vaneck.com/muni-nation-blog/a-rising-tide-07-02-14/ What I want to build on is the theme I've been noticing ― optimism over the U.S. economy ― and what I believe it might mean for municipal bond creditworthiness. Total nonfarm payroll employment rose by 217,000 in May 2014, and the unemployment rate remained unchanged at 6.3% for the month, following a decline of 0.4% in April. This is better than the recession levels of three and four years ago.

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Muni Nation 7/2/2014 2:50:19 PM In some respects, this edition of MUNI NATION might be looked upon as a sequel to one of my recent posts. What I want to build on further is the theme I've been noticing ― optimism over the U.S. economy ― and what I believe it might mean for municipal bond creditworthiness.

Total nonfarm payroll1 employment rose by 217,000 in May 2014, and the unemployment rate remained unchanged at 6.3% for the month, following a decline of 0.4% in April. This is better than the recession levels of three and four years ago. While housing has offered mixed results, perhaps due in part to the brutal winter experienced by a large part of the country, inflation as measured by the Consumer Price Index2 (CPI), has remained relatively low at 2.0% (unadjusted for the 12 months ended May 2014)3 .

Total nonfarm payroll employment

Source: Bureau of Labor Statistics, Current Employment Statistics Survey as of May 2014.

Consumer Price Index for All Urban Consumers

Source: Bureau of Labor Statistics, Consumer Price Index as of May 2014.

With modest U.S. growth expectations going forward, the outlook for creditworthiness in the muni market could be one tinged with some optimism. With activity and spending on the rise, the health of local economies may improve. Indeed, as suggested on June 6, 2014 by Michael Hanson, U.S. economist for Bank of America Merrill Lynch (BAML), 10 of the 12 national economic strength indicators he follows have been showing signs of improvement.

Philip Fischer, a municipal strategist (also of BAML), offers an analysis showing a figure for state and local tax revenues 2.7 times that of our national gross domestic product (GDP) for the period ended May 2014. The analysis also suggests that, as the nation's economy has grown, the economic activity at the local level has grown at nearly three times the national rate. If the pattern repeats, then we may begin to see the rising tide of broad-based improvement in employment and consumption which may be a contributor to stabilization in the finances of certain issuers of municipal bonds that are dependent upon a healthy tax base in real estate and local merchandizing.

1Nonfarm payroll is a statistic researched, recorded, and reported by the U.S. Bureau of Labor Statistics intended to represent the total number of paid U.S. workers of any business, excluding the following employees: general government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals, and farm employees. This monthly report also includes estimates on the average work week and the average weekly earnings of all nonfarm employees.

2CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

3Source: U.S. Bureau of Labor Statistics as of May 2014.


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Game Changer? http://www.vaneck.com/muni-nation-blog/game-changer-06-27-14/ According to The New York Times, "[A] new law [proposed by the government of Puerto Rico] intends to create an organized process through which some of its debt can be cut or reduced. It would apply to at least $22 billion owed by public corporations including the electric authority, the aqueduct and sewer authority, and the highway authority. The legislation does not apply to Puerto Rico's general obligation debt, which officials say carries constitutional protections that bondholders must be repaid."

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Muni Nation 6/27/2014 9:04:01 AM According to The New York Times, "[A] new law [proposed by the government of Puerto Rico] intends to create an organized process through which some of its debt can be cut or reduced. It would apply to at least $22 billion owed by public corporations including the electric authority, the aqueduct and sewer authority, and the highway authority. The legislation does not apply to Puerto Rico's general obligation debt, which officials say carries constitutional protections that bondholders must be repaid."

Yesterday, on that news, the debt of those authorities saw the bid-side of the market sink 3-5 points ($ price), depending upon the size of the block being offered, while the recently issued Puerto Rico general obligation (GO) 8's (8% coupon bonds, issued in March 2014 and maturing on July 1, 2035), which are very actively quoted, rose some 3 points ($ price) to $88.25. This morning these bonds were being quoted from $88.625 – $89.125.

After many months of the Commonwealth fending off suggestions that it was going down a path toward some sort of restructuring, this news could seem to be a game changer. We now must wait to see what the Legislature does with the proposal and if the Puerto Rico courts might have a say in the outcome. It could also be fair to say that this is evolving out of an environment that is challenging economically as well as politically.


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Green Grass And High Tides http://www.vaneck.com/muni-nation-blog/green-grass-and-high-tides-06-18-14/ As we continue to ride the 2014 performance wave in the municipal bond market, a colleague suggested that I address one important cause of 2013's poor performance: defaults. I believe the price decline and outflows from municipal bond mutual funds, separate accounts, and ETFs were caused in part by the City of Detroit's Chapter 9 filing, downgrades of Puerto Rico, and downgrades of various other key issuers. However, according to the May 2014 update to the Moody's annual study, "U.S. Municipal Bond Default and Recoveries 1970-2013," I believe the municipal marketplace has been remarkably resilient.

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Muni Nation 6/17/2014 9:53:19 AM As we continue to ride the 2014 performance wave in the municipal bond market, a colleague suggested that I address one important cause of 2013's poor performance: defaults.

I believe the price decline and outflows from municipal bond mutual funds, separate accounts, and ETFs were caused in part by the City of Detroit's Chapter 9 filing, downgrades of Puerto Rico, and downgrades of various other key issuers. However, according to the May 2014 update to the Moody's annual study, "U.S. Municipal Bond Default and Recoveries 1970-2013," I believe the municipal marketplace has been remarkably resilient.

Consider the following, according to Moody's:1 

  • The number of municipal bond issuer defaults has increased since the financial crisis in 2008, but default rates among such issuers generally remain low relative to corporate issuers.
  • Municipal issuer recovery rates are trending lower than they've been in the recent past and are more variable in range than corporate issuer recoveries; yet municipal recoveries are still higher than corporate recoveries.
  • Financially, governments are generally stabilizing, but Moody's expects some to remain pressured in the absence of a strong economic rebound.
  • Moody's expects municipal bond issuer defaults to generally remain few in number.

     

Furthermore, according to the study, "Municipal issuer downgrades have outpaced upgrades over any 12-month period for every monthly cohort since 2009." This suggests to me the struggle our general economy has endured since the financial crisis of 2008. However, on the bright side, Moody's notes, "Such deterioration in credit quality seems to have stabilized since mid-2012." The analysis is done in the context of only issues they rate, and therefore, the assertion that there have been only 30 defaults (among rated issuers) since 2008 understates the true amount, which would include those issuers without ratings.

To look deeper, I turn to Municipal Market Advisors' (MMA's) default study, which, although only four years old, reveals a declining pattern of downgrades and defaults, and also covers issuers who are not rated by any of the services. MMA states in the February 2014 edition of "Municipal Insights," "It appears fewer issuers with ongoing impairments are falling into default now; many of the most vulnerable bond-financed projects have already defaulted; current economic challenges are somewhat less severe than in prior years; and/or capital market solutions are now more available."

MMA's study indicates that the number of defaulting issuers it has identified has declined from 107 in 2012, to 64 in 2013, and to 19 through the end of May 2014. This is evidence, I believe, of a potentially confidence-building trend for the asset class.

All of the above is but one element of consideration for municipal asset allocators, but, in my opinion, the municipal bond fund flows seem supportive of the recent emergence of interest from investors.

1Study universe covers only issuers and issues rated by Moody's Investors Service.


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High Level View http://www.vaneck.com/muni-nation-blog/high-level-view-06-10-14/ Much of the muni commentary these past several days has focused on what, to some, may have been the surprising and meaningful performance of the asset class as measured by the Barclays Municipal Bond Index: 5.91% year-to-date (YTD) as of 6/4/14. I believe the primary driver of performance this year has been the imbalance of newly issued municipal bonds coming to market to meet demand. However, the forward 30-day visible supply may now have reached what I believe to be meaningful levels.

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Muni Nation 6/10/2014 9:31:00 AM Much of the muni commentary these past several days has focused on what, to some, may have been the surprising and meaningful performance of the asset class as measured by the Barclays Municipal Bond Index: 5.91% year-to-date (YTD) as of 6/4/14.

I believe the primary driver of performance this year has been the imbalance of newly issued municipal bonds coming to market to meet demand. The forward 30-day visible supply may now have reached what I believe to be meaningful levels (see chart). The rise in the market has taken a pause to seemingly await the arrival of the new bonds.

30-Day Visible Municipal Bond Supply (as of 6/4/14) 

  • Total Supply on 6/4/14: $13.6 billion
  • 2014 YTD Highest Supply (on 6/3/14): $15.0 billion
  • 2014 YTD Lowest Supply (on 3/7/14): $1.9 billion

30-Day Visible Municipal Bond Supply

Source: Bond Buyer. The 30-day visible supply is compiled daily from The Bond Buyer's Competitive and Negotiated Bond Offerings calendars. It reflects the dollar volume of bonds expected to reach the market in the next 30 days. Issues maturing in 13 months or more are included.

If you remember a year ago, the "Taper Tantrum" pushed rates higher by almost 100 basis points (1%), just at the suggestion of the Federal Reserve slowing its bond buying program. I don't currently see evidence or trends to suggest we will see that kind of jump again in the near term.

The municipal bond market, in my opinion, continues to offer potential value across the yield curve and the credit spectrum. I believe this has been recognized by institutional buyers. However, in my opinion, the significance of the tax exemption often goes underappreciated when investors get caught up with "trends" or secular market moves.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years.


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Reality Check http://www.vaneck.com/muni-nation-blog/reality-check-05-30-14/ Total new municipal bond issuance in the U.S. was $102 billion year-to-date (YTD) ending May 23, 2014. Tax-exempt municipal bond issuance was $93 billion during the same period. The difference between the two was taxable municipal bond issuance. Consider overlaying this data mentally with the recent performance of the municipal indices.

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Muni Nation 5/30/2014 9:47:08 AM Total new municipal bond issuance in the U.S. was $102 billion year-to-date (YTD) ending May 23, 2014. Tax-exempt municipal bond issuance was $93 billion during the same period. The difference between the two was taxable municipal bond issuance.


Year 

Total Muni Bond Issuance
($B)
 

Taxable Muni Bond Issuance
($B)
 

Tax-Exempt Muni Bond Issuance
($B)
 

2011

258

26

233

2012

352

28

324

2013

299

31

268

2014 (YTD)

106

9

98

Source: Bloomberg as of May 23, 2014.

As you look at the table above, consider overlaying this data mentally with the recent performance of the municipal indices (below). I believe this provides evidence that may support municipals until issuers regain their "mojo" and begin to bring new municipal bond deals to market in volume sufficient to sate current demand. So far this year, the issuance volume is well behind the average, even for the post-crash era, with no evidence, in my opinion, to suggest an immediate return to the "norm."


Barclays Index Total Return
As of 4/30/14

3 Months (%) 
 

YTD (%)
  

Municipal Bond Index

2.56

4.56

Municipal Long Bond Index

4.30

7.52

Municipal High-Yield Index

3.71

7.12

Municipal AAA Index

1.77

3.29

Municipal AA Index

2.26

4.14

Municipal A Index

2.88

5.22

Municipal BAA Index

4.93

7.17

Source: Bloomberg as of April 30, 2014.

The Barclays Municipal Bond Index was up 10.70% in 2011 and 6.78% in 2012, but -2.55% in 2013. To me, this suggests that issuance volume alone may not be the only driver of performance.

The reality check, as we head into the backstretch of the second quarter, is that I believe municipals could continue to perform if what appear to be improving underlying economies and credit characteristics at the state and local levels remain intact. In my opinion, both of these contribute to the demand on a market that seems to be starving for additional supply.


The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The AAA, AA, A, BAA, and long indices are subsets of this broader index. The Barclays Municipal High-Yield Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years.


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Spotlight On Rhode Island http://www.vaneck.com/muni-nation-blog/spotlight-on-rhode-island-05-16-14/ Rhode Island. The Ocean State. Little Rhody. It is officially the smallest U.S. state in area but the second most densely populated with a little over one million residents as of a 2012 census estimate. It was also the first of the original 13 colonies to declare independence from British rule. Why this little civics refresher? Rhode Island is at the heart of a serious discussion centered on the "moral obligation" to pay a debt, according to a recent Reuters article.

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Muni Nation 5/16/2014 10:00:23 AM Rhode Island. The Ocean State. Little Rhody. It is officially the smallest U.S. state in area but the second most densely populated with a little over one million residents as of a 2012 census estimate. It was also the first of the original 13 colonies to declare independence from British rule.

U.S. States with Highest Population Density

U.S. States With Highest Population Density 

Source: U.S. Census Bureau as of 2012.

Why this little civics refresher? Rhode Island is at the heart of a serious discussion centered on the "moral obligation" to pay a debt, according to a recent Reuters article.1 The bonds were issued for the benefit of a failed business enterprise belonging to former Red Sox pitcher Curt Schilling, and the article asserts that the state has no "legal" obligation to pay the debt. However, since as far back as the Revolutionary War and the subsequent adoption of the U.S. Constitution, debts incurred by states have been deemed valid obligations to be met. States, as we might be reminded by legal scholars, are generally required to observe their contracts and meet their debt obligations.

Philip Fischer points out in his 2013 book, Investing in Municipal Bonds, that state and local governments have generally met their obligations because access to the capital markets is critical to facilitating long-term growth and economic stability. Thus the concept of an "obligation," whether general, moral, or implied, has specific grounding in statehood. On Monday, Standard & Poor's Ratings Services warned of a possible downgrade to Rhode Island's "AA" credit rating if the state does not meet its obligation for the Curt Schilling bonds. Were it not to pay, the state's cost would be measured in higher interest rates for its debt. Though failure to follow through likely will not be catastrophic, in my opinion, it will send a resounding message to municipal bond investors that a cornerstone element of the municipal capital markets is being tested.

1Rhode Island Will Be Downgraded if Schilling Debt Defaults-S&P, Reuters, May 12, 2014.

All of the Market Vectors municipal bond ETFs can potentially hold debt issued by the state of Rhode Island (RI). At the time of posting, only two of our funds, the Market Vectors High-Yield and Intermediate Municipal Index ETFs, held RI debt. (Click the preceding hyperlinks to view geographic weightings.) This means the Funds would be susceptible to additional risks were RI downgraded.


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Who's Smiling Now? http://www.vaneck.com/muni-nation-blog/who-is-smiling-now-05-02-14/ The mood and landscape of the municipal bond market at the end of April could not have been more different from the general municipal bond market sentiment of 2013. Those who have paid attention to some of the fundamentals have reason to smile, in my opinion. April marked the fourth consecutive month of positive returns for the municipal bond asset class, as measured by the Barclays Municipal Bond Index, which was up 4.56% YTD as of April 30, 2014. I believe tensions in some former "Eastern Bloc" nations, a sputtering economic recovery, and a municipal market bereft of a more normalized pattern of heavier spring issuance have all conspired to create a strong bid for fixed income.

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Muni Nation 5/2/2014 3:19:46 PM The mood and landscape of the municipal bond market at the end of April could not have been more different from the general municipal bond market sentiment of 2013. Those who have paid attention to some of the fundamentals have reason to smile, in my opinion. April marked the fourth consecutive month of positive returns for the municipal bond asset class, as measured by the Barclays Municipal Bond Index, which was up 4.56% YTD as of April 30, 2014. I believe tensions in some former "Eastern Bloc" nations, a sputtering economic recovery, and a municipal market bereft of a more normalized pattern of heavier spring issuance have all conspired to create a strong bid for fixed income.

Further underpinning the municipal market are reports of increased hiring in the U.S. at the state and local government levels, steady improvement in revenue flows, and a continued decline in the number of impairments and defaults as reported in the March edition of Municipal Market Advisors' Municipal Market Brief. Impairments and defaults stood at nine compared with 25 and 22, respectively, in the same time period (January – March) for the prior two years. And what I believe is not to be overlooked is the value story that was created by an oversold market in 2013, now being harvested by certain investors that appear increasingly more comfortable with municipal credit as a potential source of attractive income.

The flow of assets back into municipal bond funds and ETFs in 2014 is especially noteworthy to me in the high-yield sector. The High Yield Muni Morningstar Category, including all ETFs and mutual funds, has seen inflows this year of $2.3 billion as of March 31, 2014. In addition, the yield spread between the Barclays Municipal High Yield Bond Index and the Barclays (investment grade) Municipal Bond Index was at 410 basis points at the beginning of April. That is 128 basis points above the long-term average of 282 basis points and, as noted by Barclays, the widest since February 2012. What I think is even more significant is the yield ratio of the Barclays Municipal High Yield Bond Index to the Barclays U.S. Corporate High Yield Index, which, as illustrated in the chart below, was at an astounding 130.1% at the end of March, its highest ratio in nearly 20 years. In my opinion, the potential opportunity has not gone unnoticed by hedge fund and cross-over corporate debt buyers.

Ratio of Municipal High Yield Index to U.S. Corporate High Yield Index Yield to Worst
December 1995 – March 2014

Ratio of Municipal High Yield Index to U.S. Corporate High Yield Index Yield to Worst 

Source: Barclays Research.

Performance is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays Municipal High Yield Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years. 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.


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Mazzilli's Municipal Musings – Part 2 http://www.vaneck.com/muni-nation-blog/mazzillis-municipal-musings-part-two-04-09-14/ MUNI NATION invited Paul Mazzilli, a leading ETF and closed-end fund analyst, to provide a three-part commentary on the state of the municipal closed-end fund market.

At this time, I believe the underlying market for municipal bonds looks favorable. Federal spending cuts, in my opinion, are not likely to affect municipal credits, and the U.S. economy continues to grow at a moderate rate, which is good for municipals. In addition, I believe last year's tax rate increase for the wealthiest Americans and the likelihood of further rate hikes, or losses of deductions, may help support the market for municipal bonds.

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Muni Nation 4/9/2014 3:15:11 PM Paul MazzilliMUNI NATION invited Paul Mazzilli, a leading ETF and closed-end fund analyst, to provide a three-part commentary on the state of the municipal closed-end fund market. 

Premiums, Discounts, and a Suitable Index 

At this time, I believe the underlying market for municipal bonds looks favorable. Federal spending cuts, in my opinion, are not likely to affect municipal credits, and the U.S. economy continues to grow at a moderate rate, which is good for municipals. In addition, I believe last year's tax rate increase for the wealthiest Americans and the likelihood of further rate hikes, or losses of deductions, may help support the market for municipal bonds. However, as the market outlook appears better so far in 2014 compared to last year, closed-end funds (CEFs) investing in municipal bonds continue to sell at historically wide discounts. Buying CEFs at discounts, in turn, tends to increase the yield an investor may get on the market price. (See example below.) I believe that discount is likely to narrow over the next few months as the underlying municipal market stabilizes. Historically, as the market stabilizes, CEF discounts have tended to shrink as investors chased the potentially higher yields provided by the discounts.

"Yield Enhancement" and Absolute Discounts  

  1. Let's assume that a fund's underlying portfolio at NAV yields 10%

    Distribution = $1.00 per share
    Net Asset Value (NAV) = $10.00 per share
    Distribution Rate at NAV = $1.00 / $10.00 = 10%

     
  2. Let's further assume that the shares trade at a 10% absolute discount

    Net Asset Value = $10.00 per share
    Share Price = $9.00 per share
    Absolute Discount = (share price – NAV) / NAV = ($9 - $10) / $10 = -10%

     
  3. Because they are buying at a discount, investors purchasing these shares will get a higher yield

    Distribution = $1.00 per share
    Share Price = $9.00 per share
    Distribution Rate at Share Price = $1.00 / $9.00 = 11.1%

    The "Yield enhancement" is calculated by distribution rate (share price) / distribution rate (NAV) or 11.1% / 10% = 1.1%
 


Source: Morningstar. Past performance is not an indication, or guarantee, of future results. Hypothetical or model performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading and accordingly, may have under- or over-compensated for the impact, if any, of certain market factors, such as market disruptions and lack of liquidity. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading. Simulated performance is subject to the fact that it is designed with the benefit of hindsight. The actual performance of the ETP may vary significantly from the hypothetical data.

In my opinion, a good barometer for the market of CEFs investing in municipal bonds is the S-Network Municipal Bond Closed-End Fund Index, an index of 84 municipal bond CEFs (as of 3/31/14) that are selected and weighted using a proprietary rules-based methodology. The index uses a value approach to take advantage of pricing inefficiencies related to CEFs trading at discounts to their NAV. Unlike most ETF indices, which are market-cap weighted, this index weights initially by NAV so as not to give a greater weight to CEFs selling at richer valuations. It then tiers CEFs to overweight those selling at higher discounts and to underweight CEFs selling at lower discounts or premiums. This value approach is designed to increase the allocation to undervalued CEFs during quarterly index rebalancing and reduce exposure to more richly valued CEFs. On average, since its inception on June 3, 2011, the index has an average discount of 2% to 4% greater than that of its overall constituents. The index's members are primarily high-quality investment-grade municipal bond CEFs. The index receives a yield enhancement from the currently 84% of assets in leveraged CEFs in addition to the index rules designed to give a greater weight to CEFs selling at discounts to their NAVs. While leverage may enhance the yield, it can also magnify losses. As of March, 14, 2014, the components of the index traded at an average discount of -7.02% and the index's dividend yield was 7.41%. This index yield is the pre-tax equivalent of 12.26% for investors subject to the maximum Federal Tax rate of 39.6% and the pre-tax equivalent of 10.29% for those subject to the Federal tax rate of 28%.

The following chart shows the history of the average discount for the S-Network Municipal Bond Closed-End Fund Index and how the current level compares to historical levels.

S-Network Municipal Bond Closed-End Fund Index: Premium/Discount — 6/30/2011 – 3/31/2014

S-Network Muni Bond Closed-End Fund Index: Premium/Discount 

Source: S Network, as of March 31, 2014. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting our website. Historical performance is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made.

Principal Investment Risks:

Diversification does not assure profit nor protect against loss.

XMPT's performance, because it is a fund of funds, is dependent on the performance of the Underlying Funds. The Fund is subject to the risks of the Underlying Funds' investments, and the Fund's shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments.

The shares of a closed-end fund may trade at a discount or premium to its net asset value ("NAV"). Additionally, the securities of closed-end investment companies in which the Fund will invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Fund's long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished.

Investment in the underlying funds may be subject to municipal securities risk, high-yield securities risk, fixed-income securities risk, tax risk, liquidity risk, leverage risk, and anti-takeover measures risk. Some of the underlying funds are considered non-diversified and can invest a larger proportion of its assets in a single company. As a result, they may be subject to greater risks than a diversified fund.

A portion of the Fund's dividends may be subject to federal, state, or local income taxes or may be subject to the federal alternative minimum tax.

S-Network Municipal Bond Closed-End Fund IndexSM is calculated and maintained by S-Network Global Indexes, Inc. S-Network does not sponsor, endorse, or promote the Fund and bears no liability with respect to the Fund or any security.

Please note that the information in this post represents the opinions of Paul Mazzilli and not necessarily those of Van Eck Global. 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-Van Eck Global 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 Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.

About Paul Mazzilli
Widely recognized as one of the leading exchange-traded fund (ETF) and closed-end fund (CEF) analysts, Paul Mazzilli has over 35 years of experience in the investment business. Paul is currently an independent Fund Consultant and a Senior Advisor to S-Network Global Indexes and Chairman of the Index Committee for the S-Network Closed-End Fund Indexes. He also is a Senior Advisor and member of Advisory Board at IndexIQ. Paul most recently was Executive Director at Morgan Stanley and Director of the firm's ETF research team, covering passively managed index-linked ETFs and actively managed closed-end fund companies, a broad range of funds listed on U.S. exchanges that invest in taxable and municipal fixed income, as well as equities in the U.S. and in international regions and countries. In addition, Paul was responsible for constructing asset allocation models using ETFs and developing Strategic Equity Portfolios (STEPs) investing in closed-end funds and ETFs.


 

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Muni 2Q'14 Investment Themes http://www.vaneck.com/muni-nation-blog/muni-2q-2014-investment-themes-04-02-13/ Watch my latest video focusing on:

  • 2Q Outlook
  • Federal Reserve Policy
  • 2014 Performance
  • Rally in High Yield


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Muni Nation 4/2/2014 9:53:37 AM Watch my latest video focusing on:

  • 2Q Outlook
  • Federal Reserve Policy
  • 2014 Performance
  • Rally in High Yield


 
 

Video Transcript 

Outlook

The second quarter of 2014 is likely to differ from last year in a couple of significant ways. We had positive momentum build in the first quarter of 2014; hopefully it will continue. What we may not have to worry about in 2014 is tapering, or the sudden rise of interest rates that occurred last May and June and threw the fixed-income markets into disarray. Now we have a scenario where we believe the Federal Reserve is going to modestly adjust its quantitative easing and provide us with a stable platform going forward with respect to interest rates.

Fed Policy

What the Fed does in this next quarter matters because of expectations. Fixed-income markets were thrown into disarray last year because of the Fed's prospects of tapering, i.e., the removal of a certain amount of quantitative easing from its policies. What the Fed does under Janet Yellen in the second quarter of 2014 will go a long way to determine whether we have stability in the fixed-income markets for the remainder of the year. Fed policies are key not only to the United States, but also to global stability in terms of fixed income.

2014 Performance

We have had good performance on the books so far in 2014 (as of 3/31/2014), and it's a bit of a surprise because we came off of a difficult year in 2013, right up to the end of the calendar year in December. The turnaround was remarkable. Performance has been good, in part, because cash has returned to mutual funds and exchange-traded funds. Supply, the amount of new issues in the municipal marketplace, has been reduced and is down significantly from what we are used to seeing, particularly in the months of February and March. With that backdrop we have already put up some very decent numbers for munis. Furthermore, if the Obama administration is going to leave any kind of a legacy with tax reform or balancing the budget, taxes inevitably are going to be higher, and that means the value of the municipal tax-free coupon will be a dominant theme for investment advisers going into the second half of 2014.

High Yield

So far this year (as of 3/31/2014), in addition to general performance gains in the municipal marketplace, high yield has rallied for a couple of reasons. Last year assets left the industry and assets left many of the high-yield funds, creating an oversold condition. My view is that going into the end of this first quarter and into the second quarter of 2014, investment advisers and other institutional investors may recognize this oversold position and, looking at the relative valuations of high-yield to investment grade, may conclude that the valuation is there. The yield that's delivered right now in the high-yield spectrum is equivalent, if not greater than that of any other high-yield product that you're going to find in fixed income.



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Mazzilli's Municipal Musings – Part 1 http://www.vaneck.com/muni-nation-blog/mazzillis-municipal-musings-part-one-03-26-14/ MUNI NATION invited Paul Mazzilli, a leading ETF and closed-end fund analyst, to provide a three-part commentary on the state of the municipal closed-end fund market.

I continue to be attracted to municipal bond closed-end funds (CEFs) given their compelling, tax-exempt yields and I believe that the Market Vectors CEF Municipal Income ETF (XMPT) is an efficient way to get diversified access to this market1. XMPT tracks the S-Network Municipal Bond Closed-End Fund Index (CEFMX) and, for those in the highest tax bracket, it is currently among the highest yielding ETFs that provide exposure to the municipal bond CEF market.

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Muni Nation 3/26/2014 2:43:10 PM Paul MazzilliMUNI NATION invited Paul Mazzilli, a leading ETF and closed-end fund analyst, to provide a three-part commentary on the state of the municipal closed-end fund market.

Efficiency, Diversity, and Yield

I continue to be attracted to municipal bond closed-end funds (CEFs) given their compelling, tax-exempt yields and I believe that the Market Vectors CEF Municipal Income ETF (XMPT) is an efficient way to get diversified access to this market1. XMPT tracks the S-Network Municipal Bond Closed-End Fund Index (CEFMX) and, for those in the highest tax bracket, it is currently among the highest yielding ETFs that provide exposure to the municipal bond CEF market. Many buyers of CEFs may not get proper diversification or have the time to research individual CEFs. As a fund-of-funds, XMPT seeks to provide diversification by asset, strategy, and active manager.

There have been significant changes in municipal CEF market prices over the past year. In much of 2012 and early 2013, these funds were selling at premiums to their net asset values (NAVs) as investors were attracted to their high tax-exempt yields and, in my opinion, were perhaps complacent about the conditions of the overall bond markets. In mid-2013, municipal bond CEFs had significant downward price movements as the multi-year rally in bonds finally came to an end and they began to sell at discounts to their NAVs. Fears about further drops in bond prices, in part, caused discounts to widen continually far beyond their historical averages.

I believe a number of factors contributed to this weakness in municipal bond CEFs in the second half of 2013. These included: rising U.S. Treasury yields, anticipation of potential municipal bond CEF dividend reductions, concerns over the federal tax-exempt status of municipal bonds, increasing municipal bond supply, and the downgrade of Puerto Rico by major rating agencies. Furthermore, given the strong performance of municipal CEFs over the past five years and their rich valuations, it seems likely that the initial declines triggered more profit taking (realizing gains) by municipal CEF investors.

However, moving into 2014, the underlying market for municipal bonds appears to have stabilized and a recent $3.5 billion new issue by Puerto Rico has improved market sentiment. Puerto Rico is considered by many as the riskiest debt issuer in the $3.7 trillion U.S. municipal bond market. All three major rating agencies recently cut Puerto Rico's credit rating to junk, citing low liquidity and persistent economic troubles. The territory has roughly $70 billion in outstanding debt and has endured nearly eight years of recession. Most U.S. CEFs investing in municipal bonds have very low exposure to Puerto Rico because they are diversified by state and avoid weaker credits. However, I see the ability of Puerto Rico to complete a large financing as good for the municipal bond market in general.

1A portion of the Fund's dividends may be subject to federal, state, or local income taxes or may be subject to the federal alternative minimum tax (AMT). Yields of closed-end funds may reflect the return of principal or other non-income items such as loan proceeds or borrowings.

The Market Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory, or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds. The Market Vectors CEF Municipal Income ETF (XMPT) does not invest in actual bonds; however some of the underlying CEFs held by the fund may invest in debt issued by Puerto Rico.

Principal Investment Risks:

Diversification does not assure profit nor protect against loss.

XMPT's performance, because it is a fund of funds, is dependent on the performance of the Underlying Funds. The Fund is subject to the risks of the Underlying Funds' investments, and the Fund's shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments.

The shares of a closed-end fund may trade at a discount or premium to its net asset value ("NAV"). Additionally, the securities of closed-end investment companies in which the Fund will invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Fund's long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished.

Investment in the underlying funds may be subject to municipal securities risk, high-yield securities risk, fixed-income securities risk, tax risk, liquidity risk, leverage risk and anti-takeover measures risk. Some of the underlying funds are considered non-diversified and can invest a larger proportion of its assets in a single company. As a result, they may be subject to greater risks than a diversified fund.

A portion of the Fund's dividends may be subject to federal, state, or local income taxes or may be subject to the federal alternative minimum tax.

S-Network Municipal Bond Closed-End Fund IndexSM is calculated and maintained by S-Network Global Indexes, Inc. S-Network does not sponsor, endorse, or promote the Fund and bears no liability with respect to the Fund or any security.

Please note that the information in this post represents the opinions of Paul Mazzilli and not necessarily those of Van Eck Global. These opinions may change at any time and from time to time. This message 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-Van Eck Global 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 from Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.

About Paul Mazzilli
Widely recognized as one of the leading exchange-traded fund (ETF) and closed-end fund (CEF) analysts, Paul Mazzilli has over 35 years of experience in the investment business. Paul is currently an independent Fund Consultant and a Senior Advisor to S-Network Global Indexes and Chairman of the Index Committee for the S-Network Closed-End Fund Indexes. He also is a Senior Advisor and member of Advisory Board at IndexIQ. Paul most recently was Executive Director at Morgan Stanley and Director of the firm's ETF research team, covering passively managed index-linked ETFs and actively managed closed-end fund companies, a broad range of funds listed on U.S. exchanges that invest in taxable and municipal fixed income, as well as equities in the U.S. and in international regions and countries. In addition, Paul was responsible for constructing asset allocation models using ETFs and developing Strategic Equity Portfolios (STEPs) investing in closed-end funds and ETFs.
 

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Waiting To Exhale http://www.vaneck.com/muni-nation-blog/waiting-to-exhale-03-21-14/ The week of March 10, 2014 will not, in my opinion, soon be forgotten by investors and market participants — as much as for what did not happen (calamity) and for what did (successful municipal bond underwritings). Once again, last week demonstrated the apparent resilience of the municipal marketplace. And, in my view, it reaffirms the ability of this market to generally deliver capital where and when it is needed.

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Muni Nation 3/21/2014 10:19:24 AM The week of March 10, 2014 will not, in my opinion, soon be forgotten by investors and market participants — as much as for what did not happen (calamity) and for what did (successful municipal bond underwritings). Once again, last week demonstrated the apparent resilience of the municipal marketplace. And, in my view, it reaffirms the ability of this market to generally deliver capital where and when it is needed.

Although the much anticipated $3.5 billion Puerto Rico new issue dominated the week, several other significant underwritings — including a $1.6 billion California deal — flooded the market with fresh municipal bonds and threatened to pressure prices of the secondary market. Yet the market held firm in the face of this supply. Demand for the Puerto Rico issue, buttressed by perhaps as much as $16 billion in interest from hedge funds and other alternative investors, according to analysts, allowed the bonds to be offered as high as $97 from their initial price of $93 within the first few hours of trading.

One-Week Change in the AAA Municipal Bond Yield Curve
One-Week Change in the AAA Municipal Bond Yield Curve 

Source: Municipal Market Data (MMD) as of March 14, 2014.

The performance of municipal bonds generally has been positive year-to-date 2014. Some analysts feared the new supply was likely to derail this momentum but so far it has not. As the above chart suggests, the decline in yields of AAA-rated municipal bonds for the week is representative of healthy demand as investors appear to become re-focused on the municipal bond market. All of the foregoing seems to me to be a stamp of approval on a potential about-face for performance from 2013. Last Friday, the sound of a collective exhalation (sigh!) from those managers and underwriters who worried about an end to the current rally was clearly audible in the industry.

The Market Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory, or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.


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Meanwhile, Back At The Ranch http://www.vaneck.com/muni-nation-blog/meanwhile-back-at-the-ranch-03-05-14/ While fund managers, financial advisors, and a growing population of domestic and international investors appear to remain fixated on all things Puerto Rico, the municipal bond marketplace generally has posted positive performance so far this year for those who have remained invested and focused on the broader fundamentals.

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Muni Nation 3/5/2014 11:13:06 AM While fund managers, financial advisors, and a growing population of domestic and international investors appear to remain fixated on all things Puerto Rico, the municipal bond marketplace generally has posted positive performance so far this year for those who have remained invested and focused on the broader fundamentals.

Municipal bond returns in every sector were up modestly in the month of February, building on the good start to 2014 that we saw in January. Despite the negative headlines, the best performing part of the municipal bond market has been Puerto Rico. The Barclay's Puerto Rico Municipal Bond Index returned 6.76% year-to-date as of February 28, 2014.

Barclays Puerto Rico Muni Bond Index 

Source: Bloomberg. Data as of February 28, 2014.

New issuance, however, has been tepid. Additionally, as illustrated in the chart below, total supply for February was nearly 50% lower than in February 2013. Flows into municipal bond mutual funds and ETFs have been net positive in 2014. Furthermore, the municipal yield curve is steep and the ratio of municipal yields to Treasury yields continues, in my opinion, to support the argument for municipal bonds.

30-Day Visible Supply of Muni Bonds 

Source: Bloomberg. Data as of February 20, 2014. The 30-day visible supply is compiled daily from both the competitive and negotiated bond offerings calendars. It reflects the dollar volume of bonds expected to reach the market in the next 30 days. Issues maturing in 13 months or more are included.

I believe the income generated by municipal bonds, on a taxable-equivalent basis, continues to be very attractive. All of the foregoing has fostered what I see as a decent environment for potentially finding value in the asset class.

Municipal bond ETFs have seen intraday-trading volumes pick up in February as compared to volumes seen in the past few months. The long-term municipal to Treasury yield ratio is in excess of 100% for AAA bonds maturing 15 years and longer, which seems to me evidence of investors asset allocating to reduce duration, or sensitivity to changes in interest rates.

The Barclays Puerto Rico Municipal Bond Index is considered representative of the broad market for investment-grade, tax-exempt bonds from issuers in the Commonwealth of Puerto Rico with a maturity of at least one year.

The Market Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory, or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.


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Crosscurrents http://www.vaneck.com/muni-nation-blog/Crosscurrents-02-26-14.aspx I turn your attention to some fundamentals in the municipal bond market that may take your mind off the snow and cold that have dominated headlines this winter. First, a thaw in the chilling performance of 2013 appears to have occurred so far this year for tax-exempt investors. Since the tapering comments the Fed made in May of 2013 and subsequent municipal fund redemptions, investors appear to have become comfortable with many analysts' expectations that increases in interest rates are to be modest in 2014.

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Muni Nation 2/26/2014 9:41:30 AM I turn your attention to some fundamentals in the municipal bond market that may take your mind off the snow and cold that have dominated headlines this winter.

First, a thaw in the chilling performance of 2013 appears to have occurred so far this year for tax-exempt investors. Since the tapering comments the Fed made in May of 2013 and subsequent municipal fund redemptions, investors appear to have become comfortable with many analysts' expectations that increases in interest rates are to be modest in 2014. Some investors seem to believe revisiting the municipal asset class may reveal opportunities. The trend of 2013 appears to have begun to change, as mutual funds and ETFs have started to experience a slight uptick of inflows in January as compared to December (see chart below).

Municipal Bond ETF and Mutual Fund Estimated Net Flow Image 

Source: Morningstar as of January 31, 2014.

Second, on the back of these positive flows and muted new bond issuance, 2014 returns generally have been strong. The Barclays Municipal Bond Index was up year-to-date by 2.54% as of February 24, 2014.

Confidence, I believe, can be described as a cumulative state of mind, and I think investors are being reminded of some of the positive elements of the municipal asset class, including low historical default rates (see chart below) and yields currently competitive with those of many other fixed-income investments, particularly on a taxable equivalent basis.

Cumulative Default Rates Image 

Source: Moody's Investors Services, "U.S. Municipal Bond Defaults and Recoveries, 1970-2012." Most recent annual study of municipal and corporate issuers published May 2013. Historical information is not indicative of future results; current data may differ from data quoted. The Moody's rating scale is as follows, from excellent (high grade) to poor (including default): Aaa to C, with intermediate ratings offered at each level between Aa and Ca. Anything lower than a Baa rating is considered a non-investment-grade or high-yield bond.

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.


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Puerto Rico News – All Day, All The Time http://www.vaneck.com/muni-nation-blog/puerto-rico-news-all-day-all-the-time-02-18-14/ It is difficult, I believe, to imagine that there is an investor who has no opinion on recent events affecting the Commonwealth of Puerto Rico. The actions recently taken by the three leading bond rating agencies to move the ratings of certain Puerto Rico issues to below investment grade have created a firestorm of commentary and angst over the possibility that Puerto Rico, the ninth largest issuer of tax-exempt municipal bonds, might default on its payment obligations.

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Muni Nation 2/18/2014 3:00:31 PM It is difficult, I believe, to imagine that there is an investor who has no opinion on recent events affecting the Commonwealth of Puerto Rico. The actions recently taken by the three leading bond rating agencies to move the ratings of certain Puerto Rico issues to below investment grade have created a firestorm of commentary and angst over the possibility that Puerto Rico, the ninth largest issuer of tax-exempt municipal bonds, might default on its payment obligations.

Muni Debt Outstanding Image 

Source: Van Eck Global Research using data compiled by Bloomberg. As of February 13, 2014.

As has been thoroughly reported, a good number of municipal bond mutual funds and ETFs across the country have (or had) exposure to many of the Commonwealth's issues of triple tax-exempt bonds (federal, state, and local levels of taxation), going into this current crisis1. Selling by wealth managers began in earnest last summer and only exacerbated the downward spiral of valuations, putting greater pressure on the island to seek to maintain a foothold in the capital markets. Significantly, S&P has mandated, as a condition of Puerto Rico's avoiding further erosion of its BB+ credit rating, that it raise capital in the bond markets, which it plans to do in the next few weeks.

Despite all of this, I offer these observations: since Moody's joined S&P to drop the credit of Puerto Rico to below investment grade, there has been no diminution in the trading of its bonds. Yes, there have been sellers, but there have also been buyers. Several dealers have reported daily trade activity in the hundreds, representing $20 million to $30 million in nominal value. It has also been reported that certain very large and opportunistic money managers are building large positions in Puerto Rico bonds, which may provide the liquidity the market needs. This may be suggestive of an oversold market, and a chance, perhaps, to position accordingly, given some expectations for recovery. Whatever the outcome, it remains important to note that below investment-grade ratings do not mean imminent default. We should consider these factors as important markers in this evolving narrative.

1Source: Bloomberg Brief Newsletter. As of February 10, 2014. "Puerto Rico Cut Means Realignment for Indexes."

The Market Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.


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Turning The Page http://www.vaneck.com/muni-nation-blog/turning-the-page-02-06-14/ 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...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."

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Muni Nation 2/6/2014 10:04:21 AM 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 Market Vectors ETF performance. Fund performance is available at www.marketvectorsetfs.com.

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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Shorten Up for Rising Rates http://www.vaneck.com/muni-nation-blog/shorten-up-for-rising-rates-01-17-14/ This past Tuesday we launched SHYD, Market Vectors® Short High-Yield Municipal Index ETF. SHYD seeks to track an index that only includes bonds with 1-10 years until maturity. The focus on this maturity range has generally meant lower duration  — or sensitivity to changes in interest rates — and yields competitive with those of an all-maturity high yield municipal bond index. Less rate sensitivity has generally meant less of a negative impact on total return during periods of rising interest rates.

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Muni Nation 1/21/2014 11:37:41 AM This past Tuesday we launched SHYD, Market Vectors® Short High-Yield Municipal Index ETF. SHYD seeks to track an index that only includes bonds with 1-10 years until maturity. The focus on this maturity range has generally meant lower duration — or sensitivity to changes in interest rates — and yields competitive with those of an all-maturity high yield municipal bond index. Less rate sensitivity has generally meant less of a negative impact on total return during periods of rising interest rates.

Historical Municipal Index Yield and Duration Profiles 

Rising Rates Had Less Impact on The Shorter Duration Index 

Index performance is not illustrative of Fund performance. Fund performance current to the most recent month end is available by visiting marketvectorsetfs.com. Past performance does not guarantee future results.


SHYD offers:

  • High Yield, Short Duration Focus
    The Index comprises highest yielding municipal bonds with maturities of 1-10 years. This potentially provides lower sensitivity to interest rates than all-maturity high yield municipal bond funds.

     
  • Enhanced Liquidity
    The Index includes 25% BBB investment-grade exposure for added liquidity.

     
  • Diverse Sector Exposure and Low Default Rates
    The Index covers a wide range of muni sectors and securities with historically low default rates.1  


Learn more about SHYD » 

SHYD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Barclays Municipal High Yield Short Duration Index (BMHYTR). 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. SHYD is subject to risks associated with non-investment grade (high yield) securities. SHYD had no operating history prior to January 13, 2014.

1Source: Moody's US Municipal Bond Defaults and Recoveries, 1970-2012.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Duration is represented by duration to worst, which measures the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality. Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

Short Muni: The Barclays AMT-Free Short Continuous Municipal Index covers investment-grade municipal bonds with a nominal maturity between 1-6 years. Interm Muni: The Barclays AMT-Free Intermediate Continuous Municipal Index covers investment-grade municipal bonds with a nominal maturity between 6-17 years. Long Muni: The Barclays AMT-Free Long Continuous Municipal Index covers investment-grade municipal bonds with a nominal maturity of 17+ years. All-Maturity HY Muni: The Barclays Municipal Custom High Yield Composite Index covers high yield rated (75%) and BBB-rated (25%) municipal bonds with a nominal maturity of 1+ years. Short HY Muni: The Barclays Municipal High Yield Short Duration Index covers high yield rated (75%) and BBB-rated (25%) municipal bonds with a nominal maturity between 1-10 years.


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Black Friday for Muni Closed-End Funds...Don't Miss the Discounts http://www.vaneck.com/muni-nation-blog/black-friday-for-muni-closed-end-funds-do-not-miss-the-discounts-12-11-13/ The discounts at which municipal bond closed-end funds are currently trading are deeper now than when they briefly plumbed fresh lows back in early August 2011. They have continued to widen inexorably since early March of this year. The weighted average discount of the underlying municipal bond closed-end funds in the Market Vectors CEF Municipal Income ETF (XMPT) was -9.95% on December 2, 2013. This is the widest it has been since XMPT’s inception on July 12, 2011.

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Muni Nation 12/11/2013 2:34:42 PM The discounts at which municipal bond closed-end funds are currently trading are deeper now than when they briefly plumbed fresh lows back in early August 2011. They have continued to widen inexorably since early March of this year. The weighted average discount of the underlying municipal bond closed-end funds in the Market Vectors CEF Municipal Income ETF (XMPT) was -9.95% on December 2, 2013. This is the widest it has been since XMPT’s inception on July 12, 2011.

Deep Discounts in Muni Closed-End Funds 

Source: Van Eck Global. Data as of December 2, 2013. The chart does not represent XMPT's premium/discount. It represents the weighted average premium/discount of the underlying closed-end funds (CEFs) held by XMPT. There are many factors that influence the up-down movement of a closed-end fund's share price, such as the Fund yields, performance, and investor demand.

Discrepancies in net asset values (NAVs) result from changing investor sentiment. When investors are nervous, discounts appear and when the outlook is positive, those discounts narrow or turn to premiums. For investors looking to get into the market now, this recent bout of wide discounts could be an opportunity not only to pick up assets relatively cheaply compared to their NAVs, but to also potentially collect a high level of tax-free income.1 

I believe that since we are coming to the end of the year, there may be investors in these funds looking to tax-loss harvest. This may, in the short term, result in discounts widening further. However, I think, generally, closed-end funds, including municipal bond closed-end funds, may offer attractive long-term income-generating opportunities.

Of course investors should not buy on the basis of discount alone. Other factors, such as risks, investment objectives, fees and expenses, also need to be fully evaluated. That said, closed-end municipal bond funds may currently be an attractive opportunity, and XMPT offers a single holding approach to investing in a portfolio diversified by strategy and manager.

1A portion of XMPT’s dividends may be subject to Federal, state, or local income taxes or may be subject to the Federal Alternative Minimum Tax (AMT).

XMPT's performance, because it is a fund-of-funds, is dependent on the performance of the Underlying Funds. XMPT is subject to the risks of the Underlying Funds’ investments, and XMPT's shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times, certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments.

The shares of a closed-end fund may trade at a discount or premium to its net asset value ("NAV"). Additionally, the securities of closed-end investment companies in which XMPT will invest may be leveraged. As a result, XMPT may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose XMPT to higher volatility in the market value of such securities and the possibility that XMPT's long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished.

Investment in the Underlying Funds may be subject to municipal securities risk, high-yield securities risk, fixed-income securities risk, tax risk, liquidity risk, leverage risk and anti-takeover measures risk. Some of the Underlying Funds are considered non-diversified and can invest a larger proportion of its assets in a single company. As a result, they may be subject to greater risks than a diversified fund.

S-Network Municipal Bond Closed-End Fund IndexSM is calculated and maintained by S-Network Global Indexes, LLC. S-Network does not sponsor, endorse, or promote XMPT and bears no liability with respect to XMPT or any security.


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Death and Taxes http://www.vaneck.com/muni-nation-blog/death-and-taxes-11-21-13/ Less than six weeks remain in 2013. To paraphrase the Chinese proverb, we have certainly lived through a year of interesting times. That being said, some savvy municipal bond market investors have not been deterred from taking advantage of a tax-loss harvest opportunity that has not been readily available in municipal bonds since the end of the last decade. This strategy involves using realized losses to offset capital gains elsewhere in your portfolio.

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Muni Nation 11/21/2013 3:08:12 PM Less than six weeks remain in 2013. To paraphrase the Chinese proverb, we have certainly lived through a year of interesting times. That being said, some savvy municipal bond market investors have not been deterred from taking advantage of a tax-loss harvest opportunity that has not been readily available in municipal bonds since the end of the last decade. This strategy involves using realized losses to offset capital gains elsewhere in your portfolio.

In some respects, now may be an opportune time to be active in the municipal bond market because overall supply of bonds continues to be weak, which generally encourages traders to make decent bids for bonds. Valuations, by most measures, show relative value strength (not cheapness), which signals a good environment for sellers. The question that investors implementing a tax-loss harvest strategy must ask, given the Federal Reserve's affirmation to keep interest rate policy steady, is "Where to reinvest, even if only in the short term?"

I believe municipal bond ETFs could serve well as a short-term choice for individuals or advisers due to daily transparency of holdings, low costs compared to traditional mutual funds, and on-demand exchange-based tradability.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could perform worse than the original investment, and that transaction costs could offset the tax benefit. There may be tax implications. Consult your tax adviser before taking action.


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A Silver Lining http://www.vaneck.com/muni-nation-blog/a-silver-lining-11-05-13/ At the end of October, we were on a downward trend in municipal bond new issuance, and the AAA municipal bond yield curve, on average, dropped 13 basis points, enough to push the return for the Barclays Municipal Bond Index to 0.79% for the month (as of October 31, 2013). On the demand side, a significant contributor had been "risk-off" trading, particularly in a variety of Puerto Rico names.

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Muni Nation 11/5/2013 2:36:11 PM At the end of October, we were on a downward trend in municipal bond new issuance, and the AAA municipal bond yield curve, on average, dropped 13 basis points, enough to push the return for the Barclays Municipal Bond Index to 0.79% for the month (as of October 31, 2013). On the demand side, a significant contributor had been "risk-off" trading, particularly in a variety of Puerto Rico names.

The return for the Barclays Puerto Rico Municipal Bond Index was positive for the month at 1.03%, however, its year-to-date return was -14.73%. (Both figures are as of October 31, 2013.) This directional turn influenced the following paraphrased comment from Citibank: Municipal bond ETFs have begun to trade at slight premiums to or near net asset value (NAV), which in the past, has preceded municipal bond fund inflows by 3-4 weeks.

Barclays Puerto Rico Municipal Bond Index Returns Image 

Source: Bloomberg as of October 31, 2013.

The long end of the AAA municipal bond yield curve continues to trade over 110% to the 30-Year U.S. Treasury Bond. Common consensus on interest rates is that the Federal Reserve will hold off on tapering until sometime next year, and once tapering occurs, long-term interest rates will move higher. For now, ratios appear richer in the short end of the yield curve; however, if supply dwindles further in the coming weeks, I expect to see continued downward movement in yields. Furthermore, despite seeing continued outflows, some municipal bond ETFs have begun to trade closer to their NAVs compared with the wide discounts of the past few months. This may lessen potential fears investors have about re-entering the market.

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 Barclays Puerto Rico Municipal Bond Index is considered representative of the broad market for investment-grade, tax-exempt bonds issued in Puerto Rico, with a maturity of at least one year.

The Market Vectors High-Yield, Long, Intermediate and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks including economic, political, regulatory, or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.


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Woe Is Munis? http://www.vaneck.com/muni-nation-blog/woe-Is-munis-10-25-13/ I cannot help but feel that fixed income investors may currently be finding themselves in a hope-and-despair loop, reeling most recently from political brinkmanship over what may occur in January 2014: another round of brinkmanship and ultimately, the looming possibility of Federal Reserve tapering and higher interest rates.

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Muni Nation 10/25/2013 9:13:52 AM I cannot help but feel that fixed income investors may currently be finding themselves in a hope-and-despair loop, reeling most recently from political brinkmanship over what may occur in January 2014: another round of brinkmanship and ultimately, the looming possibility of Federal Reserve tapering and higher interest rates.

After the delayed release of the September employment numbers, Barclays (amongst others banks) began to trumpet its expectations that Fed tapering would hold off until at least March 2014. The slowness in jobs creation appears to have given the bond markets a reprieve, at least temporarily, and if the outlook doesn't change, I believe investors have perhaps five months before the next significant decision point arrives.



Change in U.S. Non-Farm Employment Image 

Source: FactSet, as of October 22, 2013.

Meanwhile, it appears that municipal bond investors are continuing to distance themselves from the tax-exempt market in a fashion that, in my opinion, has created some market dislocations and potential opportunities. The discussion of Puerto Rico bonds aside, many observers of the market have noted that the municipal bond curve remains steep, which may benefit those who can tolerate interest rate risk for the higher yields available further out on the yield curve. I believe one such opportunity resides in the intermediate range of the yield curve, where steepness may offer a chance to capture a measure of return going into the year-end yield roll down1.

Municipal high yield, in my opinion, is another area of opportunity. Currently, the spread differential between the Barclays Municipal High Yield Index and the Barclays (investment-grade) Municipal Bond Index2 is nearly 75 basis points3. This spread is above the long-term average and represents a potential opportunity that I believe is worthy of notice during these very uncertain times.

1Roll down refers to the price appreciation a bond experiences as it "rolls down" the curve toward maturity and approaches the steepest part of the curve where market demands lower yields. As a result, a bond paying a coupon greater than what the market is currently pricing in will see its price increase.

2The 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 Barclays Municipal High Yield Index is considered representative of the broad market for below investment-grade, tax-exempt bonds with a maturity of at least one year.

3Source: Bloomberg, as of October 22, 2013.


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Unintended Consequences http://www.vaneck.com/muni-nation-blog/unintended-consequences-10-15-13/ Washington Stalemate imageIt is not my place to offer a politicized opinion on the current Washington stalemate and debt ceiling crisis. In fact, the potential consequences of not extending the debt ceiling and facing payment default on the nation’s debt are already being well documented by others.

The potential impact on the muni bond market, however, is in my purview.

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Muni Nation 10/15/2013 12:12:26 PM Washington Stalemate imageIt is not my place to offer a politicized opinion on the current Washington stalemate and debt ceiling crisis. In fact, the potential consequences of not extending the debt ceiling and facing payment default on the nation’s debt are already being well documented by others.

The potential impact on the muni bond market, however, is in my purview. In my opinion, pre-refunded municipal bonds, a corner of the municipal market that is not well known by even those familiar with municipals, may be squarely in the crosshairs of this calamity.

"Pre-res," as they are commonly called, are bonds that have been refinanced; their future payments of coupon and principal are secured by an escrow account consisting of U.S. Treasuries and/or State and Local Government Series (SLGS). These are direct obligations of the United States Treasury Department, which implicitly attributes the pre-refunded bonds with the same credit rating as the U.S. Government.

I believe the concern with respect to impact of the government shutdown on municipal bonds is not for the ultimate recovery of the principal amount but for the potential cessation of payment of income due to the bondholders for any of these pre-refunded bonds with current interest due.

Pre-refunded bonds may be often found within institutional portfolios and generally are held, I believe, as a ready store of liquidity. Individual retail investors, who in my experience tend to be unwilling to take on unfamiliar credit risk, often use them in a similar way.

I don’t believe that an interruption of coupon payments would likely have a significant impact on the broader municipal market, but I do think it could certainly leave a bitter taste in the mouths of those who have long seen pre-res as dependable payers of the highest quality available in the municipal market.


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Redefine Your Muni Core with Intermediates http://www.vaneck.com/muni-nation-blog/redefine-your-muni-core-with-intermediates-10-01-13/ The events in the fixed income markets of the past several months may have left many municipal bond investors concerned, if not confused, about what to think and how to react. Over the long term we could potentially be looking at higher interest rates as the new normal. With that in mind, I want to begin a discussion about ways one could seek to recalibrate a municipal bond investment strategy in the current investment reality.

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Muni Nation 10/1/2013 11:13:01 AM The events in the fixed income markets of the past several months may have left many municipal bond investors concerned, if not confused, about what to think and how to react.

Over the long term we could potentially be looking at higher interest rates as the new normal. With that in mind, I want to begin a discussion about ways one could seek to recalibrate a municipal bond investment strategy in the current investment reality. I believe investment-grade municipal bond investors may want to consider positioning their core muni holdings in intermediate maturities (6-17 year range) because:

  • The intermediate muni index (LMT2TR) shown in the chart below has historically outperformed the short- and long-term muni indices.


Highest Return Was the Intermediate (6-17 Year) Index1
(Annualized Five-Year Period Ending 8/31/13)

Chart: Highest Return Was Intermediate Index 

Source: Van Eck Global Research, FactSet. Past performance does not guarantee future results. Intermediate- and long-term bonds are generally more sensitive to changes in interest rates than short-term bonds. Please see footnote 1 for a description of each index.


  • As shown in the chart below, long-term munis, e.g., those above 17 years, offered little extra yield in exchange for their generally higher sensitivity to rising interest rates — only 0.57% of additional yield from 17 to 30 years.

Municipal Yield Curve Flat at Long End
(As of 9/24/13) 

Chart: Municipal Yield Curve Flat at Long End 

Source: BofA Merrill Lynch. AAA investment-grade municipal yield curve. Yield curves are subject to change daily. Past performance does not guarantee future results. Intermediate- and long-term bonds are generally more sensitive to changes in interest rates than short-term bonds.  


To access the intermediate part of the muni market, investors may want to consider an ETF of intermediate municipal bonds such as ITM®, Market Vectors Intermediate Municipal Index ETF. ITM’s underlying index, the Barclays AMT-Free Intermediate Continuous Municipal Index (LMT2TR), focuses on bonds with 6-17 year maturities.


Performance History: Average Annual Total Returns* (%)
(As of 6/30/13)

Performance History Table 

*Returns of less than one year are not annualized.

The total annual operating expenses of ITM, SMB, and MLN respectively are 0.24%, 0.20%, and 0.24%. The investment management agreement between Market Vectors ETF Trust (the "Trust") and Van Eck Associates Corporation (the "Adviser") provides that the Adviser will pay all expenses of the Fund, except for the fee payment under the investment management agreement, interest expense, offering costs, trading expenses, taxes, and extraordinary expenses.

The performance data quoted represents past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. ETF returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. 

Performance current to the most recent month end is available by calling 888.MKT.VCTR or by visiting vaneck.com/etf.

The "Net Asset Value" (NAV) of a Market Vectors Exchange-Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF's intraday trading value. Market Vectors ETF investors should not expect to buy or sell shares at NAV.

Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in an Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested, and fees and expenses. Index returns assume that dividends have been reinvested.

1Performance is based on the following indices. The Barclays AMT-Free Short Continuous Municipal Index (LMT1TR), the underlying index of SMB, is a market value weighted index designed to replicate the price movements of short-duration bonds with a nominal maturity of 1-6 years. The Barclays AMT-Free Intermediate Continuous Municipal Index (LMT2TR), the underlying index of ITM, is a market value weighted index designed to replicate the price movements of medium-duration bonds with a nominal maturity of 6-17 years. The Barclays AMT-Free Long Continuous Municipal Index (LMT3TR), the underlying index of MLN, is a market value weighted index designed to replicate the price movements of long-duration bonds with a nominal maturity of 17 years or more. An index's performance is not illustrative of any fund's performance. 


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Puerto Rico in Perspective http://www.vaneck.com/muni-nation-blog/Puerto-rico-in-perspective-09-10-13/ On August 26, 2013, Barron's trumpeted on its cover page, "Puerto Rico in Trouble". This article by Andrew Bary may be a loud timpani roll for those who own the debt of the Commonwealth either directly or indirectly. But I do not agree that it offers the thunderous crescendo that seems the intent of the author.

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Muni Nation 9/10/2013 12:15:57 PM PR FlagOn August 26, 2013, Barron's trumpeted on its cover page, "Puerto Rico in Trouble". This article by Andrew Bary may be a loud timpani roll for those who own the debt of the Commonwealth either directly or indirectly. But I do not agree that it offers the thunderous crescendo that seems the intent of the author. In fact, I was tempted to reply with a response that likely was too shrill given my understanding of the realities of politics and economics on the island. However, I do echo the sentiments offered by Richard P. Larkin, Senior Vice President, Director of Credit Analysis at H.J. Sims, in his response to the Barron's article which I feel is appropriate to reflect here.

With merit, here is how Mr. Larkin presented his views [italicized text below taken in its entirety from Mr. Larkin's piece]:
 

"Some points in the Barron's article that beg for a response:  

  • Puerto Rico debt carried most risk among major tax-exempt issuers: I'm sorry, but that award goes to over $60 billion of securitized tobacco bonds issued across the country, with most already rated below investment grade with defaults projected as early as 2030.

     
  • …whether the federal government would step in to aid Puerto Rico…: Raising this as even a possibility demonstrates the naïveté of some pundits. The U.S. will never step in to bail out a U.S. State, municipality, or even a Commonwealth like Puerto Rico. And in Puerto Rico's case, as I said in 2012, there is no need to.

     
  • Puerto Rico's debt is 10 times the average of the 50 states: The author fails to recognize that Puerto Rico citizens pay no federal income tax, and therefore do not have the burden of the federal government's deficits/national debt. If you add that to other state's burdens to make them comparable to Puerto Rico, the story would take on a totally different twist.

The Barron's article also fails to point out some unique strengths of Puerto Rico, which do not exist for other states, like owning its own bank (the Government Development Bank, or GDB), which gives this island issuer more market flexibility than most states. Or the fact that the Commonwealth's electric, water and sewer utilities are legal monopolies.  

Why do I remain bullish on Puerto Rico? Because under the previous Governor, as well as current Governor Padilla, they are not only "talking the talk", they are "walking the walk". Even Barron's notes these: major tax increases to curb deficits, tax and fee increases in utilities and the transportation sectors, and a commitment to jump-starting the economy as best it can given tight fiscal policies." 

Yes, Puerto Rico is a significantly large issuer of triple tax-exempt debt and it has found its way into a good number of actively as well as passively managed municipal bond funds all across the country. And as redemptions from bond funds and other accounts have fueled selling pressures, the liquidity ascribed to Puerto Rico debt makes it an easy name for portfolio managers to put on their sell lists. The result has been a dramatic rise in yields for all these bonds and underperformance (-19.76% YTD as of September 9, 2013 based on the Barclays Puerto Rico Municipal Bond Index1.

I am not yet convinced that it is a foregone conclusion that Puerto Rico will go down the same path as that of Detroit.

1The Barclays Puerto Rico Municipal Bond Index is considered representative of the broad market for investment-grade, tax-exempt bonds issued in Puerto Rico, with a maturity of at least one year.

The Market Vectors High-Yield, Long, Intermediate and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks including economic, political, regulatory or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.

The opinions expressed by Mr. Larkin are strictly his own and do not necessarily reflect those of Herbert J Sims & Co, Inc. or their affiliates. This is not a solicitation to buy or an offer to sell any particular investment. All investment involves risk and may result in a loss of principal. Investors should carefully consider their own circumstances before making any investment decision.


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Munis: Finding Value Post Detroit Bankruptcy http://www.vaneck.com/muni-nation-blog/munis-finding-value-post-detroit-bankruptcy-08-22-13/ Watch my latest video which focuses on:

  • Finding value in municipals now
  • Securities Industry and Financial Markets Association's (SIFMA) letter to the Michigan governor on general obligation (GO) bonds
  • Market outlook for second half of 2013

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Muni Nation 8/22/2013 5:03:43 PM Watch my latest video which focuses on:

  • Finding value in municipals now
  • Securities Industry and Financial Markets Association's (SIFMA) letter to the Michigan governor on general obligation (GO) bonds
  • Market outlook for second half of 2013


 
 

Video Transcript 

Value in Municipals Now

Recently, and this is going back over the last two months, there's been significant headline risk in fixed-income and the markets in general — beginning with Bernanke's comments about federal reserve tapering come the end of the third quarter of this year, as well as the bankruptcy filing of the city of Detroit. This has produced some dislocation in the municipal marketplace but it has also created some opportunity.

Over the last 9 to 12 months, interest rates in the muni market have risen anywhere from one to one and a half percent, meaning that there are terrific entry-point opportunities in the marketplace now that had not existed in the better part of two, two and a half years.

You might ask yourself where on the curve, or what kind of credits should I be interested in? Generally speaking, the intermediate part of the municipal yield curve remains very steep and it remains a point of opportunity, in my view, for anybody thinking about a new spot, or a new time to invest in the municipal marketplace.

The ETFs that are managed by Market Vectors encompass the entire spectrum of investment-grade credits. With some of the better opportunities currently in the A-rated and triple-B rated parts of the credit spectrum, you can be certain that the ETFs Market Vectors manages also encompass these types of opportunities.

SIFMA's Letter to the Michigan Governor on GO Bonds

As you know, the city of Detroit declared bankruptcy in the middle of July. The emergency manager that has been installed by the governor of the state of Michigan made some comments with regard to how he was going to proceed with negotiations to hopefully bring the city of Detroit out of bankruptcy. Included in some of those comments were representations about the standing of creditors, as well as bondholders, in terms of who was going to get paid and how they were going to get paid. This, amongst other comments made, raised some significant concerns amongst bondholders, as well as SIFMA.

SIFMA, and I'm going to read from their prepared statements which they sent to the governor of Michigan, was also very concerned about these comments. SIFMA said in their July 18th letter to Governor Rick Snyder, "SIFMA and its members feel investor trust and confidence in the capital markets is the cornerstone to the viability of the municipal market." And the key phrase, I think, in this letter, which they go on to mention later, goes like this: "Any action that would permit general obligation bonds to be treated on a pari passu basis with unsecured contractual obligations that are not backed by the full faith and credit pledge ignores appropriately the priority that should be given to these bonds."

What does that mean fundamentally? It means that in the construct of issues in the municipal marketplace, a $3.7 trillion industry rests on the back of that phrase, "full faith and credit pledge" of the issuers to make good on their obligation to pay the bonds. And if in fact, as Mr. [Kevyn] Orr [Detroit's emergency manager] would suggest, those bonds do not stand with the appropriate priority relative to other bonds issued, not only does that have serious implications with respect to bondholders for the city of Detroit and the community around Detroit itself, but other parts of the country as well in terms of this implicit promise that is used to build the municipal industry and general obligation bonds.

Second Half '13 Outlook

The remaining months of 2013 promise to be a compelling time, in part because we've gone through a significant upheaval in the municipal marketplace. We've seen redemptions occur in bond funds and exchange-traded funds. We have seen credit downgrades. We've seen the bankruptcy of Detroit. We've seen headline risk putting pressure on this marketplace and perhaps forcing a great deal more selling and more upward pressure on interest rates than would otherwise be brought to bear for this particular marketplace.

Yes, the Federal Reserve ultimately is going to be the determinant of where interest rates are going to go. But given the perspective that the economy is not in a robust state despite some modest gains that are made in employment, housing and other parts of the economy, there's really no reason to expect that interest rates are going to rise again dramatically from here, without some sort of outside agent affecting the direction of the markets.

My expectation is that this is a good entry point for investors for munis. We may have seen or we may be close to near-term highs in terms of recent rate moves on the upside. Fundamentally, there are great opportunities for picking up value that haven't existed for the better part of two years. Whether you're an intermediate- or a short-term investor, there are compelling reasons to put your money to work in these markets now. Money market rates are still very, very low. The amount of money that you earn on a CD, a treasury bill or a money market fund is de minimus with respect to opportunities that I think exist for investors in the municipal market.

NOTE: The outcome of the bankruptcy and legal proceedings are uncertain and there is no guarantee of payment.



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Detroit: A Guide to Chapter 9 of the Bankruptcy Code http://www.vaneck.com/muni-nation-blog/detroit-a-guide-to-chapter-nine-of-the-bankruptcy-code-08-14-13/ It has been just over three weeks since Detroit filed for Chapter 9 protection in federal court. The filing started what may be a one to two month long process to determine the city’s eligibility and number of claimants who may be able to access any settlement resource that may become available.

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Muni Nation 8/14/2013 11:30:18 AM Detroit ImageIt has been just over three weeks since Detroit filed for Chapter 9 protection in federal court. The filing started what may be a one to two month long process to determine the city’s eligibility and number of claimants who may be able to access any settlement resource that may become available.

So what is Chapter 9 bankruptcy, and, how is it different from bankruptcy in the corporate world? I discovered the following resource that may help answer many of your questions.

A Guide to Chapter 9 of the Bankruptcy Code::
 

PDF Image  What You Need to Know » 


This has been republished with permission from the authors Judith Greenstone Miller and Paul R. Hage, Partners, Jaffe Raitt Heuer & Weiss, P.C. ("Jaffe").

 

Please note that the information in the attachment represents the opinions of the authors and not necessarily those of Van Eck Global. 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-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.


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On The Horizon http://www.vaneck.com/muni-nation-blog/on-the-horizon-08-12-13/ While some may feel like August's "dog days" may already be descriptive of the next few weeks, I sense an undertone of market uneasiness which seems to me to want to push interest rates even higher (see yield curve graph below). A few observations:

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Muni Nation 8/12/2013 10:58:12 AM While some may feel like August's "dog days" may already be descriptive of the next few weeks, I sense an undertone of market uneasiness which seems to me to want to push interest rates even higher (see yield curve graph below). A few observations:

  • According to Lipper, municipal bond fund outflows have continued from the retail sector for 10 consecutive weeks. I believe cash selling from municipal bond funds may have contributed to the higher rates and tested liquidity.


  • The new issue market is challenging participants with more than $11 billion coming to market in the next 30 days.1 


  • This week, Puerto Rico Electric Power Authority (PREPA) tested demand as it brought $600 million BBB rated long maturity bonds to market.


Yields Pushing Higher Chart

Source: BofA Merrill Lynch. As of 7/31/13.

Detroit hovers like a gray mist over the marketplace. I believe market participants have been alerted to an important consequence which, even if it does not come to pass, I think is worthy of attention. As highlighted in his report of August 6, 2013, Michael Zezas of Morgan Stanley warns of how close the municipal bond market is creeping to "extension risk" and its potential impact on portfolios.

"Our analysis suggests 73% of munis carry calls, and 85% of the callable market is trading at a premium, suggesting the market is pricing in the likelihood that most bonds will be called. As rates rise, many of these bonds will "extend" in duration [interest rate risk], making the market more rates sensitive."

Mr. Zezas believes we are at, or approaching, a near-term high for rates, but he goes on to note that in his opinion, if rates do push higher by about 60 basis points, some 20% of premium bonds may turn to a discount, pushing duration significantly longer. I believe the challenge now, is to prepare our portfolios and our clients for this type of event.


1Bond Buyer as of 8/2/2013.

Extension Risk Explained: For an option-free (i.e., non-callable) fixed-coupon bond, when interest rates rise, the bond’s duration shortens. That is, the price-yield relationship for an option-free bond is said to be convex, which implies prices decline at a decreasing rate as rates rise (i.e., duration shortens). Thus, while the bond will have likely lost market value with an increase in rates, its future sensitivity to interest rate moves is dampened, which is desirable if you fear continued moves higher in rates. However, if the bond is callable, a different dynamic can apply. Specifically, for a bond trading at a premium to its call price, implying an expectation that the bond will be called, duration can extend as interest rates rise. This happens when the bond’s call option falls out of the money as the new, higher rate regime makes calling and refinancing the bond uneconomical. Consequently, the bond, which may have been trading at a yield that implied that its call date was the time when the bondholder would receive full principal, may now trade to its final, longer maturity as the issuer is less likely to redeem the bond early.


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Intervention http://www.vaneck.com/muni-nation-blog/intervention-07-23-13/ Despite recent events in Detroit, I believe the famously coined term "green shoots" is an apt descriptor for the municipal bond market at this present time. Having been scorched by the wildfire correction that engulfed the fixed-income markets since the end of April, as evidenced by the sharp rise in interest rates (represented in the graph below), there now seems to be indication of a broadening of support for munis from the retail/registered investment advisor community. I have seen inquiries coming from dealers looking for bonds across the spectrum — indeed a welcome sight. The question remains: When does this become an embedded strategy that brings assets back to mutual funds and ETFs?

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Muni Nation 7/23/2013 2:33:13 PM Despite recent events in Detroit, I believe the famously coined term "green shoots" is an apt descriptor for the municipal bond market at this present time. Having been scorched by the wildfire correction that engulfed the fixed-income markets since the end of April, as evidenced by the sharp rise in interest rates (represented in the graph below), there now seems to be indication of a broadening of support for munis from the retail/registered investment advisor community. I have seen inquiries coming from dealers looking for bonds across the spectrum — indeed a welcome sight. The question remains: When does this become an embedded strategy that brings assets back to mutual funds and ETFs?

U.S. 10-Year Treasury Yield Image

Source: FactSet as of July 19, 2013.

Two weeks ago, I observed that opportunistic investors (e.g., non-traditional and hedge fund) stepped into the breach and provided added liquidity for individual bonds that were burdensome to dealers’ balance sheets. As has happened in the past two periods of strained liquidity (2008 and 2010), these investors captured great values which, in my view, were in part represented by some of the deep discounts shown by the intraday marks on the muni ETFs. I view this "intervention" strategy as having been born out of the introduction of Build America Bonds, which I believe brought many more portfolio eyes to focus on the municipal bond market and on its unique qualities as a destination for valuable tactical trades during times of stress. Bernanke's testimony notwithstanding, I am hoping for a period of calm and consolidation so the muni bond fund community can re-establish a credible reinvestment strategy.


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Detroit City Blues http://www.vaneck.com/muni-nation-blog/detroit-city-blues-07-22-13/ Van Eck Global, as the sponsor of Market Vectors municipal bond exchange-traded funds (ETFs), naturally has serious concerns following the filing of the petition by the City of Detroit seeking protection under Chapter 9 of the bankruptcy code. What implications do I think are to be drawn?

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Muni Nation 7/22/2013 11:22:25 AM Van Eck Global, as the sponsor of Market Vectors municipal bond exchange-traded funds (ETFs), naturally has serious concerns following the filing of the petition by the City of Detroit seeking protection under Chapter 9 of the bankruptcy code. What implications do I think are to be drawn?

I believe it does mean an immediate adjustment to the valuations of securities issued by the City of Detroit and its instrumentalities. The potential diminution of those values may have an impact upon some investors’ personal as well as large institutional portfolios, to varying degrees.

Market Vectors’ municipal bond ETFs seek to track indices constructed with a rigorous rules-based structure. The City of Detroit and some of its instrumentalities are, because of their prior creditworthiness and presence as large issuers of municipal bonds, included in these indices and, hence, are present in several of the ETFs (HYD, MLN, ITM and SMB).

The following table displays exposure of Market Vectors municipal bond ETFs to City of Detroit municipal bonds versus each ETF’s underlying index. As of yesterday (July 18), prior to the Chapter 9 filing, these issues were appropriate holdings, in my view. If the ratings agencies were to adjust the credit ratings of these issuers, many holdings may no longer be eligible for inclusion in the ETFs’ underlying indices. Such is the rules-based approach of index funds and, in particular, of ETFs. If removed from the index, and as the market allows, those securities may be removed from the ETFs.


City of Detroit Municipal Bond Exposure (% of Portfolio) 

 As of June 30, 2013 

Fund 

Index1 

HYD

0.09

1.37

MLN

0.00

0.37

ITM

0.47

0.51

SMB

0.24

0.06

Source: Van Eck Global.
1Indices are as follows, HYD: Barclays Municipal Custom High Yield Composite Index; MLN: Barclays AMT-Free Long Continuous Municipal Index; ITM: Barclays AMT-Free Intermediate Continuous Municipal Index; SMB: Barclays AMT-Free Short Continuous Municipal Index. See below for index descriptions.


To be clear, I believe filing for bankruptcy by a municipality is not an end. Nor do I believe it necessarily means mass firings, closing of offices and shuttering of municipal services (e.g., police, fire, water, sewer and electric). It does mean, in my view, that there may now be a process, overseen and directed by a judge, to stop the clock on expenses to seek to redress the massive imbalance of revenues and obligations. I feel that Detroit may continue to function day-to-day as a going concern, relieved temporarily from some of the burden of payments. Assuming the bankruptcy court accepts and approves the Chapter 9 filing, I would expect the court to begin directing payments as needed. [NOTE: The outcome of the bankruptcy and legal proceedings are uncertain and there is no guarantee of payment.]

The critical element underpinning this event, in my view, also fundamentally sets the foundation for the majority of all financings done in the municipal bond market. That is, of a "moral obligation" on the part of the issuer of bonds to promise to set the "full faith and credit" and taxing power of that entity ahead of other debts in order to repay the owners of those bonds. The state-appointed emergency manager of the City of Detroit has already made representations that he, and the State, may be willing to break that foundation in its effort to save Detroit and put it back on the path to financial solvency. What is of concern to me here, and has been voiced by analysts and portfolio managers alike, is that the path chosen for Detroit may likely set a precedent for other struggling cities and communities that undermines the totality of municipal finance. Should that occur, I believe there would be damage done to untold numbers of portfolios as confidence may disappear and valuations may potentially drop.

I believe the process, to be sure, will not please everyone and pain will likely be borne. But I urge caution with regards to any precedent-breaking measures that leave a nearly $3.7 trillion municipal bond industry looking worse than Detroit in its darkest day.


Barclays Municipal Custom High Yield Composite Index is calculated using a market value weighting methodology and it tracks the high-yield municipal bond market with a 75% weight in non investment-grade municipal bonds and a 25% weight in Baa/BBB-rated investment-grade municipal bonds for liquidity and balance.

Barclays AMT-Free Long Continuous Municipal Index is a market value weighted index designed to replicate the price movements of long-duration bonds with a nominal maturity of 17 years or more.

Barclays AMT-Free Intermediate Continuous Municipal Index is a market value weighted index designed to replicate the price movements of medium-duration bonds with a nominal maturity of 6-17 years.

Barclays AMT-Free Short Continuous Municipal Index is a market value weighted index designed to replicate the price movements of short-duration bonds with a nominal maturity of 1-6 years.


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Plain Talk, Part 1 http://www.vaneck.com/muni-nation-blog/plain-talk-part-one-07-18-13/ Let’s face it: There are some truisms in life that we seem to intuitively know and believe, but will not give credence to until after the fact. One such concept is things are never as good as they seem, nor as bad.

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Muni Nation 7/18/2013 3:45:00 PM Let’s face it: There are some truisms in life that we seem to intuitively know and believe, but will not give credence to until after the fact. One such concept is things are never as good as they seem, nor as bad.

Coming off of nearly three consecutive years of strong performance in the municipal bond market, I anticipated that 2013 might deliver modest returns as it seemed likely that general economic improvement would allow the Federal Reserve to begin to gradually remove its stimulus. Was the market blind to the possibility of a rapid unwind?

We have experienced a difficult month and a half; municipal bond yields have risen a full percent (100 basis points), leading to dispiriting returns so far this year.1 Nevertheless, I caution any reader from reaching a premature conclusion that we have entered a prolonged "dark period" for municipal bond investors. Tax collections and revenues at the state and local level have continued to rise, which I believe buttresses the creditworthiness of those issuers. See the graph below; preliminary data shows that states reported strong growth in income tax in the first quarter of 2013.

State Taxes Showed Strong Growth in the First Quarter of 2013 Image

Source: Individual state data, analysis by the Rockefeller Institute. As of June 30, 2013.

By paying attention to more than just the price of fixed income, in my opinion, it is easy to conclude that there are plentiful reasons not to abandon the market. If credit quality is improving (defaults declining), I believe entry points for "fresh" cash are more appealing in terms of return for unit of risk. A future post will address just that sort of question and suggest where I believe such opportunity exists.

1Source: AAA Municipal Market Data (MMD) curve as of 7/12/13.


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Defogging Lenses Required http://www.vaneck.com/muni-nation-blog/defogging-lenses-required-06-26-13/ The various "cliffs" that we, and virtually the entire business community, have discussed and feared since last November, seem to have appeared suddenly and viciously, sending markets careening toward the fog of uncertainty. The market fall of the past five business days not only took many professionals by surprise, it seems to have cast the outlook into a curious state of confusion. I say that because, prior to the announcement (misinterpreted, in my opinion) last week by the Fed, economists and strategists were generally in agreement on the outlook for the markets and economic growth. Now, those views seem to me to be as difficult to grasp as a handful of Maine fog.

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Muni Nation 6/26/2013 4:48:14 PM The various "cliffs" that we, and virtually the entire business community, have discussed and feared since last November, seem to have appeared suddenly and viciously, sending markets careening toward the fog of uncertainty. The market fall of the past five business days not only took many professionals by surprise, it seems to have cast the outlook into a curious state of confusion. I say that because, prior to the announcement (misinterpreted, in my opinion) last week by the Fed, economists and strategists were generally in agreement on the outlook for the markets and economic growth. Now, those views seem to me to be as difficult to grasp as a handful of Maine fog.

Everyone has an opinion about why or what has happened. Uncertainty, however, is a mighty force which, in the case of muni investors, may cloud decision making. I offer what I consider to be some fog-piercing data points below that I hope make clear some essential realities muni investors can use to rebuild confidence.

  1. In contrast to the sell-off in fixed income, I believe continued growth of the economy further enhances credit quality of most municipal issuers.
  2. With CPI at 1.7%, I believe the "real" rate of return on municipals now is compelling. 10–year AAA muni yields at 2.80% deliver more than 1% of inflation-free income. 30-year AAA bonds yielding 4.13% now offer nearly 2.50% of inflation-free income.1 
  3. The yield ratios of AAA munis to Treasuries — except for 5 years — are all well over 100%, which may attract traders or even corporate investors, potentially setting a floor to recent declines.2 
  4. I think the sudden rise in rates may postpone many new issues, which could reduce the strain on Wall Street balance sheets and free up room to provide more liquidity.
  5. As now seen through clearer lenses, the spreads — the reward for the risk premium of different rated issuers — are now more appropriate, in my view, than any time since the crash of 2008.


I believe all of the above suggests that now is NOT the time to abandon municipals as a core strategy.

1Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. AAA yield minus CPI equals inflation-free income. Source: Bloomberg as of 5/31/13.

2AAA Municipal Market Data (MMD) curve as of 6/21/13. The municipal to Treasury ratio is a comparison of the current yield of municipal bonds to U.S. Treasuries indicating whether municipal bonds offer attractive yields compared to Treasury yields. If the ratio is below 100%, municipal bonds are yielding less than Treasuries; if the ratio is above 100%, municipal bonds are yielding more than Treasuries.


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The “Category F5 Tornado” Has Passed http://www.vaneck.com/muni-nation-blog/the-category-f5-tornado-has-passed-06-21-13/ Traders are telling me, in so many words, that they are beginning to touch solid ground (perhaps with only their toes) and set bids in today's market in the wake of the selling frenzy which occurred yesterday. The recalibration of the AAA yield curve for municipals reveals a nearly 100 basis point adjustment to 30 year yields from the end of April.

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Muni Nation 6/24/2013 9:55:56 AM Traders are telling me, in so many words, that they are beginning to touch solid ground (perhaps with only their toes) and set bids in today's market in the wake of the selling frenzy which occurred yesterday. The recalibration of the AAA yield curve for municipals reveals a nearly 100 basis point adjustment to 30 year yields from the end of April.

AAA Municipal Yield Curve 

AAA Municipal Yield Curve graph  


Ratios of municipal bond yields to Treasury yields are in most cases above 100% as illustrated in the table below. I believe there is potential value in this market that I have not seen in over two years.


AAA MMD Yields  vs. Treasuries table 


 

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For What It’s Worth http://www.vaneck.com/muni-nation-blog/whats-going-gown-06-14-13/ The Buffalo Springfield song refrain, "…what's that sound, everybody look what's going down" applies as much to the financial markets of today as it did to life in 1967. We seem to have reached a tipping point where investors and traders are intent upon stealing the Fed’s thunder and have begun to drive interest rates higher on their own. In my view, bearish talk and sentiment have led to the selling of mutual fund shares, which has led to the selling of cash bonds, pushing prices lower and yields higher. Because a large portion of the muni market is owned by retail investors who are sensitive to these issues, mutual fund and ETF price declines have the potential to force even more selling.

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Muni Nation 6/14/2013 10:09:06 AM The Buffalo Springfield song refrain, "…what's that sound, everybody look what's going down" applies as much to the financial markets of today as it did to life in 1967. We seem to have reached a tipping point where investors and traders are intent upon stealing the Fed’s thunder and have begun to drive interest rates higher on their own. In my view, bearish talk and sentiment have led to the selling of mutual fund shares, which has led to the selling of cash bonds, pushing prices lower and yields higher. Because a large portion of the muni market is owned by retail investors who are sensitive to these issues, mutual fund and ETF price declines have the potential to force even more selling.

"What’s going down" is more than just prices. I believe several factors are likely at work in pushing this anxious market to act before the news is actually on the tape: a sea change in overall sentiment, talk of the rotation out of bonds into stocks and the subsequent performance of these securities and, lastly, the possibility that the Fed will scale back its quantitative easing policy. Where does this leave concerned investors?

As often happens during times of market volatility, corrections — dramatic changes in market direction evidenced by great price changes — are very often overdone. Momentum in this type of market may be difficult to stop and generally overshoots reasonable endpoints. Let's not overlook the fact that, in my view, these higher taxable equivalent yields may some time in the future look attractive versus equities and corporates once more. The seasonal technicals governing the positive outlook for near-term demand are still in place. I am not the only one suggesting that this is not the time to abandon the baseline philosophy that municipals should remain prominent in one’s portfolio.

Index/Bond Table

Source: FactSet, as of 6/11/13.


*12-month dividend yield: 12 month dividend per share/price.

**Yield to worst or the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

Indices listed are unmanaged and not a security in which an investment can be made. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sectors. The S&P 100, a subset of the S&P 500, includes 100 leading U.S. stocks. Constituents of the S&P 100 are selected for sector balance and represent about 57% of the market capitalization of the S&P 500 and almost 45% of the market capitalization of the U.S. equity markets. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The U.S. Aggregate Index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the U.S. market. 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.

Taxable equivalent yields (TEY) are used by investors to compare yields on taxable and tax-exempt securities after accounting for federal income taxes. TEY represents the yield a taxable bond investment would have to earn in order to match, after deducting federal income taxes, the yield available on a tax-exempt municipal bond investment. TEY = Tax-Free Municipal Bond Yield/(1 -Tax Rate).


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A Second Half Story http://www.vaneck.com/muni-nation-blog/a-second-half-story-06-10-13/ In the past I have referenced "headline risk" as a market impediment to which the municipal market seems inexorably tied. The municipal market still appears, to me, unable to shrug off the wet blanket of concern that most recently has taken cash away from muni assets and pushed yields higher. See the tables below; in my view, the Barclays Municipal Bond Indices demonstrate that the increase in yields may have caused negative returns for the month of May.

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Muni Nation 6/10/2013 1:16:58 PM In the past I have referenced "headline risk" as a market impediment to which the municipal market seems inexorably tied. The municipal market still appears, to me, unable to shrug off the wet blanket of concern that most recently has taken cash away from muni assets and pushed yields higher. See the tables below; in my view, the Barclays Municipal Bond Indices demonstrate that the increase in yields may have caused negative returns for the month of May.


"AAA" MMD Muni Yields % (as of May 31, 2013) 

 Maturity 

4/30/2013 

5/31/2013 

Changes 

5 YR (2018)

0.74

0.94

+ 20 bps

10 YR (2023)

1.69

2.09

+ 40 bps

15 YR (2028)

2.25

2.60

+ 35 bps

20 YR (2033)

2.55

2.90

+ 35 bps

25 YR (2038)

2.77

3.13

+ 36 bps

30 YR (2043)

2.84

3.22

+ 38 bps

Source: Mesirow Financial, Municipal Market Data (MMD)



Barclays Muni Index Performance % (as of May 31, 2013) 

 Index 

MTD 

Last 3 MOs 

YTD 

Muni Bond Index

-1.22

-0.57

0.15

Muni 10 Year Index

-1.80

-0.79

-0.17

Muni High Yield Index

0.20

1.86

3.11

Source: Bloomberg


I have also spoken in the past about the technical aspects of reinvestment opportunities: modest new issue supply; a renewal of demand based upon higher marginal tax rates and large amounts of cash generated from coupon payments, bond maturities and calls. I believe these technicals remain very much in place and may support a sound finish to second quarter results. In my view, because municipals are not generally well understood, even the slightest dent in the armor can cause hesitation. I believe this has recently occurred. Now that headlines are trumpeting the notion that the Federal Reserve may raise rates this year, the ardor for municipals appears to have cooled.

As coaches instruct their charges during half-time breaks, there is still a lot of game left to play. Much as they did in the second half of 2011, I believe municipal bonds now have many fundamental reasons to potentially turn around before the year is through. I will discuss some of these considerations in future commentaries.


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 Municipal 10 Year Index is a subset of the broader index. The Barclays Municipal High Yield Index is considered representative of the broad market for below investment-grade, tax-exempt bonds with a maturity of at least one year.


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H2Oh! – Part 2 http://www.vaneck.com/muni-nation-blog/H2Oh-part-two-05-31-13/ Despite water's ubiquitous nature, I believe there are compelling reasons for investors in the municipal market to consider how changes to this indispensable, natural resource might alter long-held views about the water sector.

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Muni Nation 5/31/2013 10:58:16 AM Despite water's ubiquitous nature, I believe there are compelling reasons for investors in the municipal market to consider how changes to this indispensable, natural resource might alter long-held views about the water sector.

Loop Capital Markets writes in a recent report entitled, "Water Supply, Water Rights and the Impact on Economic Growth and Credit," that despite water scarcity, cities and states have overcome short-term supply issues and that rating downgrades because of water shortages are unlikely. The report addresses the depletion of aquifers serving the central U.S. farmland and the complicated federal and state legal frameworks governing water sourcing and interstate commerce. Accordingly, changes in traditional patterns of delivery or those attributable to weather may adversely impact economies of rural communities and antiquated systems. New infrastructure may bring trouble in the future: ".  .  . the American Society of Civil Engineers forecasts that by 2020 there will be a deficit for sustaining water delivery and wastewater treatment of $84 billion, causing an average annual loss in GDP of $42 billion from 2011 to 2020."

I believe investors should pay attention to consumers’ reactions to delivery rate increases as a possible consequence of municipalities conducting repairs and upgrades. As a result, greater issuance and spread widening in muni bonds are probable, in my view. The famous line from the movie Chinatown, "Either you bring the water to L.A. or you bring L.A. to the water," may soon apply to other parts of the country.

Water Image

Source: Loop Capital Markets, 2013.


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H2Oh! – Part 1 http://www.vaneck.com/muni-nation-blog/H2Oh-part-one-05-24-13.aspx Delivery of potable water is a high-quality, monopolistic enterprise and I believe it embodies the essential public purpose underpinning municipal finance.

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Muni Nation 5/24/2013 10:54:30 AM Delivery of potable water is a high-quality, monopolistic enterprise and I believe it embodies the essential public purpose underpinning municipal finance.

Until headlines such as one from this past Monday’s The New York Times, "Wells Dry, Fertile Plains Steadily Turn to Dust" are more common, turning on the faucet to brush your teeth will remain routine and undeserving of a second thought. Our complacency stems from historic reliability of vast delivery systems nationwide.

In a report entitled "2012 Outlook: Water and Sewer Sector," Fitch indicates: "The outlook for the U.S. water and sewer sector is stable despite current economic, capital, and political pressures .  .  . and the average sector rating remains unchanged at AA." For investors, I see municipal water supply programs as a potential store of value in terms of their generally high credit quality. The water and sewer sector is the second largest weighting (15.18%) and the highest credit quality (AA1) among revenue bonds in the Barclays Municipal Bond Index1. The demand for water largely exceeds supply, which has historically meant strong financial results for these systems. But we cannot overlook the impact of drought and dwindling supply in any area of the country. In my view, the domino effect of collapsing supply could have serious implications for growth and economic vitality, leading to destabilization of the creditworthiness of some affected regions.

 

Barclays Municipal Revenue Bond Index by Sector/Credit
Barclays Municipal Revenue Bond Index by Sector/Credit

Source: Barclays as of 5/21/13.


My next commentary will detail areas for concern emanating from another point of view.

1The 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.


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Reading the Flows http://www.vaneck.com/muni-nation-blog/reading-the-flows-05-15-13/ Last week, several reporting sources for fund flows recorded a change in course. Cash flowing into municipal bond funds in aggregate recorded the first positive week in the past two months. The monthly numbers are still negative but I believe the turn may signal that the recent swoon is over.This event does not make a trend but I believe it has ended one. So what might the reasons be for an improved outlook? 

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Muni Nation 5/16/2013 9:11:10 AM Last week, several reporting sources for fund flows recorded a change in course. Cash flowing into municipal bond funds in aggregate recorded the first positive week in the past two months. The monthly numbers are still negative but I believe the turn may signal that the recent swoon is over.This event does not make a trend but I believe it has ended one. So what might the reasons be for an improved outlook?

May and June are estimated to deliver more than $60 billion in rollover cash in the form of maturing bonds and calls1.Despite the strong performance recently enjoyed by the equity markets, there is no universal consensus that the recovery is in full throttle, leaving advisors a little cautious about asset allocation decisions. If they opt for municipal bonds it will be because the metrics of low volatility, low correlation and taxable equivalent yields have continued to call attention to the asset class.

The combination of tax-payment-day selling and increased new issuance supply, in some cases, has provided attractive price points for investors seeking tax-free income. Further evidence of this can be seen in the recent average discounts emerging for municipal bond closed-end funds and ETFs: -1.12% and -0.05%, respectively (see premium/discount chart). The discounted market price relative to the underlying valuation of the portfolios, in my opinion, presents a potential opportunity to achieve total return should market pricing return to positive territory, where it remained for much of 2012.

Monthly Average Premium/Discount2 

muni_graph_monthly-avg-premium_may15 

Additionally, the fact that municipal ETF flows have not followed the same pattern as municipal mutual fund flows is interesting to me. With ETFs trading at a slight discount with little or no outflows, any positive turn in demand could push ETFs to a premium, thus generating positive total returns (see fund flows chart below).


Muni ETF Flows Modestly Positive Every Month YTD2 


muni_graph_etf_flows_modestly_positive_may15 

 

 

1 Source: Citi Research, Municipal Market Comment 5/3/13. 

Source: Morningstar as of 4/30/13. 


 

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Green on Fertile Ground http://www.vaneck.com/muni-nation-blog/green-on-fertile-ground-05-10-13/ Municipal bond investors may not think of themselves as "doers" as much as they think of themselves as "receivers" (of tax-free income). I offer here an example of how muni investors can regard themselves as both, by supporting green initiatives1 when buying tax-free bonds.

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Muni Nation 5/10/2013 10:45:36 AM Green ImageMunicipal bond investors may not think of themselves as "doers" as much as they think of themselves as "receivers" (of tax-free income). I offer here an example of how muni investors can regard themselves as both, by supporting green initiatives1 when buying tax-free bonds.

The Milwaukee Metropolitan Sewerage District, an issuer of municipal bonds, is responsible for the production of Milorganite®, one of the oldest, branded fertilizers on the market today. It is not widely known that the Milorganite® program is one of the world’s largest recycling efforts or that it was started in the 1920s by reform-minded socialists to become a rare profit-generating municipal enterprise. The District captures wastewater from the metropolitan Milwaukee area, including local industries such as MillerCoors. This water is then treated with microbes to digest the nutrients. Cleaned water is then returned to Lake Michigan. The microbes are then dried, becoming Milorganite®, which is sold throughout North America as golf course, home lawn and garden fertilizer.

Having been to the facility and having seen the product itself, I continually marvel at the simplicity of the process, as well as the benefits the community derives from Milwaukee’s long-standing recycling initiative.

Other broad-based municipal programs, such as light-rail mass transit, are also green and ought to be recognized for their contributions to general welfare and for utilizing low cost, tax-exempt financing. Municipal bonds, however, are in the crosshairs of the ongoing budget debate, and despite these examples of beneficial mandates, all municipal programs may have to compete for higher cost of capital if tax-exempt financing were to be capped or eliminated.

1Projects funded through municipal financing may not be aligned with every investor’s values. Some municipal bonds are secured by alcoholic beverage taxes, legalized gaming taxes and payments from the tobacco settlement agreement. In addition, some municipal bonds are issued to support and construct nuclear power plants and prisons.

Any discussion of specific securities mentioned in this blog post is neither an offer to sell nor a solicitation to buy these securities. A fund’s holdings will vary.


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No Lake Wobegon for Munis? http://www.vaneck.com/muni-nation-blog/no-lake-wobegon-for-munis-05-03-13/ "Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average." – Garrison Keillor

Shall we compare the municipal market to the fictional Lake Wobegon? This asset class continues, in my view, to exhibit solid, stable characteristics that I believe make it nearly impervious to the exogenous volatilities of the world around it.

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Muni Nation 5/3/2013 10:36:13 AM "Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average." – Garrison Keillor

Shall we compare the municipal market to the fictional Lake Wobegon? This asset class continues, in my view, to exhibit solid, stable characteristics that I believe make it nearly impervious to the exogenous volatilities of the world around it. The Barclays Municipal Bond Index is still AA31 average quality, tax collections for states are predicted by many analysts to exceed pre-recession levels and, according to Bloomberg, the economic health of 44 states improved in the fourth quarter of 2012. As the recovery continues to gain ground, I believe strong, good looking and above average could apply to the municipal bond market.

All things considered, if one were to judge the municipal bond market by performance alone (-0.43% in March and 1.10% in April2), the past two months have been rather indifferent. Behind the numbers, however, the market has been churned by a handful of significantly large (+$1 billion) new deals, a steady outflow of cash from bond funds and the well documented political assault underlying the Obama administration’s proposed budget, which, if passed, would cap the tax-exempt benefit at 28%. And despite the obvious flaws reflected in names such as Harrisburg, Vallejo, Stockton and Detroit, in my opinion, this asset class, if nothing else, demonstrated its resiliency. (See timeline graphic.)



Municipal AAA GO 10-Year Yield Chart

I believe the near-term outlook for municipals continues to build a positive narrative, as investible cash from maturities, bond calls and coupon payments should, in my opinion, prime demand. Now that we have personal income tax payments in our rear-view mirror, investors can again focus on the fundamentals which I believe continue to argue for municipals as a positive income generator with generally high credit quality and potentially less volatility than some other fixed-income options. Lake Wobegon doesn’t sound so bad after all.

1Source: Moody’s. The Moody’s rating scale is as follows, from excellent (high grade) to poor (including default): Aaa to C, with intermediate ratings offered at each level between Aa and Ca. Anything lower than a Baa rating is considered a non-investment-grade or high-yield bond.

2Source: Barclays. Based on the Barclays Municipal Bond Index which is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year.


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White Paper on Muni ETFs: Product Evolution and Innovation from 2007-2012 http://www.vaneck.com/muni-nation-blog/white-paper-on-muni-etfs-product-evolution-and-innovation-from-2007-2012-04-26-13/ Municipal bond ETFs have begun to move into what I think of as the "mature" stages of a fund’s life. Now that several have five-year track records, some with substantial assets under management, I believe that an independent assessment of this product innovation can potentially provide investors and advisors with insight based on the very same analytical approach and detail they are accustomed to for other asset classes.

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Muni Nation 4/26/2013 10:42:05 AM White Paper Icon Municipal bond ETFs have begun to move into what I think of as the "mature" stages of a fund’s life. Now that several have five-year track records, some with substantial assets under management, I believe that an independent assessment of this product innovation can potentially provide investors and advisors with insight based on the very same analytical approach and detail they are accustomed to for other asset classes.

The white paper by Municipal Market Advisors (MMA) offers, in broad terms, MMA’s view to the "utility" of municipal ETFs and possibly identifies municipal ETFs’ competitive positioning relative to other (more traditional) municipal investment options. I hope you will take the time to consider this important work which, in my opinion, currently stands alone in its professional field.


White Paper Download Button 



Because of its relevance in today’s market, we are making MMA’s report publicly available in its entirety. MMA’s research study was commissioned by Van Eck Associates Corporation (VEAC), sponsor of Market Vectors ETFs. However, VEAC had no input into the findings of MMA’s research study.
 

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Taxes http://www.vaneck.com/muni-nation-blog/taxes-04-19-13/ The $3.7 trillion municipal bond market resides largely in the domain of individual investors, whether through direct purchases or financial intermediaries. Monday was tax day — a day when investors can truly realize the benefits of municipal investments.

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Muni Nation 4/19/2013 9:39:30 AM The $3.7 trillion municipal bond market resides largely in the domain of individual investors, whether through direct purchases or financial intermediaries. Monday was tax day — a day when investors can truly realize the benefits of municipal investments.

Although returns have been subdued so far this year (0.93% for the Barclays Municipal Bond Index and 2.56% for the Barclays Municipal High Yield Bond Index1), those who invested in munis in 2012 were rewarded with strong performance (6.78% and 18.14% for the investment-grade and high-yield indexes, respectively).

I believe the increase in the top income tax rate to 39.6% has created an additional benefit for income seekers who continue to commit to municipals. For those considering new allocations, however, there are some uncertainties, especially in the context of the latest budget proposal by the administration.
 

What you should know:

  • Warnings have been issued from influential groups such as the National League of Cities about the detrimental effects of impairing the municipal market’s ability to provide states and municipalities with access to low-cost capital.
  • Capping the exemption would, in my opinion, harm more than the (very) wealthy. Studies from leading bank analysts reveal that municipal investors are a broader group of wage earners than previously thought; many fall well below the top tax bracket.
  • BofA Merrill Lynch research suggests that a 28% cap would raise only a small fraction of the exemption’s roughly $30 billion current "expenditure" while significantly raising borrowing costs for issuers.
  • I believe we are nearing the end of a "seasonal adjustment" which has seen issuance surge and demand ebb. The combination of headline concerns, income tax payments, and a large supply of new bonds may create a better buying opportunity in the coming weeks.

So while Congress debates, in my opinion, opportunity could present itself in the near term.


Munis Attractive at Ratios ≥ 100% of U.S. Treasuries2 

 Maturity 

Yield Ratios 

1 Year

172.40%

2 Year

126.09%

5 Year

105.71%

10 Year

100.00%

20 Year

113.51%

30 Year

100.69%

Ratio of U.S. Treasuries to AAA munis. Source: Bloomberg as of 4/15/13.


1Returns as of 4/15/13. 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 Barclays Municipal High Yield Bond Index is considered representative of the broad market for below investment-grade, tax-exempt bonds with a maturity of at least one year.


2The municipal to Treasury ratio is a comparison of the current yield of municipal bonds to U.S. Treasuries indicating whether municipal bonds offer attractive yields compared to Treasury yields. If the ratio is below 100%, municipal bonds are yielding less than Treasuries; if the ratio is above 100%, municipal bonds are yielding more than Treasuries.


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Territorial Advantage http://www.vaneck.com/muni-nation-blog/territorial-advantage-04-11-13/ One of the truly unique features of the idiosyncratic municipal bond market is that the exempt nature of the income from issuers extends beyond what we know to be the 50 states. In fact, because the United States has territorial control over certain islands, they, in turn, have the ability to access the capital markets of the United States by issuing municipal securities which are exempt from federal as well as local income taxes for U.S. taxpayers.

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Muni Nation 4/11/2013 4:32:38 PM One of the truly unique features of the idiosyncratic municipal bond market is that the exempt nature of the income from issuers extends beyond what we know to be the 50 states. In fact, because the United States has territorial control over certain islands, they, in turn, have the ability to access the capital markets of the United States by issuing municipal securities which are exempt from federal as well as local income taxes for U.S. taxpayers.

We are most familiar with Puerto Rico as an issuer of municipal bonds, but there are two other issuers that, from time to time, gain the attention of investors for the reason mentioned above, as well as for potentially attractive yields that may augment a diversified portfolio structure. I am speaking of the U.S. Virgin Islands and Guam.

Although their combined presence in our five municipal bond ETFs currently only represents approximately one half of one percent of our holdings, bonds from the Virgin Islands and Guam have generally delivered exempt yields that are in line with those of certain Puerto Rico issuers. Their relative scarcity represents a potential store of value that I believe is recognized by the market as demand often far exceeding supply.

These relationships, a vestige of territorial colonialism, may provide certain economic benefits, albeit less significant than 100 years ago. While military considerations for the Caribbean were paramount in the United States’ acquisition of the Virgin Islands from Denmark, Guam is the one territory which still retains the imprimatur of strategic military positioning in the Pacific.

Guam has recently found its way into the press due to North Korea’s threats suggesting its own capability to launch a missile strike against the United States, with Guam located at the outer rim of its technology. None of this sabre rattling has had any impact upon the market for Guam’s bonds to date, and therefore has not yet impacted valuations.

I believe analysts will, of course, pay close attention to all aspects of this story, but the unquestioned military support for these territories may provide enhancement to credit quality.

Location of U.S Insular Areas 

Location of U.S Insular Areas Image

Source: U.S. Government. There are nine additional U.S. insular areas not listed on the map. The areas are: Navassa Island, Baker Island, Howland Island, Kingman Reef, Jarvis Island, Johnston Atoll, Midway Atoll, Palmyra Atoll and Wake Atoll.


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Active Vs. Index Debate: In Search Of Evidence http://www.vaneck.com/muni-nation-blog/active-vs-index-debate-in-search-of-evidence-04-04-13/ The lyrics of "I Can See Clearly Now," a 1972 hit song, came to mind recently when I was revisiting one investment theme that is commonly raised around this time of year as individuals prepare to pay their taxes and consider strategies for tweaking their portfolios: which performs better — active or passive management?

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Muni Nation 4/4/2013 9:59:20 AM The lyrics of "I Can See Clearly Now," a 1972 hit song, came to mind recently when I was revisiting one investment theme that is commonly raised around this time of year as individuals prepare to pay their taxes and consider strategies for tweaking their portfolios: which performs better — active or passive management?

The "clarity" came in a biannual report published by S&P Dow Jones entitled "S&P Indices Versus Active Funds (SPIVA) Scorecard1." It threw some light on this interesting question.

In any given year, to varying magnitudes, benchmark indices outperform managers. In the year-end 2012 edition, the report indicates that in the General Muni Debt category, 29.03% of active muni funds were outperformed by the S&P National AMT-Free Municipal Bond Index2 for the 1-year period ending 12/31/12.

However, what caught my eye was data for the 3- and 5-year periods ending on the same date. For the 3-year period, 44.44% of general muni debt funds failed to outperform the S&P benchmark. And for the 5-year period, well more than half (60.00% of the funds) did not beat the index. (See table below.)


Percentage of Active Municipal Funds Outperformed by Benchmarks
Percentage of Active Municipal Funds Outperformed by Benchmarks Chart

Source: S&P Dow Jones Indices, CRSP. For periods ended Dec. 31, 2012. Outperformance is based upon equal weighted fund counts. All index returns used are total returns. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results.


The concept that helped drive the development of index-based equity ETFs as well as the growing acceptance of indexed strategies appears to also have basis for the muni ETF market. While we must be careful not to generalize, this study does create a base for informed discussion on how to employ a muni investment strategy.

1The full report is available for download.

2The S&P National AMT-Free Municipal Bond Index is a broad, comprehensive, market value-weighted index designed to measure the performance of the investment-grade tax-exempt U.S. municipal bond market.


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Sequestration and The Great Rotation: The Impact on Munis http://www.vaneck.com/muni-nation-blog/sequestration-and-the-great-rotation-the-impact-on-munis-03-21-13/ Watch my latest video which focuses on:

  • Near-Term Outlook and Performance Drivers
  • Impact of Sequestration on the Market
  • Considerations in Light of the Great Rotation

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Muni Nation 3/20/2013 5:05:48 PM Watch my latest video which focuses on:

  • Near-Term Outlook and Performance Drivers
  • Impact of Sequestration on the Market
  • Considerations in Light of the Great Rotation


 
 


Video Transcript 

Near-Term Outlook and Performance Drivers
While inflows have been positive, cash for reinvestment, a huge contributor to demand in 2012, has ebbed significantly this March, and is expected to do so again in April. I expect demand will not drive the market forward these next two months as it did most of last year. Looking back at historical returns, since 1990, there have been only five times when March performance has been positive. Large issuance of new bonds, such as the current $2.1 billion California general obligation (GO) issue, is an example of how supply now, and in prior years, has subdued demand. Therefore, my expectations are for munis to underperform slightly these next two months, but create attractive price points for investors come May.

Impact of Sequestration on the Market
Since December and the fiscal cliff issue, the municipal marketplace has responded very positively — at least for the first two months — to congressional pronouncements concerning the long-term viability of the tax-exempt coupon. Going forward, however, uncertainty remains as to whether or not Congress will continue to think about, if not impose, limitations on the tax-exempt coupon. One positive note out of these recent events is the fact that the highest personal income tax rate has gone up to 39.6%. This continues to bode well for munis in an absolute sense, because the value of the tax-exempt coupon to those in the highest tax bracket remains significant.

Considerations in Light of the Great Rotation
Despite the terrific performance that the equity markets have put in year-to-date, there are still opportunities to be had for municipal investors. There are two things to be mindful of. First, the Federal Reserve has given no indication yet that rates are about to rise, or about to rise anytime in the near future. So opportunities to earn taxable-equivalent returns from municipal products still look attractive. Second, the municipal yield curve remains steeply-sloped, particularly in the intermediate part of the curve. That's where many professionals suggest that there are, and will remain, opportunities for investors to earn performance returns for the 2013 calendar year.



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Cave Idus Martias – Municipals http://www.vaneck.com/muni-nation-blog/cave-idus-martias-municipals-03-15-13/ Beware the Ides of March

Yes, yes, this Shakespearean reference is a little over the top but it has been readily observed by many authors that the month of March has often been a cruel one for participants in the municipal bond market. In this year — MMXIII — it just so happens that we have had, so far, a stellar 10% rise in the Dow in tandem with the dual crises of sequestration and Federal government funding (shutdown), creating headlines that I believe place doubt ahead of decision in the minds of fixed income investors.

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Muni Nation 3/14/2013 5:23:34 PM Beware the Ides of March

Yes, yes, this Shakespearean reference is a little over the top but it has been readily observed by many authors that the month of March has often been a cruel one for participants in the municipal bond market. In this year — MMXIII — it just so happens that we have had, so far, a stellar 10% rise in the Dow in tandem with the dual crises of sequestration and Federal government funding (shutdown), creating headlines that I believe place doubt ahead of decision in the minds of fixed income investors.

It is unique to have evidence suggesting, in my opinion, a certain annual and reliably repetitive market pattern. In a normal year, increased muni bond new issuance and reduced reinvestment flows might be all that is required to perpetuate this pattern of weak performance in March on the heels of a good month of February.


Monthly Municipal Reinvestment Chart

Source: Municipal Market Advisors as of 2/28/13. Historically, municipal reinvestments are lowest in March and April. 


The Barclays Municipal Bond Index1 returned a positive 0.30% last month (February). As our friends at Municipal Market Advisors (MMA) point out, only five times since 1990 has price performance been positive in March.

So, Quid Facere? (What to do?)

It is important to remember that the months following this late winter pattern have the potential to produce positive returns because adjustments to yields may generate attractive price points for investors when they re-engage. Also, I believe it remains a central theme that the Fed will continue to target low rates in the near term, which caps the upward boundary for municipals just as it does for treasuries. The yield to worst of the Barclays Capital AMT-Free Intermediate Continuous Municipal Index2 was 2.31% as of 3/13/13. On a tax equivalent basis3 that is 3.21% for taxpayers in the 28% bracket and 3.82% for those in the top 39.6% bracket. For investors who recognize the value accruing to the tax-free nature of the coupon, the intermediate area of the municipal market is still generally regarded as — near term — an attractive position from which to grab income as well as return from a steep yield curve.

Yes, beware the Ides of March, but be mindful of the opportunities.


1The Barclays Municipal Bond Index, which is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year.

2Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date. The Barclays Capital AMT-Free Intermediate Continuous Municipal Index is a market value weighted index designed to replicate the price movements of medium-duration bonds with a nominal maturity of 6-17 years.

3The tax-equivalent yield is used by investors to compare taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). It represents the yield a taxable bond would have to earn in order to match — after taxes — the yield available on a tax-exempt municipal bond.
 


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Got Credit? Part 2 http://www.vaneck.com/muni-nation-blog/got-credit-part-2-03-07-13/ As I attempted in the first installment, I offer a high level overview to generalize my view on the credit quality of a vast expanse of states, cities and local issuers of municipal bonds. I believe ratings do matter because, not only do they represent a measure of differentiation and separation of value for some 60,000 issuers, but in the long run, they may serve as an affirmation of the soundness and strength of tax-exempt investments.

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Muni Nation 3/7/2013 9:44:06 AM As I attempted in the first installment, I offer a high level overview to generalize my view on the credit quality of a vast expanse of states, cities and local issuers of municipal bonds. I believe ratings do matter because, not only do they represent a measure of differentiation and separation of value for some 60,000 issuers, but in the long run, they may serve as an affirmation of the soundness and strength of tax-exempt investments.

Part 1 summarized ratings at the state level. This installment seeks to do the same, but for the broader expanse of issuers. While the downgrades of 2012 outpaced the upgrades by nearly a 5 to 1 margin, this is a recent phenomenon that defines the post-recession years (2009 – 2012). Prior years, going back to 1989, evidenced year-over-year upgrades that consistently outpaced downgrades.

In a recent report from Moody’s, the attention grabbing headline was that in 2012, “a record of $311 billion of public debt” was downgraded, surpassing the prior record of $194 billion in 2009. I believe that a better metric, however, is assessing the ratings actions that were taken during the year rather than the representative market value. Why? Because if the ratings of one or two very large issuers change, they may skew the overall results. For example, in the fourth quarter of 2012 almost 50% of the downgrades by market value alone were attributable to Puerto Rico issuers.

In my view, the key figures are: (1) in 2012, when more than 80% of all ratings changes were downgrades, Moody’s only changed ratings on 1,000 of 14,000 issuers it rates; and (2) the number of upgrades in 2012 increased by 50% (187/125) over 2011. By that representation, some municipal bond issuers were able to improve their financial positioning while the great majority (some 13,000) was able to maintain its ratings status. I am not diminishing the significance of the trend, but do think it important to highlight that local governments appear to have acted responsibly and with fiscal restraint, and I believe that we have the potential to continue to benefit in the context of broadly diversified portfolio structures, i.e., ETFs, from this generally high-quality asset class.


2012 Activity Results Chart


 


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Rotations and Bubbles http://www.vaneck.com/Templates/Blog.aspx?id=2147491251&blogid=2147483856 Many portfolio manager commentaries from large, well-known investment companies have, over the past several weeks, generated thoughts about the murky future of the markets and economy. Several appear to lead with the suggestion that an unseen hand is poised to pull on a figurative lever to categorically change broad strategy (asset allocation) from bonds to stocks; this would be called "The Great Rotation." Others offer suggestions that the current strategy of asset allocation, which has taken us to significant returns over the past 24 months, is about to combust; this would be called "Bursting the Bubble." Because of the eye-catching phraseology involved, I fear that readers may feel that these potentialities are faits accomplis.

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Muni Nation 2/22/2013 3:03:52 PM Many portfolio manager commentaries from large, well-known investment companies have, over the past several weeks, generated thoughts about the murky future of the markets and economy. Several appear to lead with the suggestion that an unseen hand is poised to pull on a figurative lever to categorically change broad strategy (asset allocation) from bonds to stocks; this would be called "The Great Rotation." Others offer suggestions that the current strategy of asset allocation, which has taken us to significant returns over the past 24 months, is about to combust; this would be called "Bursting the Bubble." Because of the eye-catching phraseology involved, I fear that readers may feel that these potentialities are faits accomplis.

The Great Rotation, or change in asset allocation from bonds to stocks, is a discussion worth having for those investors and managers who are actively managing assets and trying to generate alpha or returns significantly higher than median. Given that, at some point, it is not unreasonable to expect that stimulative efforts of the Federal Reserve will induce growth and inflation, I believe that we will likely see interest rates rise and turn the favor of investors toward equities. We just don't know whether this turn will happen during this calendar year.

Bursting the Bubble relates to the possibility that an overreliance upon bonds as an asset allocation will lead to damaged returns if and when rates do begin to rise. A reasonable definition of the term "Bubble Theory" reads as follows: "A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these bubbles are easily identifiable."*

I offer up this comment to suggest that while these terms have merit, I believe that there is danger in accepting the face value of these concepts, especially out of context of the longer view of an asset allocation strategy using tax-exempt bonds. For investors in tax-exempt products, one must remember that since personal income taxes have risen, the value of the exemption might mean more now than it did when purchased over the past several years. Furthermore, the debate should, in my opinion, focus less on whether prices have truly risen "far beyond their true values" and focus more on the fact that this asset class delivers what I consider a greater benefit of credit quality and stability in an increasingly volatile marketplace.


*Investopedia

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Migratory Patterns http://www.vaneck.com/muni-nation-blog/migratory-patterns-02-14-13/ Let's give credit where credit is due: recently, Forbes published an article that to some might seem like the kind of article that sits on the shelf until there is a slow news day and the editor is looking for a filler piece. In fact, this article raises a number of important points that, in my opinion, all touch upon the national economic recovery and just may be the locus of the revival of small business and wealth creation.

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Muni Nation 2/14/2013 12:04:44 PM Let's give credit where credit is due. Recently, Forbes published an article that to some might seem like the kind of article that sits on the shelf until there is a slow news day and the editor is looking for a filler piece. In fact, this article raises a number of important points that, in my opinion, all touch upon the national economic recovery and just may be the locus of the revival of small business and wealth creation.

Why is this important to MUNI NATION? My concern is for the economic health — no, survival — of state and local governments that issue tax-exempt debt securities in order to meet the public needs of their inhabitants. The Forbes article points to migratory population shifts (measured in part by statistics from moving companies) that I believe will have very real consequences for certain states. As there is net "out migration," there may typically be loss of tax revenues, user fees and consumption at the local level. Naturally, that may result in further belt-tightening for budgeting and, as we saw during the recession, jobs were cut and/or taxes were raised to meet those obligations already etched in stone. For some of the affected areas in the Rust Belt, I believe the consequences of the high cost of living and already high taxes will create painful decisions.

The article highlights the following, which might not come as a surprise, except that I believe it reflects the perpetuation of a disturbing long-term trend lawmakers should soon address.


 State 

Out Migration Rate* 

New Jersey

62%

Illinois

60%

New York

58%

Michigan

58%

Maine

56%

Connecticut

56%

Wisconsin

55%


By contrast, the following states have the highest ratio of people migrating in: North Carolina, Oregon, South Carolina and Nevada. Surprisingly, Washington, D.C., reports Forbes, currently is the most popular destination for relocation. The area attracts highly educated professionals to high-tech and government-sponsored jobs.

All of the above makes, in my view, the case for investing in highly diversified products, such as low-cost ETFs, where any price adjustments resulting from the impact of migratory patterns should be de minimis, potentially avoiding over concentrations to those states where the impact might be the greatest.


Migration Study Map Image


*Source: United Van Lines 2012 Migration Study. Migration rate represents United Van Lines' customers moving from one state to another during the course of the year.

 


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No Good Deed Goes Unpunished http://www.vaneck.com/muni-nation-blog/no-good-deed-goes-unpunished-02-05-13/ Looming under the somewhat Byzantine headline name, Sequestration, are automatic cuts to government spending that may include planned reimbursements to state and local issuers of Build America Bonds (BABs). BABs are taxable municipal bonds, authorized as a stimulus program under the 2009 American Recovery and Reinvestment Act. The federal government promised rebates to the issuers equal to 35% of their interest costs as an incentive to raise capital for "shovel ready" projects. Many market participants considered it to be a highly successful program.

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Muni Nation 2/5/2013 10:52:15 AM Looming under the somewhat Byzantine headline name, Sequestration, are automatic cuts to government spending that may include planned reimbursements to state and local issuers of Build America Bonds (BABs). BABs are taxable municipal bonds, authorized as a stimulus program under the 2009 American Recovery and Reinvestment Act. The federal government promised rebates to the issuers equal to 35% of their interest costs as an incentive to raise capital for "shovel ready" projects. Many market participants considered it to be a highly successful program.

In the lawyer-crafted pages of the Act, however, is language that permits Congress to take away or reduce the 35% rebate at its discretion. If that should happen, I believe city and state issuers will be obligated to make up the difference, likely forcing some of these issuers to reconfigure their budgets to accommodate these additional obligations. Ultimately, the extra burden, in my opinion, will rest with taxpayers who may have thought that certain needs and benefits coming out of the recession were already accounted for, but now find the hand of government back in their pockets.

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January Rebound http://www.vaneck.com/muni-nation-blog/january-rebound-1-01-31-13/ With the political ripples of the "cliff" and inauguration finally reaching the edge of the pond, the markets appear to be once again fully engaged in the dissection of domestic economic releases, earnings and European monetary drama. The elements that I believe sparked a year-end selloff have now receded, allowing municipals to push forward with a month-to-date gain of 0.62% as of January 25, 2013. New flows into municipals, along with cash from calls, maturities and coupon payments are again positive, overwhelming a meager January supply: a formula that is prevalent in most years, coined the "January Effect."

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Muni Nation 1/31/2013 1:28:29 PM With the political ripples of the "cliff" and inauguration finally reaching the edge of the pond, the markets appear to be once again fully engaged in the dissection of domestic economic releases, earnings and European monetary drama. The elements that I believe sparked a year-end selloff have now receded, allowing municipals to push forward with a month-to-date gain of 0.62% as of January 25, 2013.* New flows into municipals, along with cash from calls, maturities and coupon payments are again positive, overwhelming a meager January supply: a formula that is prevalent in most years, coined the "January Effect."

Municipal high yield has continued to push the envelope, as credit spreads narrow further (32 basis points this month). Recent new high-yield issues brought to market report having been oversubscribed as much as 5–8 times, and once trading, have seen bids higher by 1–2 points within the first half hour.

Puerto Rico, shaken by downgrades and negative news at the end of last year, has also rallied in January, posting month-to-date gains of 2.61%.* My sources report that, while it is still early in the new administration of Puerto Rico Governor-elect Garcia Padilla, it would appear that there may be bi-partisan support for the effort to narrow the $1 billion deficit through some combination of cost reductions in public health and government payrolls. Business initiatives to create some 10,000 new jobs have also been presented, which may give hope to investors that the long period of economic decline might be arrested. Price performance of Puerto Rico debt year-to-date, in my opinion, seems to evidence the market's awareness and hope for this effort.

Spreads Continue Narrowing Graph
Source: FactSet as of 1/28/13.

*Based on the Barclays Municipal Bond Index, which is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year. The Barclays Puerto Rico Municipal Bond Index is a subset of this broader index.

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

Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.


 


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Got Credit? (Part 1) http://www.vaneck.com/muni-nation-blog/got-credit-part-1-01-25-13/ One point which I believe is universally made regarding the municipal bond market is that the overall credit quality (the implied security) of the issues brought to the market not only underpins the attraction of municipals as an asset class, but separates it very distinctly from other fixed-income choices.

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Muni Nation 1/25/2013 10:49:40 AM One point which I believe is universally made regarding the municipal bond market is that the overall credit quality (the implied security) of the issues brought to the market not only underpins the attraction of municipals as an asset class, but separates it very distinctly from other fixed-income choices.

Moody's, S&P and Fitch are the companies whose analyses of the legal, contractual and moral promises made by issuers result in a scorecard grade that may suggest the likelihood of full and timely repayment of their debts. I think it is a good time to revisit some of these important details, lest we lose sight of what brings strength to this market.

First, there are 13 states that garner no less than a triple-A (AAA) rating from one or all of the above agencies. States such as Alaska, Delaware, Georgia, Maryland and North Carolina are part of a subset that have triple-A from all three.*

Second, apart from Puerto Rico and other Territories of the U.S., the lowest-rated states are California (A1, A-, A-) and Illinois (A2, A, A). Neither one has anything less than an A- from at least one of the three agencies. In fact, included in the list of the 10 lowest-rated states are New Jersey (Aa3, AA-, AA-) and Michigan (Aa2, AA-, AA-).

The point? Though this just speaks to state issuers, since the bottom of the investment grade range is BBB-, one should appreciate that the general quality of bonds appears very strong. As shown in the graph below, the average rating among all U.S. states is AA. Thus, in the context of a broadly diversified portfolio, the quality, in my opinion, represents a high likelihood of full repayment.

The next installment will more fully explore this thesis.

Distribution of S&P Credit Rating by State Table
Source: S&P and First Southwest as of January 22, 2013.

*As of January 22, 2013, the full list of states with triple-A ratings from all three rating agencies includes: Alaska, Delaware, Georgia, Iowa, Maryland, Missouri, North Carolina, Utah and Virginia. The rating scales are as follows, from excellent (high-grade) to poor (including default) for Moody's, S&P and Fitch: Aaa/AAA/AAA to C/D/D, with intermediate ratings offered at each level between. Anything lower than a Baa/BBB-/BBB- rating is considered a non-investment-grade, high-yield or junk bond.


 


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Alas, Poor Tax-Free Coupon, I Knew Thee Well... http://www.vaneck.com/muni-nation-blog/alas-poor-tax-free-coupon-I-knew-thee-well-01-17-13/ If there is one certainty that I believe municipal bond investors can lean upon as we fully commit to writing 2013 in our check registers, it is the seemingly perpetual uncertainty regarding the political deliberations about to resume in Washington, which again could include discussions about capping the benefit of the tax-free coupon. Ask yourself, "What has changed since the November elections?" and you'll probably answer, "Nothing." However, with the adjusted personal income tax rates now at higher levels, this statement is not entirely true; the market has been living with this cloud of uncertainty going on five months or more.

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Muni Nation 1/17/2013 11:51:44 AM If there is one certainty that I believe municipal bond investors can lean upon as we fully commit to writing 2013 in our check registers, it is the seemingly perpetual uncertainty regarding the political deliberations about to resume in Washington, which again could include discussions about capping the benefit of the tax-free coupon. Ask yourself, "What has changed since the November elections?" and you'll probably answer, "Nothing." However, with the adjusted personal income tax rates now at higher levels, this statement is not entirely true; the market has been living with this cloud of uncertainty going on five months or more.

Armed with facts and figures that demonstrate the relatively small benefit to deficit reduction this tax plan would potentially create (only 2%-4% of revenues needed), state and local treasurers and industry proponents appear to be standing ready to once again defend small local issuers and taxpayers who would likely bear the incrementally and disproportionately higher costs of capital under this plan.

Since March seems to be the legislative deadline, we have nearly three months to endure this uncertainty. The danger, in my opinion, is that investors can become indecisive. Holding onto cash with rates as low as they are can be costly. If you invested $100,000 in a money fund from the beginning of the year to the end of March and it was yielding 25 bps, $62.16 would be the income received, but at what cost? Fees can eat away that income while one waits.

US Money Market Tax Free Morningstar Category Table

Municipals have benefited marginally from the new higher personal income tax rates, but I believe there is little about the near future to suggest that investors, despite the uncertainties, should not participate in current markets.

As we watch this drama play out before us, portfolio managers and individuals face a continuing dilemma: in this low interest rate environment, to invest or not to invest? That is the question.  

*Source: Morningstar Direct as of 1/15/13.

 


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Muni Health Check 4Q’12 http://www.vaneck.com/muni-nation-blog/muni-health-check-4Q12-01-10-13/ Watch my latest Video Viewpoint on:

  • Year-End Volatility
  • States & Municipalities
  • Measuring Impacts of Puerto Rico Downgrade
  • U.S. Fiscal Debate


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Muni Nation 1/10/2013 11:00:29 AM Watch my latest Video Viewpoint on:

  • Year-End Volatility
  • States & Municipalities
  • Measuring Impacts of Puerto Rico Downgrade
  • U.S. Fiscal Debate


 
 


Video Transcript 

Year-End Volatility
What has occurred is pretty normal in terms of markets. Market participants are normally used to seeing corrections, re-settings and re-balancings of opportunities in their markets. The same thing has just happened in the municipal marketplace. It's a healthy thing. When people come back from their Christmas vacations, they're going to find yields and opportunities in municipals even more attractive than they were back in October and November. Such has been the correction that's occurred recently, but it is a healthy correction. Nothing fundamentally has changed, and credit quality remains at the very top of the spectrum relative to other asset classes.

States & Municipalities
The outlook for states and municipalities in 2013 is improving. There are many reasons to be optimistic about the recovery and the health of communities around the country. Although growth is not robust and we still face significant challenges, all evidence points to increased revenues and tax collections. States and municipalities must balance their budgets. Constitutionally, they need to produce balanced budgets every fiscal year, which leads to more proactive participation on the part of legislators to actually manage revenues and manage through difficult times. I would say the outlook continues to be fairly positive for all states and municipalities who are issuers of municipal bonds.

Measuring Impacts of Puerto Rico Downgrade
Recently, Moody's Investors Service downgraded the credit quality of Puerto Rico — the commonwealth's obligations as well as several other issuers in the commonwealth. The impact of that right now may seem significant because we have had some price dislocation in the market. Long term, I do think that Puerto Rico, as it is held collectively by almost every investment manager in this country in investment portfolios, will continue to be an important part of strategic allocation in those portfolios. Now that the margin between investment grade and non-investment grade debt is much narrower than in past years, I think that Puerto Rico debt is going to force the new government that has recently been elected in Puerto Rico to address those questions and issues and put the commonwealth back on track to more robust growth and development. While it might seem like Puerto Rico is under a great deal of pressure near term, I think the commonwealth will respond, and I think that investment managers will continue to — very carefully, as they always have done — monitor the creditworthiness of all Puerto Rico issuance.

U.S. Fiscal Debate
For munis in particular, there is a notion that there may be a cap on the benefit of the tax-exempt coupon. 28% is a number that has been kicked around Washington and that certainly would have an impact and consequences. Also, there is a question as to whether the tax-exemption of the municipal coupon will continue as it is. In other words, will Congress say, "We have got to find ways to raise more revenue; we have got to balance the budget; we have got to lower the deficit?" One of the ways is to eliminate the deductibility, or the benefit of tax-free income. If that should happen, there would be untold consequences, one of which might be impacting state and local governments in a meaningful way; their access to the capital markets would be far more costly because these bonds and this access to the capital markets are no longer tax-exempt. The yields would no longer be at lower levels; they would be at higher levels and cost the states and municipalities more for their programs. One additional point that should not be lost in the debate and the discussion is the impact of taxing tax-free income means, in effect, an additional tax on taxpayers, the general taxpaying population across the country. Many of those people don't even invest in municipal bonds. Increasing the cost of capital for those municipalities will have a broader impact than perhaps most people are aware. The question remains: what is going to happen? No one really knows. We're preparing for the worst and hoping for the best.




 


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No Cliff For Old Munis http://www.vaneck.com/muni-nation-blog/no-cliff-for-old-munis-01-03-13/ In the eleventh hour of the first night of 2013, Congress passed legislation which, among tax increases and other items, left the municipal bond coupon tax-free and unscathed. As you undoubtedly know by now, the bill provides for extensions of the Bush era tax cuts and credits and permanently "patches" the Alternative Minimum Tax (AMT) going forward.

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Muni Nation 1/3/2013 4:20:07 PM In the eleventh hour of the first night of 2013, Congress passed legislation which, among tax increases and other items, left the municipal bond coupon tax-free and unscathed. As you undoubtedly know by now, the bill provides for extensions of the Bush era tax cuts and credits and permanently "patches" the Alternative Minimum Tax (AMT) going forward.

Personal income taxes for individuals with income over $400,000 and households over $450,000 will increase; as will taxes on dividends and capital gains for those investors. There will be much more debate to follow as Congress must address the deficit and debt ceiling in the coming months.

The rally in the equity markets and the simultaneous sell-off in Treasuries seem to be an expression of relief from investors who had sought safety in bonds while awaiting the outcome of these deliberations. What needs to occur in my view, however, is a response from business that reflects both relief and confidence in the stimulus. Business may need to see how more revenues will be raised and what programs may be pushed over the cliff before employment increases and GDP can rise.

At this time, tax-free investors can exhale knowing that their tax-free income streams remain preserved as we roll off the second strong performance year in a row; the Barclays Municipal Bond Index returned 6.78% in 2012. With higher taxes coming for many Americans, I believe the tax-free coupon makes munis all the more desirable. 

The Higher the Tax Rate the More Attractive Municipal Bonds Become Chart

Based on proposed 2013 federal tax rates. For illustrative purposes only. Taxable equivalent yield = (tax-deferred interest rate) x (1 / (1-your tax bracket). These numbers are examples only and are not representative of future yields. Actual yields may be lower or higher than the example. Income exempt from regular federal income tax may be subject to U.S. federal alternative minimum tax (AMT) as well as state and local taxes.

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.


 


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Santa Claus, Still Coming… http://www.vaneck.com/muni-nation-blog/santa-claus-still-coming-12-20-12.aspx Month-to-date, and really it is over the last eight business days, munis have sold off in dramatic fashion (now, drama in muniland is far from what is experienced in equities or treasuries). The Barclays Municipal Bond Index is down 1.66% and even the High Yield Index is down 1.08%. The representative Aaa yield curve – MMD – has risen by over 40 basis points in that time in a move that likely has many dealers shaken and investors confused.

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Muni Nation 12/20/2012 2:31:25 PM Month-to-date, and really it is over the last eight business days, munis have sold off in dramatic fashion (now, drama in muniland is far from what is experienced in equities or treasuries). The Barclays Municipal Bond Index is down 1.66% and even the High Yield Index is down 1.08%. The representative AAA yield curve — MMD — has risen by over 40 basis points in that time in a move that likely has many dealers shaken and investors confused. In truth, I don't believe anyone saw this correction coming. My previous MUNI NATION post explains the conditions which took the market down, but other than the downgrade of certain Puerto Rico credits, this was very much a technical correction.

Still, the impact of the failure of our representatives to reach any meaningful accord on serious issues of taxation and spending is a source of enormous frustration. Further, the question of what becomes of the tax-exempt coupon remains a topic of debate, and has clearly spooked the market.

Yes, Santa is still coming to muniland, in the form of reinvestment of coupon, calls and maturities to the jingling of more than $20 billion for December. And once the snow globe settles for investors and advisors, I believe they will see the same high credit quality marketplace at yield levels not seen for many, many weeks. If investors loved the muni market a month ago at the rate of $1 billion in new cash, then the relative value proposition is now all the more compelling. Ho Ho Ho.  


MMD "AAA" Yields Reverse Trend

 Maturities 

9/14/2012  

9/21/2012 

12/7/2012  

12/19/2012 

5 YRS

0.75

0.69

0.64

0.83

10 YRS

1.93

1.79

1.49

1.82

15 YRS

2.34

2.21

1.82

2.15

20 YRS

2.64

2.51

2.12

2.45

30 YRS

3.06

2.95

2.49

2.86

Source: Municipal Market Data as of 12/19/2012.

 


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A Perfect Storm http://www.vaneck.com/muni-nation-blog/a-perfect-storm-12-18-12/ For all the professionals who embraced the strong market performance of municipal bonds year-to-date, I attribute the sudden break in the positive trend to the confluence of the following events leading to what could be called a "muni perfect storm":

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Muni Nation 12/18/2012 4:15:15 PM For all the professionals who embraced the strong market performance of municipal bonds year-to-date, I attribute the sudden break in the positive trend to the confluence of the following events leading to what could be called a "muni perfect storm":

  • Despite the continued strong inflows of cash, the recent surge in new issue supply overwhelmed dealers who appear to be paring back their inventory for the yearend.
  • Aggressive selling of several hundred million (par value) of tobacco settlement bonds pressured traders early last week.
  • Thursday's downgrade of Puerto Rico muni debt by Moody's to just one notch above high-yield status triggered a wave of selling and pushed prices generally lower (yields higher).
  • Lack of clarity surrounding the Washington debate over the fiscal cliff has left observers fearing that, one way or the other, the tax-free coupons of municipal bonds are likely in jeopardy.


Munis gave up more ground again on Monday as more selling emerged from a cross section of investment portfolios. (See graph below.) Some seemed intent on off-loading more Puerto Rico issues, while others appear to have used the current market weakness as an excuse to step aside while the "compromise dance" continues on in Washington. Several well-known strategists have furthered the notion that the benefit from the tax-free coupon of municipals may either disappear or be aggregated into a "cap" on certain deductions (28% being the line that has been drawn in the sand). I see little likelihood that prior ownership and income will be grandfathered through new legislation, because the cash needs are dire and the result of capping only new issuance would likely result in insufficient tax revenue in the near term.
 

Municipal Bids-Wanted Hit Highest Level Since January 2011*
Simple Moving Average
 

Municipal Bids-Wanted Hit Highest Level Since January 2011 Image

Source: Bloomberg. The J.P. Morgan MBWDPAR Index represents the total dollar amount of wanted items on Bloomberg's buyside bids wanted system.
*Bid Wanted is the process by which an investor or broker-dealer actively solicits bids on a position of securities from the marketplace.
 


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Year in Review and Outlook http://www.vaneck.com/muni-nation-blog/2012-in-Review-12-14-12/ I believe that 2013 promises to stand in contrast to the linear upward moves for municipal bonds in 2012. There appears to be conflicting expectations about new issue supply, so my conservative view is to say that volume has the potential to be +/- 10% of that of 2012. Much depends on a solution out of Washington concerning taxes, entitlements and federal support for state and local government programs.

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Muni Nation 12/14/2012 10:46:47 AM I believe that 2013 promises to stand in contrast to the linear upward moves for municipal bonds in 2012. There appears to be conflicting expectations about new issue supply, so my conservative view is to say that volume has the potential to be +/- 10% of that of 2012. Much depends on a solution out of Washington concerning taxes, entitlements and federal support for state and local government programs.

My outlook anticipates that municipal bond tax exemption should remain in place for individual investors and allow municipalities continued access to the capital markets, as has been customary since the early 20th century. The uncertainty includes a possible return to stimulus, such as the Build America Bond program.

Even if some of the tax benefit was capped at 28%, the muni market already seems to be anticipating higher nominal rates in the second half of 2013, and an adjustment could happen very suddenly if new legislation regarding muni tax exemption is passed.

2012 was more profitable for muni investors than was predicted at the beginning of the year. Year-to-date index returns of 8.12% for the Barclays Municipal Bond Index and 18.11% for the Barclays Municipal High Yield Index summarize a story that includes spread narrowing, curve flattening and large inflows to municipal funds (nearly $50 billion YTD). Though there were more credit downgrades than upgrades, I believe 2012 will deliver fewer defaults or credit impairments than the prior two years.

Overall, I believe municipals will continue to offer investors potential opportunity in terms of yield and return in 2013. However, there may be less of a total return opportunity than we've seen in 2012, since quality spreads have narrowed throughout 2012 and the curve could flatten in a meaningful way in the 1–10 year segment.

 

Historical Fixed-Income Index Returns (%)
Historical Fixed Income Index Returns (%) Chart

Source: FactSet. For illustrative purposes only based on historical performance of various indexes. Please see index descriptions below. The listed indices are unmanaged and are not securities in which an investment can be made. Historical information is not indicative of future results. Past performance is no guarantee of future results. Not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security.

Index Descriptions

US AGG: Barclays US Aggregate Index is composed of intermediate-term government bonds, investment-grade corporate debt securities, and mortgage-backed securities. US HY CORP: Barclays US Aggregate Credit Corporate High Yield Index is composed of fixed-rate, publicly issued, non-investment grade U.S. corporate debt. GLB HY CORP: BofA Merrill Lynch Global High Yield Index is composed of USD, CAD, GBP and EUR denominated below investment grade corporate debt issued by corporations from developed and emerging markets countries. EM USD CORP: BofA Merrill Lynch Emerging Markets Liquid Corporate Plus Index is composed of USD denominated investment-grade and non-investment grade debt issued by corporations in emerging markets countries. EM LOCAL SOV: JP Morgan GBI-EM Global Composite Index is composed of local currency denominated non-investment grade debt issued by emerging markets governments. EM USD SOV: JP Morgan EMBI+ Index is comprised of USD denominated debt issued by emerging markets governments. US CORPS: Barclays US Aggregate Credit Corporate Investment Grade Index is the investment grade corporate component of the Barclays Capital Global Aggregate Bond Index. MORTG REIT: Barclays US Aggregate Mortgage Index is the U.S. MBS component of the Barclays U.S. Aggregate index. GLB AGG: Barclays Global Aggregate Index is composed of the U.S. Aggregate, Pan-European Aggregate, and the Asian-Pacific Aggregate Indexes. It also includes a wide range of standard and customized sub-indices by liquidity constraint, sector, quality and maturity. TIPS: Barclays US Aggregate Government TIPS Index is composed of TIPS with one or more years remaining maturity with total outstanding issue size of $500m or more. MUNI: Barclays Municipal Bond Index is composed of tax exempt revenue bonds and state government obligations. HY MUNI: Barclays Municipal High Yield Index is the below investment grade subset of the Barclays Municipal Bond Index. US TREAS: BofA Merrill Lynch US Treasury Index of US dollar denominated sovereign debt publicly issued by the US government in its domestic market. PREFERRED: BofA Merrill Lynch Core Fixed Rate Preferred Securities Index is composed of fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market.
 


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Who’s Afraid Of The Fiscal Cliff? http://www.vaneck.com/muni-nation-blog/who-is-afraid-of-the-fiscal-cliff-11-30-12/ The municipal market continues to be well-bid by evidence of continued strong flows into muni funds. I believe we can expect the demand side of the equation to drive the market through yearend.

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Muni Nation 11/29/2012 5:09:29 PM Fiscal Cliff Ahead ImageThe municipal market continues to be well-bid by evidence of continued strong flows into muni funds. I believe we can expect the demand side of the equation to drive the market through yearend.

Amidst all the talk about the fiscal cliff, it seems to me that concern for higher personal tax rates in 2013 is bolstering the attractiveness of municipal bonds. Additionally, the potential impact of a higher capital gains rate could be seen as enticing investors to seek shelter in municipal bond ETFs. They may be taking gains now, at the current lower rate and "parking" the proceeds in a tax-free vehicle, awaiting the right opportunity to re-enter positions.

 

2012 YTD Cumulative Municipal Bond Fund Flows
Cumulative Municipal Bond Fund Flows Graph

Source: J.P. Morgan, Lipper Weekly Municipal Bond Fund Flows ending 11/21/2012. 


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Play Your Cards http://www.vaneck.com/muni-nation-blog/play-your-cards-11-20-12/ Amid all the questions and uncertainties whirling around Washington in the aftermath of the presidential election, the image of higher personal income taxes — fiscal cliff or not — is coming into sharper focus. In what could become known as the next "Great Compromise," I believe taxes are almost assuredly going higher. We may also have to throw capital gains taxes into the stew of tweaks and twists to which congressional leaders may need to agree. What is there for individual investors to do?

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Muni Nation 11/20/2012 5:59:50 PM Play Your Cards ImageAmid all the questions and uncertainties whirling around Washington in the aftermath of the presidential election, the image of higher personal income taxes — fiscal cliff or not — is coming into sharper focus. In what could become known as the next "Great Compromise," I believe taxes are almost assuredly going higher. We may also have to throw capital gains taxes into the stew of tweaks and twists to which congressional leaders may need to agree. What is there for individual investors to do?

There is precious little time remaining in the calendar year to take action on capturing embedded gains in one's fixed-income portfolio. Whether from Treasury or municipal bond holdings, gains from the long-term bull market in fixed income are still taxable at 15%. For those wondering what they can do before yearend, this may be the last opportunity to preserve capital gains and avoid an involuntary surrender of investment gains to unknown future legislative action. Savvy professionals may find that harvesting these gains is the biggest end-of-year idea to implement. Needless to say, such activity could potentially push the markets to higher levels of volatility.

For those coming out of high cost structures, there may be the temptation to find lower-cost vehicles for reentry and asset allocation. ETFs can potentially play a significant role in capturing some of those flows — either temporarily or longer term — while the political issues play out.

For muni investors who sense impending change that might significantly alter their long-term strategy, I believe playing the cards in hand to a known strategy may be better than hoping for the luck of the draw.

 

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Crossroads http://www.vaneck.com/Templates/Blog.aspx?id=2147490461&blogid=2147483856 In the aftermath of Hurricane Sandy, more than just the massive property destruction has been revealed to municipal participants as needing dire attention. National and local infrastructures have been weakened and are at the mercy of natural disasters that now seem to be occurring more regularly. From power supply and transportation to drinking water, Sandy exposed most of the projects and programs that constitute "public purpose" and define municipal finance as damaged and in need of repair.

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Muni Nation 11/16/2012 12:06:30 PM In the aftermath of Hurricane Sandy, more than just the massive property destruction has been revealed to municipal participants as needing dire attention. National and local infrastructures have been weakened and are at the mercy of natural disasters that now seem to be occurring more regularly. From power supply and transportation to drinking water, Sandy exposed most of the projects and programs that constitute "public purpose" and define municipal finance as damaged and in need of repair.

After Wednesday's announcement of the resignation of the chief operating officer of the Long Island Power Authority, New York Governor Andrew Cuomo commented, "I believe LIPA has been beyond repair for a long, long time. I don't believe you can fix it. I believe it needs to be overhauled and you need a new system." This is only the beginning of what I believe promises to be a contentious period for governors and regional managers alike. In the Mid-Atlantic, where over 8 million customers throughout 21 states lost power, there will be a need for restoring infrastructure. In my opinion, traditional tax-exempt financing supplemented with proceeds from insurance and federal grants will likely fund reconstruction.

If that sounds like business as usual, think again. This nation's economy still appears to be teetering on the edge. Unemployment is currently at 7.9%, business formation and investment are low, the fiscal cliff looms and Washington lawmakers are toying with reducing, if not eliminating, the tax-free advantage of municipal bonds. At a time when municipalities need every opportunity to continue to access the capital markets, the possibility of higher financing hangs overhead.

I see the municipal market at a crossroads. Order is needed but confusion seems close at hand. Yields are at or close to all-time lows just when confidence in the process needs affirmation rather than undermining. With year-to-date returns above 7%, municipal bonds generally have performed better than expected. Now is not the time to pull the plug. And, if recent flows into municipals are any indication, investors have not yet lost the desire for this asset class.


Municipal Bond Yields at Lowest Level in 10-Years
Yield to Worst Chart

Source: FactSet, as of 11/14/12. Based on yield-to-worst of the Barclays Municipal Bond Index.  


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. Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date. 



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Two Ideas For Muni Bond Investors Amid A Low Rate Environment http://www.vaneck.com/muni-nation-blog/two-ideas-for-muni-bond-investors-amid-a-low-rate-environment-11-08-12/ Watch my latest interview with TheStreet.com.

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Muni Nation 11/8/2012 4:06:10 PM Watch my latest interview with TheStreet.com.

 

 
 


Lindsey Bell, Investment Analyst TheStreet.com: Jim, given Fed actions, interest rates are going to be low for some period of time. Investors have responded by getting into municipal bonds, given their higher yields and higher returns. There's a concern now that those returns aren't going to remain forever. Do you agree with this? What are your thoughts here?

Jim Colby: I think this year, 2012, will be another positive year of returns for munis, but in fact, what has happened is with the decline in nominal rates and the contraction in spreads between different types of municipal bonds, the opportunity to earn terrific returns, or returns beyond what we're probably going to experience in 2012, will be limited and that's a natural result of what's occurred these past two years.

Lindsey Bell: Are there any specific areas within muni bonds that should see better returns beyond 2012?

Jim Colby: I like two areas. One is high yield. I just spoke about credit contraction in the marketplace. The yield of high-yield municipal bonds is nearly 100 basis points above its long-term average, even going back to the early 1990s. At 100 basis points above its long-term mean, high yield presents an opportunity for earning alpha out of a municipal bond product that normally just offers the benefit of the coupon return.

Another area I like is the intermediate part of the investment grade municipal curve. Why do I like it? I like it because the spread in yield between the different maturities — municipal bonds come out in serial maturity structure with bonds that mature 6, 7, 8, 10, 15 years from now — and the difference in yield between those individual maturities are now at a fairly wide margin, which means 20-25 basis points between different maturities. I like this because of what's called the roll down. As bonds mature, as we get through the end of 2012 into 2013, a 10-year bond suddenly becomes a 9-year bond and it gets priced to the 9-year yield, which means an actual pickup in price or an improvement in price for that particular bond.

Those are two areas where I think there is still opportunity for the municipal investor to earn returns above what is normally anticipated with a coupon.


Copyright © 2012 TheStreet.com - The compilation of all content in this video is the exclusive property of TheStreet.com.


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Tipping Point? http://www.vaneck.com/Templates/Blog.aspx?id=2147490303&blogid=2147483856

Without dispute, the superstorm named Sandy has, and will continue to deliver, wide-ranging repercussions to the communities of the Mid-Atlantic and Northeast United States. Below I mention only a few of the many issues our country will tackle, but I believe these points are indisputable:  

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Muni Nation 11/2/2012 4:05:11 PM

Without dispute, the superstorm named Sandy has, and will continue to deliver, wide-ranging repercussions to the communities of the Mid-Atlantic and Northeast United States. Below I mention only a few of the many issues our country will tackle, but I believe these points are indisputable:

  • Several months to a full year will pass before we have an accurate assessment of the true cost of the storm.
  • Revenue loss to the cities and states will count in the tens of billions of dollars.
  • The contribution of some $7 billion by FEMA will pale compared to the overwhelming need.
  • The survival instincts of communities will enable the marshaling of resources in dramatic and effective ways. Recoveries from Hurricanes Andrew and Katrina are measurable successes.

Recoveries from Hurricanes Andrew and Katrina, however, were accompanied by a stronger national economy than what I believe we have now. The current financial strains on the government (federal, state and local) call into question just how rapidly a return to normalcy might occur. Even if the insurable recovery is 100% from the damage to the various physical infrastructures, such as the NY MTA (est. $20 billion), airlines or oceanfront communities, the country is still mired in a very low-growth period economically. Will Sandy become a tipping point for the creditworthiness of small, local governments?

History has demonstrated the resilience of municipalities in all types of business cycles and calamities. With some 60,000 issuers of municipal bonds from which to build diversified portfolios, I believe investors would benefit most from professionally managed products, such as ETFs. ETFs may help weather the storm through a process that generally seeks to avoid concentrating assets in a narrow region. In my opinion, municipal credit quality, while damaged in obvious ways from the likes of Sandy, should continue to hold its strength.

James Colby
James Colby
Senior Municipal Strategist
 

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After The Dust Settles http://www.vaneck.com/Templates/Blog.aspx?id=2147490278&blogid=2147483856 Even after the election decides the next leadership team, as well as the framework or "platform" on which political initiatives will likely drive expectations, I believe market fundamentals will continue to frame current opportunities in the municipal bond market...

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Muni Nation 10/26/2012 4:12:35 PM Even after the election decides the next leadership team, as well as the framework or "platform" on which political initiatives will likely drive expectations, I believe market fundamentals will continue to frame current opportunities in the municipal bond market:

  • The Federal Reserve is expected to keep rates low for months to come.
  • To date, there have been 46 consecutive weeks of positive inflows into municipal bond ETFs and mutual funds, reaching approximately $45 billion.
  • The ratio of investment-grade municipal bond yields to 10-year U.S. Treasury yields, while moving to, if not through, 100%, in my opinion, still presents municipals as an attractive value on a taxable-equivalent basis.
  • Major bank portfolio buying has augmented strength on the demand side, which, I believe, is stimulated in part by unattractive lending alternatives and higher deposit requirements of Basel III and Dodd-Frank agreements.
  • Although yield spreads have contracted, I believe there is still room for further positive moves if the current trend of spread-narrowing continues for (1) high-yield municipals to investment-grade municipals, as well as for (2) low investment-grade municipals (BAA) to highest investment-grade municipals (AAA).
  • A dwindling of reported defaults in the municipal marketplace appears to have buttressed investors' confidence in municipal credit quality in the short-term.

Now through December will be a time for planning a 2013 strategy. I believe we can count on investors settling on choices for allocating their resources or rebalancing their portfolios — after the dust settles.

 

Morningstar Muni Category Flows YTD: $45.4 Billion
Morningstar Chart
Source: Morningstar as of September 30, 2012



Comparative Yields on a Tax-Equivalent Basis
Comparative Yields on a Tax-Equivalent Basis Chart
Source: Bloomberg as of 10/22/2012. For illustrative purposes only. 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.

*Tax-equivalent yield is used by investors to compare yields on taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). Taxable-equivalent yield represents the yield a taxable bond would have to earn in order to match — after taxes — the yield available on a tax-exempt municipal bond. Taxable-Equivalent Yield = Tax Free Municipal Bond Yield/(1-Tax Rate). Tax-equivalent yield was calculated based on federal income tax rates. State, local and alterative minimum taxes have not been considered in the analysis. Yields are based on yield to worst, which is the lowest yield that a buyer can expect among the reasonable alternatives, such as yield to maturity, yield to call and yield to refunding.


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Point Counterpoint http://www.vaneck.com/Templates/Blog.aspx?id=2147490215&blogid=2147483856 In September, Montana senator, Max Baucus, requested the Congressional Committee on Taxation to recommend revenue generating ideas. The Committee's report, which was released on October 11, included a repeal of the interest exclusion from municipals, calling the interest "tax expenditure."

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Muni Nation 10/19/2012 4:17:48 PM In September, Montana senator, Max Baucus, requested the Congressional Committee on Taxation to recommend revenue generating ideas. The Committee's report, which was released on October 11, included a repeal of the interest exclusion from municipals, calling the interest "tax expenditure." In response, a coalition of municipal market professionals is forming an alliance called "Municipal Bonds for America." It will be dedicated to protecting the tax-exempt status of municipal bonds. Its premise — repealing the interest exclusion of municipal bonds will lead to higher financing costs for governments and, consequently, local taxpayers — is a burden that logically neither presidential candidate would want to advocate.

I believe this debate will likely be waged across the political aisle as a matter of "privilege" versus "practicality." It must be noted that both candidates have made mention of the Committee's proposal; whether it actually becomes a focal point leading up to the election will likely depend upon how forcefully this "point-counterpoint" debate is waged.

In my opinion, the practical aspect of this debate rests on the reality that state and local governments must have access to capital if they are truly to recover and rebound from the recession. Municipals generally have long been an effective vehicle for that access, and with rates remaining near historically low levels, I see no better financing alternative.

 


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Municipal Bond Market Outlook for 4Q'12 http://www.vaneck.com/muni-nation-blog/municipal-bond-market-outlook-for-4Q12-10-12-12/ Muni index performance has generally been good this year...I believe we can expect continued good performance but with the following two caveats...

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Muni Nation 10/12/2012 10:38:31 AM Muni index performance has generally been good this year.

  • Falling yields have contributed to positive returns year-to-date.
  • Through September, municipal mutual funds and ETFs have witnessed 43 consecutive weeks of positive cash inflows.
  • Only recently has supply begun to accelerate and approach the more normalized patterns of the past 10 years.
  • I believe the continued value proposition embedded in municipal yields — nominally higher than those of treasuries — has attracted both individual and institutional buyers.
  • Re-investable cash in the form of "called away" bonds, coupons and maturities has propelled performance through the end of the third quarter and is, in my opinion, likely to continue to drive demand in the fourth quarter.

I believe we can expect continued good performance but with the following two caveats: (1) political risk in the form of potential changes to, or elimination of, the tax-exempt nature of municipal interest, and (2) credit deterioration resulting from weak underlying economics. Either could have an adverse impact on the market.


 

Municipal Bond Index Performance*

 Index 

MTD 

QTD 

YTD 

Barclays Municipal Bond

0.60%

2.32%

6.06%

Barclays Municipal High Yield Bond

0.81%

3.87%

13.89%

Barclays Municipal High Yield Long Bond

0.52%

5.21%

18.49%

Barclays Municipal High Yield Tobacco Bond

1.25%

7.17%

21.66%

Source: Bloomberg as of 9/28/12

 

Triple-A MMD Yield Changes YTD**

 Maturity 

12/30/2011 

9/28/2012 

Change (bps) 

5 Yr (2017)

0.85%

0.62%

-23

10 Yr (2022)

1.83%

1.70%

-13

15 Yr (2027)

2.68%

2.11%

-57

20 Yr (2032)

3.18%

2.42%

-76

25 Yr (2037)

3.50%

2.78%

-72

30 Yr (2042)

3.55%

2.85%

-70

Source: MMD YTD as of 9/30/12

 

Annual Muni Issuance Since 2000 as of 9/28/12
Muni Chart
Source: Thomson Financial; *BofA Merrill Lynch Global Research forecast through end of 2012.


*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 Barclays Municipal High Yield Bond Index is considered representative of the broad market for below investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Municipal High Yield Long Bond Index and Barclays Municipal High Yield Tobacco Bond Index are a sub-set of this broader index.

**MMD provides a broad range of benchmark data and technical/fundamental analysis to the municipal market. Their analytical services offer a unique perspective on the municipal bond market, highlighting key areas of value and opportunity.


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Red Light, Green Light http://www.vaneck.com/Templates/Blog.aspx?id=2147490007&blogid=2147483856 This week began with a firm tone as I believe the secondary market seems poised for municipal bond prices to move higher. Dealers appeared comfortable with current municipal market levels and we have seen increased interest in the shorter end of the curve.

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Muni Nation 9/27/2012 11:24:53 AM This week began with a firm tone as I believe the secondary market seems poised for municipal bond prices to move higher. Dealers appeared comfortable with current municipal market levels and we have seen increased interest in the shorter end of the curve.

During the week ending September 14th, municipal bond prices fell as yields increased anywhere between 5 to 15 basis points; the equity market staged a rally on positive news from the European Central Bank and the U.S. Federal Reserve Bank. However, a nearly complete reversal took place the following week ending September 21st, even as new supply began to push bond yields higher. I believe investors may have either been enticed by the rising yields and newer names or by the 42nd consecutive week of cash flow into municipal bond ETFs and mutual funds.

With the calendar rolling by, technicals, driven by demand, appear to be firmly in charge. The state of California is already pre-marketing $1.55 billion of general obligation bonds. As of September 25th, retail has soaked up approximately $1 billion of the new issue, even before institutions such as Franklin Funds or other mutual funds with a California presence have placed orders.

Over the past six business days we’ve seen increased trading in the Market Vectors Short Municipal Index ETF (NYSE Arca: SMB) and Market Vectors Intermediate Municipal Index ETF (NYSE Arca: ITM). Selling emerged in Market Vectors High-Yield Municipal Index ETF (NYSE Arca: HYD) and in ETFs from several other providers last Tuesday, which left me wondering if someone was unwinding a strategy. Despite a notional value of nearly $50 million total in high yield municipals sold during this period, the market makers appeared able to absorb the activity without any unusual widening of bid/ask spreads.


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Always Borrow Money From a Pessimist http://www.vaneck.com/Templates/Blog.aspx?id=2147489959&blogid=2147483856 "Always borrow money from a pessimist he doesn’t expect to be paid back." - Unknown

Not only aren't investors in municipals pessimists, but these lenders are also optimistic that they’ll get their money back with interest. Perhaps this is a reversal of expectations.

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Muni Nation 9/21/2012 10:55:38 AM "Always borrow money from a pessimist; he doesn't expect to be paid back." -Unknown

Not only aren't investors in municipals pessimists, but these lenders are also optimistic that they'll get their money back with interest. Perhaps this is a reversal of expectations.

Therein lies a tenet of today's financial journalism. I believe most people expect municipal bonds to meet their obligations and repay creditors. When we suddenly find ourselves staring at headlines that trumpet the failings of locations such as Harrisburg, PA, Stockton, CA and Jefferson County, AL, journalists wring their hands, despairing that the standing dominoes will fall.

As many have noted in the past two years, a unique and important feature of municipal investing is the historically low rate of defaults that is in evidence, especially for investment grade rated bonds. Bonds rated below the investment grade spectrum or not rated at all generally have been less likely to fail than their corporate counterparts.

Then why the great concern?

The answer resides somewhere between our emotional attachment to our own communities, which issue bonds, and our distaste for paying taxes. I am guessing that many of us have come to expect that the same government structure that issues munis may seek to protect them from failure. If default ensues, we fail too.

I suggest that we take comfort from the facts at hand. Municipals have been generally stable, and while the ride may get a little bumpy, I believe the highway, built by municipals, will continue to deliver us, and our money, to our destination.

*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. 


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Opportunity In Plain Sight http://www.vaneck.com/muni-nation-blog/opportunity-in-plain-sight-09-14-12/ 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.

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Muni Nation 9/14/2012 11:28:27 AM 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. 


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Roadblocks For The Muni Bond Market? Maybe Only Speed Bumps! http://www.vaneck.com/muni-nation-blog/roadblocks-for-the-muni-bond-market-maybe-only-speed-bumps-08-31-12/ Watch our latest muni video which focuses on my short-term outlook and assessment of the potential fiscal cliff.

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Muni Nation 8/31/2012 11:30:48 AM Watch our latest muni video which focuses on my short-term outlook and assessment of the potential fiscal cliff.

 

 
 


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Fall From Grace? http://www.vaneck.com/Templates/Blog.aspx?id=2147489687&blogid=2147483856 Muni Nation 8/24/2012 6:41:35 PM The municipal bond market entered the month of August on a roll. A seemingly disproportionate level amount of demand over supply of available new issues had, in my opinion, driven the market higher for many weeks, producing positive returns for virtually all categories. Year-to-date returns for the Barclays Municipal Bond Index* was 5.31% as of July 31. However, there was concern from investors that nominal rates were again pushing toward all-time lows which were achieved in February 2012, from which emerged a five week adjustment. The past two weeks have seen a growth in new issue supply, and, ignoring the two $10bn note deals (one from California, the other Texas), the municipal bond market slipped a little, perhaps under the spell of summer vacations and modest supply, to post higher yields for familiar and attractive names.

The good news, in my opinion, is that municipal bonds have not fallen from grace, and with yields currently at slightly higher levels than around this time last month, investors may re-emerge from their summer somnolence to find a healthy marketplace offering strong relative value (versus other asset classes) with strong evidence of interest. For week ending August 22, there was over $400mm of inflows into municipal bond funds according to Bond Buyer.

Investors want to know what to do next. The Fed continues to assert that rates will remain low for some time to come. Under that forecast, I remain constructive on municipal bonds as an asset class. As unemployment rates subside, and states' tax collections continue to grow (for the 9th consecutive quarter), these conditions could set the foundation for a strengthening economy. Bumps in the road can and do occur, of course, and if there were no risk, I believe there would be zero yield. All things considered, I believe there is potentially reasonable compensation in the muni asset class.

*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. 


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Ratings Vs. Market Realities: The Exodus That Never Happened http://www.vaneck.com/muni-nation-blog/ratings-vs-market-realities-the-exodus-that-never-happened-08-08-12/ A year ago, as the world struggled to recover from global recession, S&P made history by downgrading the credit rating of the United States — a first for the country long considered a safe haven. Common wisdom dictated that the inevitable consequence would be a rush to dump U.S. Treasuries as investors took the downgrade as a sign of instability in the U.S. markets.

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Muni Nation 8/8/2012 4:45:02 PM A year ago, as the world struggled to recover from global recession, S&P made history by downgrading the credit rating of the United States — a first for the country long considered a safe haven. Common wisdom dictated that the inevitable consequence would be a rush to dump U.S. Treasuries as investors took the downgrade as a sign of instability in the U.S. markets.

The exodus never happened. The 10-year yield on 8/8/2011, just three days after the downgrade, stood at 2.319%. Today it is at 1.548%, continuing the rally that began in the fourth quarter of 2011. In fact, even PIMCO's Bill Gross capitulated and actually increased his allocation to Treasuries.

Since the perception of safety and liquidity seems to me to have trumped the anticipated impact of the downgrade, one may question the value of sovereign ratings and perhaps the significance of the entire rating system. If, in reality, the markets determine valuations, what role do ratings play?

Complicating the picture, the Federal Reserve has announced its intention to hold rates at low levels, which has the potential to distort the value of both Treasury and municipal bonds. It's therefore, in my opinion, more important than ever for investors to consider credit quality as they assess their portfolio holdings.

Source of yield data is Bloomberg. Quoted current yield is as of August 6, 2012.  


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Dislocations Have Driven Muni Investors To Professionals http://www.vaneck.com/muni-nation-blog/dislocations-have-driven-muni-investors-to-professionals-07-12-12/ Muni Nation asked Alexandra Lebenthal, President and CEO of Lebenthal & Company, to identify the most important changes in the municipal market over the past year, and here is her perspective: Recent changes have been significant, perhaps more so than at any other time in my company's long history...As a result, we have seen individuals turn their municipal investing activities dramatically toward separately managed accounts, mutual funds and ETFs, as opposed to buying and managing individual bonds.

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Muni Nation 7/12/2012 3:21:39 PM
  • Alexandra Lebenthal, guest commentator, offers her insight
  • She has seen demand shift from individual bonds to SMAs, mutual funds and ETFs
  • Muni Nation invited Alexandra Lebenthal, President and CEO of Lebenthal & Company, to provide this week's commentary. Alexandra's grandparents founded Lebenthal as a pioneering municipal bond trading firm in 1925. The firm's tradition was carried on by her father, James Lebenthal, until Alexandra became President and CEO in 1995.

    Muni Nation asked Alexandra to identify the most important changes in the municipal market over the past year, and here is her perspective:

    Alexandra Lebenthal Photo Recent changes have been significant, perhaps more so than at any other time in my company's long history. The financial crisis of 2008-09 created dramatic dislocations in the market including the demise of major investment firms, the debacle over auction rate securities and the downfall of municipal bond insurance. We believe these events left individuals without a clear investment strategy, and perhaps feeling at a disadvantage in the market.

    As a result, we have seen individuals turn their municipal investing activities dramatically toward separately managed accounts, mutual funds and ETFs, as opposed to buying and managing individual bonds. In our opinion, individual investors don't feel equipped to differentiate between today's opportunities. This has put professionals back in a leadership position with respect to managing municipal assets.

    The original Lebenthal business model cultivated individual investors and their municipal bond orders. Recent changes have been so great that I question whether that model can succeed in today's market.

     

    Municipal Bond Funds Have Become More Prevalent


    Muni Chart
    Source: Simfund/Strategic Insights as of 12/31/2011.

    1Assets under management include all U.S. non-money market municipal bond open-end funds, closed-end funds and exchange-traded funds that invest primarily in municipal securities.

    Please note that the information in this post represents the opinion of Alexandra Lebenthal and not necessarily those of Van Eck Global. 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-Van Eck Global 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 Van Eck Global. MUNI NATION is a service mark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.
     

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    Dancing On The Head Of A Pin http://www.vaneck.com/muni-nation-blog/dancing-on-the-head-of-a-pin-06-28-12/ Often we look for macro issues and trends to help define direction and opportunity in the municipal bond market as a whole. However, there is an element of potential opportunity in the narrower realm of the pre-refunded municipal bond segment. As of June 25, 2012, these bonds offered higher yields compared to those of tax-free money market funds, 1.05% versus 0.02% respectively.1 

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    Muni Nation 6/28/2012 8:59:56 AM Often we look for macro issues and trends to help define direction and opportunity in the municipal bond market as a whole. However, there is an element of potential opportunity in the narrower realm of the pre-refunded municipal bond segment. As of June 25, 2012, these bonds offered higher yields compared to those of tax-free money market funds, 1.05% versus 0.02% respectively.1

    Pre-refunded municipal bonds are munis that have been refinanced by the issuers, with all future payments secured by U.S. Treasury bonds held in escrow. Therefore, their implied credit quality is considered, by some, to be the equivalent of the underlying Treasuries. According to Municipal Market Advisors (MMA), the recent scarcity of 2-5 year pre-refunded municipal bonds may take investors out a little further on the curve, raising demand in an already supply challenged market.2 For example, the number of securities in the Index tracked by the Market Vectors Pre-Refunded Municipal Index ETF (NYSE Arca: PRB) has shrunk by 885 issues since June 2009. MMA believes this reduction in available bonds may point to further price gains in longer dated, pre-refunded positions and they continue to give the sector "a buy" recommendation.2

    Yes, this is a small niche area of municipals, but if one is looking for tax-exempt income with the perceived safety of Treasuries, I believe PRB may provide access in this less well-known part of the market. In my opinion, dancing on the head of this pin may be less daunting for the conservative investor than investing in other muni bond segments.


    1Muni Yield Source: Six-Year pre-refunded bonds based on the MMD Municipal Yield Curve, June 25, 2012. Money Market Yield Source: iMoneyNet Money Fund Report, June 22, 2012.
    2MMA Weekly Outlook June 25, 2012.
     

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    Value In Plain Sight http://www.vaneck.com/muni-nation-blog/value-in-plain-sight-06-20-12/ The secondary market for municipal bonds has been somewhat subdued the past several days. The broad market successfully absorbed over $10 billion in new issues last week, with some selling of high-grade muni bonds in the secondary market, possibly to fund purchases or restructure segments of existing portfolios. Municipal bond yields have been moving slightly lower but have generally underperformed U.S. Treasuries, which I believe makes their relative valuations look all the more appealing to non-traditional managers looking for potential trading opportunities.

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    Muni Nation 6/20/2012 2:13:51 PM The secondary market for municipal bonds has been somewhat subdued the past several days. The broad market successfully absorbed over $10 billion in new issues last week, with some selling of high-grade muni bonds in the secondary market, possibly to fund purchases or restructure segments of existing portfolios. Municipal bond yields have been moving slightly lower but have generally underperformed U.S. Treasuries, which I believe makes their relative valuations look all the more appealing to non-traditional managers looking for potential trading opportunities.

    The table below shows the ratios of AAA municipal bonds to U.S. Treasuries as of 6/14/2012, based on the Municipal Market Data (MMD scale).1 With nominal yields of municipals currently well above those of U.S. Treasuries, in my opinion this suggests that municipal bonds must be in the discussion as an attractive near-term choice for inclusion in portfolio allocation models. I currently see value in the 7 to 15 year maturity range, accessible through the Market Vectors Intermediate Municipal Index ETF (NYSE Arca: ITM).
     

     Maturity 

    MMD Ratio to Treasuries (%) 

    1 Year

    116.27

    2 Year

    110.43

    5 Year

    111.27

    7 Year

    121.50

    10 Year

    117.39

    15 Year

    131.86

    20 Year

    130.51

    25 Year

    127.09

    30 Year

    116.48

    Source: Municipal Market Data as of 6/14/2012

    1In the municipal bond market, the accepted measure for the risk-free rate is the triple-A scale published by Municipal Market Data every day at 3:00 PM (commonly referred to as the MMD scale).  

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    A New Paradigm http://www.vaneck.com/muni-nation-blog/a-new-paradigm-06-13-12/ With investor sentiment now shaded by the daily changes in market direction for both equities and fixed income, I suggest that we are faced with a changed investment paradigm, at least in the near term. While Europe tries to extricate itself from economic doom and gloom, many major equity indices struggle to post positive year-to-date returns1. In my opinion, as shown in the table below, inflows into fixed income may be an indication that it is currently the preferred asset class over equities. More specifically, I believe municipal bonds have generally offered investors some sense of stability. The Barclays Municipal Bond Index2 returned 3.43% year-to-date, with an average coupon of 4.90%3. This generated enough return to help investors weather momentary downturns in market value.

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    Muni Nation 6/13/2012 3:50:30 PM With investor sentiment now shaded by the daily changes in market direction for both equities and fixed income, I suggest that we are faced with a changed investment paradigm, at least in the near term. While Europe tries to extricate itself from economic doom and gloom, many major equity indices struggle to post positive year-to-date returns1. In my opinion, as shown in the table below, inflows into fixed income may be an indication that it is currently the preferred asset class over equities. More specifically, I believe municipal bonds have generally offered investors some sense of stability. The Barclays Municipal Bond Index2 returned 3.43% year-to-date, with an average coupon of 4.90%3. This generated enough return to help investors weather momentary downturns in market value.

    Managing investor expectations means a modification to the risk/return equation. If risk, in the form of price volatility, continues to take a hit on total return, then perhaps investors will consider fixed income as the predominate return generator in their asset allocation, since coupons generally are a steady source and component of total return.

    If you couple the average coupon of the Barclays Municipal Bond Index with the current spread of 216 bps3 between the Barclays BAA Municipal Bond Index with the Barclays AAA Municipal Bond Index, an investor may have reason to believe that any economic improvement would result in the narrowing of this spread to its long-term mean of 121 bps3. This would potentially generate 95 bps of excess return. However, without any improvement, the coupon alone generated nearly 5.00% to returns year-to-date. With today's uncertain markets, I think investors might find this appealing.
     

     Broad Asset Class Flows YTD ($Mil) 

    Asset Class 

    Estimated Net Flow 

    Fixed Income 

    118,844

    Equity 

    (1,633)

    Balanced 

    17,415

    Other

    6,462

    Source: Morningstar, May 31, 2012. Note: Balanced funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion.

    1All year-to-date references are as of June 8, 2012.
    2The 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 Barclays Municipal AAA, BAA Indices are subsets of the broader index.
    3Source: Barclays Municipal Credit Research, May 2012.
     

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    What Is An Investor To Do? http://www.vaneck.com/muni-nation-blog/what-is-an-investor-to-do-06-06-12/ If you have not asked yourself this question, then you may either be blissfully unaware of the cacophony raised as investors rush out the exit marked "equity" based on fund flow data from Morningstar, or your expectations might be so low for investment returns that you've turned to watching re-runs of AMC's Mad Men. With everything seemingly in freefall – including yields – I offer my opinion as follows:

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    Muni Nation 6/6/2012 4:36:18 PM If you have not asked yourself this question, then you may either be blissfully unaware of the cacophony raised as investors rush out the exit marked "equity" based on fund flow data from Morningstar, or your expectations might be so low for investment returns that you've turned to watching re-runs of AMC's Mad Men. With everything seemingly in freefall – including yields – I offer my opinion as follows:

    Do nothing at your own peril. To default to cash means paying someone else for the opportunity to hold your money, for nothing. With the Fed signaling that rates are likely to remain low for some time, one needs to choose an investment strategy that provides liquidity, generates an income stream and avoids the clouds of uncertainty through diversification.

    In my view, fund structures such as ETFs may achieve these points. Offered in a wide variety of strategies, investors have the potential to match their tolerance for credit and/or interest rate risk. For example, municipal bond ETFs with duration targets such as short, intermediate or long. Currently municipal bonds offer taxable-equivalent returns greater than those offered in the U.S. Treasury or U.S. corporate bond markets1.

    Despite the offering of Warren Buffett on the topic of diversification when he said, "Put all your eggs in one basket and then watch that basket very carefully," I believe most investors may not have the luxury of Buffett's expertise. Diversification in the municipal world seeks to protect against the unknowable, and a way to perhaps keep those eggs from cracking.

    1Source: Barclays Municipal Credit Research, May 2012.  

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    End Of May, Don't Go Away http://www.vaneck.com/muni-nation-blog/end-of-may-do-not-go-away-05-31-12/ I've taken a little liberty with a familiar saying to suggest that for municipals, I am not booking my three-month summer vacation just yet. Month-to-date and year-to-date performance of all muni high-yield bond sectors (with the exception of tobacco) has been positive. The technicals of demand overpowering supply, which I've previously written about, are still in place.

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    Muni Nation 5/31/2012 1:01:44 PM I've taken a little liberty with a familiar saying to suggest that for municipals, I am not booking my three-month summer vacation just yet. Month-to-date and year-to-date performance of all muni high-yield bond sectors (with the exception of tobacco) has been positive. The technicals of demand overpowering supply, which I've previously written about, are still in place.

    The table below lists the six states with the largest June 2012 cash flows1 into munis.


     State 

     June 2012
    Actual Cash Flow
     

     June 2011
    Average Cash Flow
     

    New York

    $6,316,735,000

    $2,480,633,800

    New Jersey 

    $3,573,764,000

    $883,941,830

    California 

    $2,571,381,000

    $3,137,475,000

    Florida 

    $2,387,384,000

    $1,134,553,300

    Wisconsin 

    $1,402,093,000

    $336,209,410

    Illinois

    $1,134,754,000

    $738,346,910

    Source: Siebert Brandford Shank & Co. Municipal bond calls as of 5/25/12. Subject to change as more bond calls are announced. 


    The municipal market appears to be looking for evidence of improvement of any variety. I believe that:

    • Larger cities and states have weathered the slow recovery relatively well; at least well enough to convince investors that potential value resides in issuers rated BBB as compared to those rated AAA.
    • This is evidenced by the yield spread of the Barclays Municipal Bond BBB Index to Barclays Municipal Bond AAA Index, which continues to narrow from 233 basis points on 4/30/12 to 217 basis points as of 5/25/122.  
    • The smaller issuers, who may have fewer resources or options than larger issuers, are, in my opinion, less likely to command the same attention. The current predicament faced by the nation is that there may be few solutions in an election year that Washington is willing to pursue. As the refunding of outstanding debt and the careful management of budgets have continued to give relief to smaller issuers, it is worth noting that ratings agencies have yet to raise warning flags for this class of issuers.


    1Cash flow is the sum of maturities, coupon payments and bond calls. This is considered representative of money available for reinvestment back into municipal bonds at a given time.

    2The Barclays Capital 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 Barclays Municipal AAA, BBB and High-Yield Bond Indices are subsets of the broader index.
     

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    Yield On The Run http://www.vaneck.com/muni-nation-blog/yield-on-the-run-05-23-12/ Muni High Yield has been a top-performing segment among municipal bonds, with a total return of 7.75% YTD through April 30, 2012, for Barclays Municipal High Yield Index1.  I believe that the dynamic which has propelled performance in the investment grade muni market is also at play for muni high yield: demand is overwhelming supply. 

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    Muni Nation 5/23/2012 9:29:37 AM Muni High Yield has been a top-performing segment among municipal bonds, with a total return of 7.75% YTD through April 30, 2012, for Barclays Municipal High Yield Index1. I believe that the dynamic which has propelled performance in the investment grade muni market is also at play for muni high yield: demand is overwhelming supply. 

    Inflows from individual as well as institutional investors have been strong. According to year-to-date inflows, compiled by JPMorgan, of the more than $21B that has flowed into municipal mutual funds and ETFs, investors have poured $4.2B or 20% into municipal high yield — an average of nearly $210 million per week.

    The price of some individual muni issues is higher by as many as 15 basis points from the beginning of the calendar year, which is representative of the kind of market movements that, in my opinion, have driven performance and continue to offer potential opportunity for those seeking relief from today's ultra low-yield environment.   

    As of April 30, 2012, according to Barclays, the yield spread of high yield to investment grade munis was at 365 basis points — still 92 basis points above the long-term average. As of May 18, 2012, the same yield spread, as reported by Barclays, is at 369 basis points, giving the investor a possible performance opportunity of 96 basis points as incentive to continue to participate in this market segment. Investors seem to have been particularly attracted to ETFs in the high-yield muni space, perhaps drawn by the liquidity features offered by the vehicle in a challenging market.

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    1The Barclays Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year.

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    A Little Negative News Is Good http://www.vaneck.com/muni-nation-blog/a-little-negative-news-is-good-05-17-12/ The municipal bond market has experienced a significant rally — slow but steady — for nearly three weeks. Supportive data and technicals have pushed the market higher. Despite spreads which point at municipals as a value purchase, surprise news (i.e., Meredith Whitney's prediction of mass defaults in 2010) can erect barriers to further advances. Recently, the market had to digest commentary discussing:

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    Muni Nation 5/17/2012 4:50:12 PM The municipal bond market has experienced a significant rally — slow but steady — for nearly three weeks. Supportive data and technicals have pushed the market higher. Despite spreads which point at municipals as a value purchase, surprise news (i.e., Meredith Whitney's prediction of mass defaults in 2010) can erect barriers to further advances. Recently, the market had to digest commentary discussing:

    1. The outlook and sustainability of Tobacco Settlement Bonds; and
    2. Challenges facing Puerto Rico as it attempts to pull its economy out of recession.

    The presence of these headlines can turn investor sentiment. Such has been the case in the past few days where municipal bond valuations retreated from recent highs.

    Reports from the "Street" suggest a large portfolio may be looking to sell several million municipal bonds, which I believe is leading traders to push back their bids. While a selling of this magnitude could be a market moving event in the near term, the overall result could potentially be positive. I believe it's helpful for investors to view these types of events as potential opportunities. Whether it is in the form of new names coming to market or better pricing, in my opinion, a market reboot might be helpful in establishing a new base from which to move to higher levels.

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    Strategy & Commitment http://www.vaneck.com/muni-nation-blog/strategy-and-commitment-05-11-12/ Municipal yield curve steepness was a significant contributor to 2011 municipal bond returns, and it currently remains so. Because recent changes in yields have been fairly consistent across maturities, the intermediate part of the curve (10 to 14 years) — where yield differences of as much as 25 basis points currently exist between each maturity — continues to be a focal point. Thus, investors should consider how best to assess the combined risks associated with credit and maturity.

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    Muni Nation 5/11/2012 4:49:17 PM Municipal yield curve steepness was a significant contributor to 2011 municipal bond returns, and it currently remains so. Because recent changes in yields have been fairly consistent across maturities, the intermediate part of the curve (10 to 14 years) — where yield differences of as much as 25 basis points currently exist between each maturity — continues to be a focal point. Thus, investors should consider how best to assess the combined risks associated with credit and maturity.

    Municipal Market Advisors (MMA) recently noted that YTD returns from bonds with a duration of 10 years and shorter had provided less than 15% of all municipal bond market returns, while those with a duration of 20 years and longer had generated 25%. This seems logical to me given that, in my opinion, the Federal Reserve is likely to continue to hold short-term rates at low levels as long as inflation is contained. Investors must consider that the risk measured by the difference in duration of intermediate versus longer-term bonds exposes them to potential price declines exceeding 50% when rates rise. That risk drops to 29% with intermediates.1 The ability to swiftly adjust strategy when market conditions change is also important.

    The market has demanded yield. High-yield muni mutual funds and ETFs have continued to see inflows, pushing prices higher. Evidence suggests that muni bond investors are using strategies that encompass a combination of intermediate to long duration and high yield to accomplish their goals in today's market.

     

     jim_colby_signature 

    As of 5/10/12. The difference in interest rate risk, as measured by modified adjusted duration, between intermediate and long (Barclays Capital 10-Year Municipal Index and Barclays Capital 20-Year Municipal Index) is 5.89 versus 9.66 = 64% greater interest rate sensitivity. Modified Adjusted duration calculated by Barclays Capital. 

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    The Trend Is Your Friend http://www.vaneck.com/muni-nation-blog/the-trend-is-your-friend-05-04-12/ In contrast to what, historically, has been normal for the end of April, municipal performance ended the month on a very positive note. The Barclays Capital Municipal Bond Index1 was ahead by 1.15%2 and the Barclays Capital High Yield Municipal Bond Index1 nearly doubled that at 2.23%2...Cash flow from maturities and called bonds, according to street source Siebert Brandford Shank & Co., is estimated to be higher this May by nearly $3 billion over last year. Average monthly reinvestment into municipal bonds in 2011 was $22 billion, but it is already $1 billion higher in 2012.

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    Muni Nation 5/4/2012 9:15:25 AM In contrast to what, historically, has been normal for the end of April, municipal performance ended the month on a very positive note. The Barclays Capital Municipal Bond Index1 was ahead by 1.15%2 and the Barclays Capital High Yield Municipal Bond Index1 nearly doubled that at 2.23%2. As I have pointed out in prior posts, the technicals driving demand are all favorable. Municipal fund flows have been a positive $18.2 billion YTD, and new issuance — although up from a year ago — has barely been keeping pace with demand. Cash flow from maturities and called bonds, according to street source Siebert Brandford Shank & Co., is estimated to be higher this May by nearly $3 billion over last year. Average monthly reinvestment into municipal bonds in 2011 was $22 billion, but it is already $1 billion higher in 2012.

    Although market strategists continue to tout "intermediates" in the 8–12 year range as the prime area of opportunity, high-yield muni bonds have seen steady inflows, further driving performance and pushing yields lower up to this point. A positive report from tobacco producers (less negative sales and distribution results) has led to a broad-based rally in the tobacco sector in high yield. Between 3/31/12 and 4/30/12, the yield of the Barclays Capital High Yield Tobacco Index1 fell from 7.34% to 7.09%.


    Big Picture View

    My conclusion in looking at two important elements of economic activity for the individual states listed below is that broad recovery remains uncertain and continued vigilance of credit must temper the optimism generated by positive returns. I think that diversified portfolio structures may potentially offer the proper "hedge" required by investors.


    1-Year Change in Home Prices (as of 2/29/12) 

     State 

     Change (%) 

    AK 

    5.10

    ND 

    4.36

    TX 

    1.49

    RI 

    -7.90

    CA

    -4.61

    Source: Federal Housing Agency 


    4Q'11 – 4Q'10 Change in Sales-Tax Revenues 

     State 

     Change (%) 

    NV 

    69.3

    ND 

    47.6

    TX 

    12.4

    CA

    -12.8

    NJ

    -1.3

    Source: Federation of Tax Administrators 


    1The Barclays Capital 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 Barclays Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Capital High Yield Tobacco Index is a subset of the broader Barclays Capital High Yield Municipal Bond Index.

    2Time period: April 1 - 30, 2012
     

     

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    Road Map http://www.vaneck.com/muni-nation-blog/road-map-04-27-12/ With flows continuing to favor municipals, BBB-rated munis are receiving recommendations as their spreads to investment-grade muni bonds continue to compress. Even in a rising rate environment, the less volatile BBBs have historically outperformed investment-grade munis and have provided a potential cushion to a diversified portfolio.

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    Muni Nation 4/27/2012 12:40:43 PM
  • According to S&P®*:
  • - Upgrades of muni bonds outpaced downgrades 121 to 83 in Q1 2012.
    - Credit quality in U.S. public finance appeared to stabilize overall in Q1 2012.
    - The gulf between stronger and weaker credits may grow in some sub-sectors.
  • Depending upon whose definition you use, between 6 and 17 issuers "defaulted" in Q1 2012, about the same number as in Q1 2011.
  • S&P revised its outlook to positive from stable for California — one of the three largest U.S. issuers of municipal bonds.
  • The Federal Reserve Board has clarified that the Volcker rule will not take effect until July 21, 2014.

  • With flows continuing to favor municipals, BBB-rated munis are receiving recommendations as their spreads to investment-grade muni bonds continue to compress. Even in a rising rate environment, the less volatile BBBs have historically outperformed investment-grade munis and have provided a potential cushion to a diversified portfolio.

    Historically, May and June have been strong months for municipals due to reinvestment opportunities. Yes, I expressed that same theme at the end of 2011, but I continue to see some slack in new issuance, setting the stage for a continuation of the positive relationship between demand and supply.

    I still see some soft spots in the road ahead, specifically with some smaller, local municipalities, but with modest expectations, I believe we should be able to comfortably reach the end of next quarter.
     

    *S&P® (Standard & Poor’s) is a third-party rating agency that assesses the credit quality of municipal and other bonds.
     

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    From Tax Freedom To Tax-Free Opportunity http://www.vaneck.com/muni-nation-blog/from-tax-freedom-to-tax-free-opportunity-04-20-12/ This week we arrived at Tax Freedom Day, the first day of the year in which the nation as a whole has theoretically earned enough income to fund its annual tax burden. I can only speculate that the slowdown of inflows into munis is possibly related to investors allocating their financial resources to tax obligations. I do not presume that they are using any muni facility for funding purposes but the drop in activity is not unexpected at this time of the year.

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    Muni Nation 4/20/2012 9:44:57 AM This week we arrived at Tax Freedom Day, the first day of the year in which the nation as a whole has theoretically earned enough income to fund its annual tax burden. I can only speculate that the slowdown of inflows into munis is possibly related to investors allocating their financial resources to tax obligations. I do not presume that they are using any muni facility for funding purposes but the drop in activity is not unexpected at this time of the year.

    Nevertheless, the technicals continue to favor municipals. Plenty of supply has and, I believe, will continue to enter the market offering up familiar high-grade names in significant size to attract both institutional and individual demand. The ratios of AAA munis compared to Treasuries continue to be — with the 10-year spot the single exception on the curve — north of 100%. This means that tax-free bonds yield more than taxable Treasuries. I believe this will continue to draw attention to municipals once tax time has passed. In addition, default rates are trending lower than last year. One point of caution may be smaller, local issuers continuing to struggle with revenue deficiencies under a stagnant national economic revival.
     

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    Stepping Into 2Q'12 http://www.vaneck.com/muni-nation-blog/stepping-into-2q12-04-13-12/ An equity market rebound, such as we witnessed yesterday (+181 points as measured by the DJIA1), usually spells doom for the fixed-income markets. Additionally, the revelation that Bill Gross has reduced his holdings in U.S. Treasuries by 4-5% would further the notion that the day would go badly for bonds. And with the Treasury auction of $13billion of 30 year-bonds...

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    Muni Nation 4/13/2012 10:18:47 AM An equity market rebound, such as we witnessed yesterday (+181 points as measured by the DJIA1), usually spells doom for the fixed-income markets. Additionally, the revelation that Bill Gross has reduced his holdings in U.S. Treasuries by 4-5% would further the notion that the day would go badly for bonds. And with the Treasury auction of $13 billion of 30 year-bonds (no longer the benchmark), the early byline would be expected to bemoan a market unable to get out from under...

    But only a modest retreat in the municipal market was in order yesterday despite the above.

    With significant new supply in the municipal market, certain price concessions allowed issues such as California General Obligations and Puerto Rico Electric to find plenty of demand. There was particular focus on high-grade secondary issues around the 10-year spot on the curve, helping to hold market interest away from the new issues. Like our Treasury counterpart, only modest losses are evident on the curve.

     jim_colby_signature 

     1The DJIA is a broad measure of the U.S. stock market and refers to the Dow Jones Industrial Average, a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. 

     

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    Credit Quality Update http://www.vaneck.com/muni-nation-blog/credit-quality-update-04-05-12/ Governmental issuers of municipal bonds will continue under scrutiny as long as unemployment remains above 8% and the soft housing market continues. This focus is warranted due to concerns over muni bond price declines for issuers struggling with economic recovery.

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    Muni Nation 4/5/2012 11:49:34 AM
  • Challenges remain for some government issuers
  • Valuation problems increase their interest cost
  • My view: Defaults are not on the horizon

  • Governmental issuers of municipal bonds will continue under scrutiny as long as unemployment remains above 8% and the soft housing market continues. This focus is warranted due to concerns over muni bond price declines for issuers struggling with economic recovery.

    Although overall municipal credit quality remains strong, muni issuers in selected areas continue to face budget pressures and revenue headwinds. When muni bonds drop in price, reflecting investor anxiety, the cost of government capital rises. For example, Rhode Island is an Aa2 and AA credit, but the state continues to lag in key recovery metrics. A downgrade to single A could mean an additional 30 to 40 bps in the state's interest cost.

    Currently, only a few states are on negative credit watch. Moody's has nine states, but S&P has just two and Fitch five. Conversely, S&P has three states on positive credit watch, Fitch two and Moody's none. California (A1, A-, A-) and Illinois (A2, A+, A) are the only states rated less than Aa quality, with Puerto Rico also in this category. Investors can take comfort in knowing that the great majority of state issuers are at least Aa and, in my opinion, they will continue to contribute positively to investment portfolios.

    At the state level, we are far from the point where the word "default" belongs in intelligent discussion. 

    Moody’s Investors Service, Fitch Ratings, and Standard & Poor’s are third-party rating agencies that assess the credit quality of municipal and other bonds. 

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    Strong Technicals Vs. Weak Headlines http://www.vaneck.com/muni-nation-blog/strong-technicals-vs-weak-headlines-03-30-12/ Both Wednesday (3/28) and Thursday (3/29), municipal prices regained lost ground, especially in the intermediate part of the curve. Why? 1) New issue supply fell by nearly 50% week over week; 2) Bernanke's testimony implied more Fed stimulus to support employment; and 3) Data showed no meaningful improvement in the housing sector.

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    Muni Nation 3/30/2012 9:55:20 AM
  • Muni demand-supply technicals are favorable
  • The market shrugs off downbeat headlines
  • High-yield munis continue to offer potential value

  • On both Wednesday (3/28) and Thursday (3/29), municipal prices regained lost ground, especially in the intermediate part of the curve. Why? 1) New issue supply fell by nearly 50% week over week; 2) Bernanke's testimony implied more Fed stimulus to support employment; and 3) Data showed no meaningful improvement in the housing sector.

    Price activity suggests that today's muni yields and relative valuations appear attractive, although we suspect that professional traders drove the trend. Muni technicals are favorable, given that demand is catching up with supply, and the 10-20 year yield on municipal bonds* now stands at 107% of Treasuries.

    Despite a few downbeat headlines — e.g., the state of Michigan threatening to takeover cash-strapped Detroit and Chapter 9 saber-rattling in Providence, RI — munis continue to trade smoothly overall. It appears that the market is viewing the headlines calmly, as isolated events that are not likely to spread contagion to other sectors or regions.

    As measured by Barcap Indices1, investment-grade munis remain in positive territory year-to-date, with high-yield munis performing even better. (See performance breakout below.) High-yield munis currently are trading about 100 basis points above their long-term average spread to investment-grade indices, and, in our opinion, they continue to represent value.  

     

    Yield 

     Index 

    March
    Month-to-Date through 3/26/2012
     

     Year-to-Date through 3/26/2012 

    Barcap Muni1 

    -0.81%

    1.59%

    Barcap HY Muni1 

    0.64%

    5.21%


    *As measured by the Barclays Capital Municipal Bond index.
    1The Barclays Capital 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 Barclays Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year.
     

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    Positive Finish For Munis http://www.vaneck.com/muni-nation-blog/positive-finish-for-munis-03-23-12/ After suffering under the recent pressure of significant new-issue supply, the muni market recovered its footing and ended this week with a positive finish. Demand is being driven by arbitrageurs ("arbs"), who are attracted to the intermediate part of the yield curve, where the ratio of high-grade muni to Treasury yields is above 110%. Near term, muni new-issue supply is expected to ebb somewhat, which should help to support prices heading into the Easter/Passover break.

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    Muni Nation 3/23/2012 4:13:01 PM
  • Demand is rising
  • ETFs are driver of muni fund flows
  • Muni ETFs are gaining traction
  •  

    After suffering under the recent pressure of significant new-issue supply, the muni market recovered its footing and ended this week with a positive finish. Demand is being driven by arbitrageurs ("arbs"), who are attracted to the intermediate part of the yield curve, where the ratio of high-grade muni to Treasury yields is above 110%. Near term, muni new-issue supply is expected to ebb somewhat, which should help to support prices heading into the Easter/Passover break.

    One set of "enhanced" data has caught my eye. It comes from J.P. Morgan (JPM), which, as far as I know, is the first dealer to refine its flow-of-funds reporting to show contributions from exchange-traded funds (ETFs). Significantly, JPM now assigns ETFs their own category, whereas in the past, ETFs were grouped with muni bond mutual funds. For the week of 3/21/12, JPM reported that all municipal bond funds had a net inflow of $88 million and "approximately 50% ($44mn) was from ETFs."

    This is significant data because it confirms our observation that muni ETFs are continuing to gain traction with investors and financial advisors. It also may indicate a gradual shift in investment preference, from actively managed muni bond funds into indexed, exchange-traded ETFs. MUNI NATION will keep an eye on this data and help you interpret the demand trend.

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    The Good “D” Word: Diversification http://www.vaneck.com/muni-nation-blog/the-good-d-word-diversification-03-20-12/ Markets go up and down, and money is made and lost as the ebbs and flows of opportunities coincide or diverge. Great fortunes can be made by placing risky bets. However, the probability of achieving such success is fairly small, which leads to an age-old question: How can prudent investors craft a risk-appropriate strategy?

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    Muni Nation 3/20/2012 11:23:33 AM
  • What price, risk?
  • Credit "events" do occur in munis
  • ETFs may offer built-in diversification

  • Markets go up and down, and money is made and lost as the ebbs and flows of opportunities coincide or diverge. Great fortunes can be made by placing risky bets. However, the probability of achieving such success is fairly small, which leads to an age-old question: How can prudent investors craft a risk-appropriate strategy?

    For the majority of us who are not possessed with the gifts of insight and inventiveness, one element of Modern Portfolio Theory has proven its value as a steadying hand: diversification. Acquiring a diverse array of assets in a particular category (as well as across many categories) potentially helps to hedge against any one or two investments going sour and irreparably damaging an entire portfolio. In municipal bond portfolio construction, diversification can be especially valuable. Municipal bond ETFs are naturally diversified in that they hold multiple bonds — many of them broadly — with the aim of tracking an index's returns for an especially difficult asset class to understand, let alone master, by buying and selling individual bonds.

    Although it is generally true that municipal bonds are of medium investment-grade quality, credit events do occur, and portfolios with only a small number of positions run the risk of having a singular event wreak havoc. ETFs that seek to replicate muni indices, with hundreds or even thousands of securities, are naturally diversified. Though it may be impossible to "replicate" a full index, an ETF's "representative sampling" techniques produce a diversified, index-tracking vehicle that has the potential to cushion investors against unexpected negative impacts.

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    The Dreaded “D” Word http://www.vaneck.com/muni-nation-blog/the-dreaded-d-word-03-14-12/ We have seen and heard the term default brought into play for the municipal bond market in a significant way over the past 18 months, but never more so than in the six months subsequent to Meredith Whitney's pronouncements from her December 19, 2011 appearance on 60 Minutes. Sparing the details, her suggestions sent the municipal market into a tailspin during the first half of 2011. What she did not make clear was the all-important distinction between the terms "default" and "bankruptcy" as they apply to municipal bonds. In the muni universe, these terms have significantly different meanings than in the corporate world...

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    Muni Nation 3/14/2012 9:18:27 AM
  • Default has different meaning for municipals
  • Who is the authority on muni defaults?
  • Perception of rising muni defaults is not the reality

  • We have seen and heard the term default brought into play for the municipal bond market in a significant way over the past 18 months, but never more so than in the six months subsequent to Meredith Whitney's pronouncements from her December 19, 2011 appearance on 60 Minutes. Sparing the details, her suggestions sent the municipal market into a tailspin during the first half of 2011. What she did not make clear was the all-important distinction between the terms "default" and "bankruptcy" as they apply to municipal bonds. In the muni universe, these terms have significantly different meanings than in the corporate world. While corporate defaults conjure images of layoffs and restructuring, municipal defaults can — and often do — mean a failure of an issuer or obligor to meet certain terms of the controlling operating documents. Most often, it requires and spells out a remedy. But it doesn't necessarily mean non-payment.

    What, then, is the average investor to believe when reading headlines speaking of defaults and bankruptcies in the muni space? The ratings agencies (Moody's Investors Service and Standard & Poor's) have each periodically produced studies of these events, but they generally limit their activities to issues they have rated. Other analyses come from advisors and market professionals who glean details from many sources to produce broader studies. There is, however, no single "go to" authority for a universally accepted evaluation. To generalize from all information available, we can conclude that the combination of default and bankruptcies in the municipal market has been exceeded in the corporate market by a factor of approximately three to one. (Based on historical data from 1980 through the present.)

    The perception that there is danger in the municipal market because of a rising number of defaults often ignores the reality that bondholders are still being paid their coupons and that remedies often set the course for a cure. Still, non-payments may occur — and they demonstrate that certain risks inhabit the world of municipals, but, we would argue, usually at a far lower rate and severity than in the taxable universe.

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    Leave Well Enough Alone http://www.vaneck.com/muni-nation-blog/leave-well-enough-alone-03-07-12/ Municipal bonds are "Main Street investments," with an estimated 73% of the $3.7 trillion in outstanding principal owned by households or mutual funds1. On the other hand, municipal bonds are traded in an over-the-counter (OTC) market where dealers create liquidity. Main Street depends on Wall Street, and vice versa, with both sides benefitting.... Enter the Volcker Rule which seeks to limit proprietary portfolio trading by banks.... thousands of revenue muni bonds that depend on dealer liquidity are not exempt, and are vulnerable to the Rule's unintended consequences.

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    Muni Nation 3/7/2012 10:58:12 AM
  • Munis need dealer liquidity
  • The Volcker Rule poses a challenge
  • Many voices are rallying to defend munis

  • Municipal bonds are "Main Street investments," with an estimated 73% of the $3.7 trillion in outstanding principal owned by households or mutual funds1. On the other hand, municipal bonds are traded in an over-the-counter (OTC) market where dealers create liquidity. Main Street depends on Wall Street, and vice versa, with both sides benefitting.

    Enter the Volcker Rule, named for former Fed Chairman Paul Volcker, and proposed in response to the devastating 2008 economic crisis. The Rule seeks, among other things, to limit proprietary portfolio trading by banks, especially activities of the speculative or rogue variety that could harm investors. Certain securities are exempt – U.S. Treasuries/Agencies and General Obligation municipals. However, thousands of revenue muni bonds that depend on dealer liquidity are not exempt, and are vulnerable to the Rule's unintended consequences.

    Muni proponents are objecting that the Rule goes too far and could create a loss of confidence in thinly traded issues. In a recent letter, Citigroup Global Markets stated: "If this (Rule) were to occur in an environment where dealers' abilities to provide liquidity were severely compromised by the Volcker Proposal, the effect of individuals liquidating into a distressed, illiquid market would be devastating for existing bondholders and issuers2."

    In response to the avalanche of dissent, Volcker Rule implementation has been pushed back from its summer deadline. For now, I believe that the symbiotic relationship between Main Street investors and muni dealers is working well, and markets are trading efficiently. I expect that Congress and financial regulators will listen to the rising chorus of voices and leave well enough alone. 


    _________________________
    1Reuters, 12/22/11 using data from the Federal Reserve Flow of Funds, December 2011.
    2Letter from Citigroup Global Markets Inc. to federal regulators, 1/27/12.
     

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    Reward For Risk http://www.vaneck.com/muni-nation-blog/reward-for-risk-02-29-12/ Municipal high yields, thus far in 2012, continue to be priced at attractive spreads....Looking forward, I believe that investment grade municipals will remain fairly stable given the Federal Reserve's stance. However, given the type of issuers that dominate the muni high yield space (airlines, oil services, paper, chemicals, autos, health care services, etc.), it is my opinion that if the economy improves, then a total return opportunity could be realized in high yield if the two Indices revert to their long-term average relationship of 272 basis points.

     

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    Muni Nation 2/29/2012 3:03:57 PM
  • High-yield muni bonds are at attractive spreads despite a recent rally in AAA munis
  • Current yield spreads indicate a potential total return opportunity for investors
     
  • "Hey! Did you make a mistake?" you may ask after looking at the table below. "Well, no" I would reply. The table shows the yield spreads, or the difference in yields, between high-yield and investment grade munis, as measured by the Barclays Capital Municipal Bond Index and the Barclays Capital High Yield Municipal Bond Index, respectively, measured as of January 1, 2012, and currently. Yes, the numbers are the same, during the recent YTD period [1/1/12 - 2/27/12] when AAA municipal yields hit all-time lows and then rose approximately 20 basis points [bps] as supply began to build.


     Municipal Bond Spreads:
    High Yield vs. Investment Grade Munis
      

     

     As of
    10/31/95 - 1/01/12 

     As of 
    10/31/95 - 2/27/12
     

    Current Yield Spread

    399 bps 

    399 bps 

    Long-Term Avg. Yield Spread

    272 bps 

    272 bps 

    Historic Minimum Yield Spread

    113 bps 

    113 bps 

    Historic Maximum Yield Spread

    636 bps 

    636 bps 


    Municipal high yields, thus far in 2012, continue to be priced at attractive spreads of 399 basis points, or 127 basis points above the long-term average of the past 16 years between the two Indices. Additionally, high-yield munis are currently offering nearly 4% more in yield than investment grade munis.

    Looking forward, I believe that investment grade municipals will remain fairly stable given the Federal Reserve's stance. However, given the type of issuers that dominate the muni high yield space (airlines, oil services, paper, chemicals, autos, health care services, etc.), it is my opinion that if the economy improves, then a total return opportunity could be realized in high yield if the two Indices revert to their long-term average relationship of 272 basis points.

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

     

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    Clean That Wall http://www.vaneck.com/muni-nation-blog/clean-that-wall-02-22-12/ A particular saying I used to hear around the office of my first job was, "let's throw it against the wall and see if it sticks", comparing the testing of new ideas to the testing of properly cooked spaghetti. I was reminded of this analogy as I read several recent articles with headlines like "Obama Seeks to Curb Muni Bond Tax Breaks, Again." Sparing you the minutiae, the recent Obama 2013 budget plan repeats much of what was originally in the hands of the "Super Committee" last fall. The committee was charged with repairing the deficit, and its guidelines included initiatives to reduce, if not completely repeal, the tax benefits currently offered by municipal bonds.

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    Muni Nation 2/22/2012 11:17:46 AM
  • Election year posturing
  • Another assault on municipals
  • Double whammy for taxpayers

  • A particular saying I used to hear around the office of my first job was, "let's throw it against the wall and see if it sticks", comparing the testing of new ideas to the testing of properly cooked spaghetti. I was reminded of this analogy as I read several recent articles with headlines like "Obama Seeks to Curb Muni Bond Tax Breaks, Again." Sparing you the minutiae, the recent Obama 2013 budget plan repeats much of what was originally in the hands of the "Super Committee" last fall. The committee was charged with repairing the deficit, and its guidelines included initiatives to reduce, if not completely repeal, the tax benefits currently offered by municipal bonds.

    It strikes me as especially desperate and lacking in constructive thinking to, in this instance, steal from Peter in order to pay Paul. By imposing a tax on income derived from tax-free bonds, Obama's plan would instantly devalue portfolios holding nearly a half trillion dollars in open-end mutual funds. Furthermore, the cost of capital would increase for state and local municipalities that depend on this market to finance roads, bridges, schools and hospitals at low cost to their taxpayers.

    On top of this is Obama's desire to revive the highly successful Build America Bond program, at a subsidy rate lower than the original rate in the Stimulus Act of 2009 [a.k.a., The American Recovery and Reinvestment Act of 2009]. Municipals would, therefore, become an even more complex asset class.

    If this sounds confusing, it is. In the context of an election year, I believe there is little likelihood of Obama's proposed 2013 budget passing. However, by extension of the analogy, if you throw enough spaghetti against the wall SOME of it is going to stick. And it will be messy. Will the taxpayers have to foot the bill to have the White House walls cleaned? 

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    Pitchers & Catchers http://www.vaneck.com/muni-nation-blog/pitchers-and-catchers-02-15-12/ As I anticipate another season of "America's Favorite Pastime," I cannot help but feel that the past two months of strong performance for municipals will likely level out into a more traditional pattern, much like when reality meets expectations with spring baseball. I think demand-generated performance will very likely be met with an elevated supply of new muni bonds. This in turn may bring on a slew of news headlines that are likely to moderate the current environment of positive sentiment and, in my view, cause the muni market to correct. Watch my latest video: Muni Health Check 1Q'12 >>  

       

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    Muni Nation 2/15/2012 11:43:16 AM
  • The "real" season for munis has yet to begin
  • Pull back in current prices is not unexpected
  • Patience often pays off for those looking for their pitch
  •  

    Anticipating another season of "America's favorite pastime," I cannot help but feel that the past two months of strong performance for municipals will likely level out into a more traditional pattern, much like when reality meets expectations with spring baseball. I think demand-generated performance will very likely be met with an elevated supply of new muni bonds. This in turn may bring on a slew of news headlines that are likely to moderate the current environment of positive sentiment and, in my view, cause the muni market to correct.

    What's more — while the municipal market is used to legislative challenges — this is a presidential election year. We will likely receive more than our share of negative press — much like spring training when reporters and scouts travel from park to park reporting on the strengths and weaknesses of players and teams.

    March and April have traditionally been challenging months for the muni market. The April 15 tax deadline forces liquidations and increases supply from issuers. I foresee any pull back from current price levels as an opportunity to deploy cash in what, in my view, will likely be a more diverse secondary market. Just like general managers pour over spring rosters in search of the best players, investors should view the continuing fundamentals of the municipal market as constructive. It is my opinion that they should let the sharp breaking curve of price adjustment pass and wait for the fastball (in this case, better valuations) that may follow.

    Ted Williams could "smell" the horsehide coming off his bat. Will you?

    Video IconWatch my latest video: Muni Health Check 1Q'12 >>  

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    In Perspective http://www.vaneck.com/muni-nation-blog/in-perspective-02-08-12/ Returns for municipal bonds YTD in 2012 represents third strongest start to a year since 1990 (2.31% YTD as of 1/31/2012). Investors are rushing back to municipals as evidenced by strong inflows of $6 billion in January. A combination of factors are boosting investor demand: a lower supply of muni bonds given the tepid new issuance calendar, and renewed acceptance of munis as a harbor of credit quality and liquidity. Also, persistent headlines on Europe’s troubles continue to pressure investors to seek safety in U.S. Treasuries, which in turn supports municipal bond returns.

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    Muni Nation 2/8/2012 10:15:35 AM
  • January's gains mark strong start to the year
  • $6 billion inflows in January fuel rally
  • Moody’s and S&P differ on credit outlook for state and local governments
  •  

    Returns for municipal bonds YTD in 2012 represents third strongest start to a year since 1990 (2.31% YTD as of 1/31/2012). Investors are rushing back to municipals as evidenced by strong inflows of $6 billion in January. A combination of factors are boosting investor demand: a lower supply of muni bonds given the tepid new issuance calendar, and renewed acceptance of munis as a harbor of credit quality and liquidity. Also, persistent headlines on Europe’s troubles continue to pressure investors to seek safety in U.S. Treasuries, which in turn supports municipal bond returns.

    Cash available for reinvestment in the muni bond market continues to provide opportunities for fund managers looking to grab market performance through the first quarter of 2012. Despite the lofty price levels achieved YTD (and inversely, the low absolute yields), I believe investors will target any perceived price weakness as an entry point. Investor interest is likely to be generally focused further out on the curve where yields are higher, and credit quality is lower.

    Credit quality in the muni bond market continues to be a topic of discussion and debate. A survey of states reveals an uptrend in revenues, consistent with a view of economic improvement at the national level. However, because local governments rely heavily on property taxes and state aid, it is curious to see a divergence in the credit outlook by the credit rating agencies: Moody’s Investors Service and Standard & Poor’s. Moody’s outlook remains negative in 2012 for the fourth consecutive year, while S&P’s outlook is more optimistic.

    As measured by the Barclays Capital Municipal Bond Index. The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. 

     

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    Municipal Trifecta http://www.vaneck.com/muni-nation-blog/municipal-trifecta-02-01-12/ The continuation of strong cash flows, elevating municipal asset levels for investment platforms has led to a resumption of positive performance for virtually all sectors of the muni market in January. The Barclays Capital Municipal Bond Index posted a 2.31% gain for the month, and the Barclays Capital High Yield Municipal Bond Index was up by 3.68%. This illustrates both the strong search and demand for yield, as well as the renewed confidence in an asset class which was shunned just a year earlier.

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    Muni Nation 2/1/2012 9:57:42 AM
  • Strong inflows boost market
  • Fed policy supportive of municipals
  • Tax-exempt income "off the table" in Washington
  •  

    The continuation of strong cash flows, elevating municipal asset levels for investment platforms has led to a resumption of positive performance for virtually all sectors of the muni market in January. The Barclays Capital Municipal Bond Index posted a 2.31% gain for the month, and the Barclays Capital High Yield Municipal Bond Index was up by 3.68%. This illustrates both the strong search and demand for yield, as well as the renewed confidence in an asset class which was shunned just a year earlier.

    Underpinning all fixed-income markets is the Fed [Federal Reserve Board], which continues to make clear its intention of holding rates at these historically low levels for the next three years, sensing "significant downside risks" despite the appearance of the economy "expanding moderately" in certain areas. It is our opinion that this macro view is supportive of municipals. Why? Because municipal yields typically follow those of U.S. Treasuries, and, in our view, Treasuries are likely to hold to these lower trading ranges. Lower rates would likely also gradually entice issuers to the market to "refund" outstanding higher-cost debt, which should reduce costs for municipalities. We think that any improvement in the economy, along with cost savings, will boost credit valuations.

    Finally, removing one potential impediment, senior White House economic advisors have told state and local officials that tax-exempt bond interest is "off the table" and will not be part of the administration's proposed 28% cap on the value of exclusions, deductions and other tax preferences for wealthy taxpayers. This is likely to boost confidence for muni investors.

    Barclays Capital 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 Barclays Capital High Yield Municipal Bond Index is a subset of this major Index.   

     

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    Nosebleed Prices http://www.vaneck.com/muni-nation-blog/nosebleed-prices-01-25-12/ The municipal bond market has been on a seven-week march to all-time low rates (yields), as the chart below shows. Given the voracious appetite that investors have had for munis, I would have expected that the natural order would be for the market to take a pause — even to back-up a bit as investors reassess relative value. Traders have begun to refer to bonds trading at NOSEBLEED prices, suggestive of a market moving too high, too fast.

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    Muni Nation 1/25/2012 10:24:48 AM
  • Municipal yields decline to all-time lows (higher bond prices)
  • Traders/investors pause to assess value
  • Strong demand likely to hold valuations near current levels

  • The municipal bond market has been on a seven-week march to all-time low rates (yields), as the chart below shows. Given the voracious appetite that investors have had for munis, I would have expected that the natural order would be for the market to take a pause — even to back-up a bit as investors reassess relative value. Traders have begun to refer to bonds as trading at NOSEBLEED prices, which suggests a market moving too high, too fast.

    Is the muni market overbought?  

    Perhaps a little, but cash is still flowing into open-end mutual funds, and the forward calendar of new issues coming to market does not yet satisfy the reinvestment demand lurking in the shadows. Despite these nosebleed prices, it appears that investors continue to view munis as a relative value play, given their high level of creditworthiness.

    _________________________________________

    This table shows the previous, low yields on AAA-rated general obligation municipal bonds since June 1, 1981, and compares them to Friday's (1/20/12) yields:

    Muni Bond Yields Hit New Lows  

     Maturity  

    Previous Low Since 1981*  

    Closing Yield  

    1/20/2012  

    Comparison 

    1 Year 

    0.20% on 1/6/12 

    0.20% 

    SAME

    2 Year 

    0.30% on 8/11/11 

    0.35%     

    HIGHER

    5 Year 

    0.79% on 1/19/12 

    0.77% 

    LOWER

    10 Year 

    1.69% on 1/19/12 

    1.67% 

    LOWER

    15 Year 

    2.30% on 1/19/12 

    2.28% 

    LOWER

    20 Year 

    2.81% on 1/19/12 

    2.79% 

    LOWER

    25 Year 

    3.12% on 1/19/12 

    3.10% 

    LOWER

    30 Year 

    3.17% on 1/19/12 

    3.15% 

    LOWER

    *Since the 6/1/1981 inception of Thomson Municipal Market Data (MMD). MMD provides a broad range of benchmark data and technical/fundamental analysis to the municipal market. Their analytical services offer a unique perspective on the municipal bond market, highlighting key areas of value and opportunity.
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    Game On http://www.vaneck.com/muni-nation-blog/game-on-01-19-12/ Perhaps it was a combination of views expressed last week by the likes of PIMCO, Barron’s and The Wall Street Journal, touting the merits and benefits of the municipal bond market, but interest is clearly being expressed by buyers gobbling up investment grade bonds in spasms of transactions. Many municipal bond positions have already traded at levels of 5 -10 basis points lower in yield from opening offers, which translates to higher prices....GAME ON.

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    Muni Nation 1/19/2012 3:20:27 PM
  • Investors purchasing high volumes of investment grade bonds
  • Limited supply is boosting prices, and applying pressure on yields
  • 2011's positive performance trend continues in the New Year

  • Perhaps it was a combination of views expressed last week by the likes of PIMCO, Barron’s and The Wall Street Journal, touting the merits and benefits of the municipal bond market, but interest is clearly being expressed by buyers gobbling up investment grade bonds in spasms of transactions.  

    Many municipal bond positions have already traded at levels of 5 -10 basis points lower in yield from opening offers (which translates into to higher prices).  Even more dramatically, some tobacco muni bonds*, which offer both block size and trading liquidity, have moved higher by 3 points ($3) in price, while losing 40 basis points in yield. GAME ON.

    The message to insurance companies and some mutual funds from the general marketplace seems to be: Don’t wait for supply to show up. Buy now.  And, this week, they are.

    The municipal bond market has continued to make gains day-over-day in January, as the coupon and maturity reinvestment opportunities are now fully an exercise of demand overwhelming supply.  As such, it seems to me that the outperformance of the muni bond market did not end with the 2011 calendar year. Year to date (as of 1/17/11), the general Barclays Capital Municipal Bond Index has already gained 1.63%, and Barclays Capital High Yield Municipal Bond Index is up 2.85%.

    *Revenue bonds backed by annual payments made in perpetuity by domestic cigarette companies.

    Barclays Capital 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 Barclays Capital Municipal Bond High Yield Index is a subset of this major Index.  

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    Rekindled Demand As We Roll Into A New Year http://www.vaneck.com/muni-nation-blog/rekindled-demand-as-we-roll-into-a-new-year-01-11-12/ The January effect — coupon payments and maturing bonds — are fueling muni demand despite sharp volatility in U.S. Treasuries. The technical offset to the "real" market, however, is the "roll" which occurred at the first of the year. For example, bonds that were classified as 15-year maturities on 12/30/11 were reclassified as 14-year maturities as of 1/1/12.... I expect intermediates will be the biggest beneficiary of the roll because the yield curve has been steepest in the area of the curve they occupy: 6 to 16 years. 

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    Muni Nation 1/11/2012 3:20:27 PM
  • Demand for munis strong as we move into the new year
  • Calendar "roll" likely to benefit intermediates most: 6-16 year bonds
  • Modest expectations for overall muni performance in 2012

  • The January effect — coupon payments and maturing bonds — are fueling muni demand despite sharp volatility in U.S. Treasuries. The technical offset to the "real" market, however, is the "roll" which occurred at the first of the year. For example, bonds that were classified as 15-year maturities on 12/31/11 were reclassified as 14-year maturities as of 1/1/12.

    The "roll" means that the value (yield) of these bonds is now based on a shorter number of years to maturity. Since the difference in yield between 15 and 14 years right now is approximately 14 basis points, the reclassified bond receives a one-time performance boost  to higher prices just by standing still (remember: price and yield have an inverse relationship).  I expect that intermediates are likely to be the biggest beneficiary of the "roll" because the yield curve has been steepest among these maturities: 6 to 16 years.

    My expectations for performance of the broad municipal market in 2012 are modest. Hence, attention to portfolio duration1 and the eventual modification of interest rate policy by the Federal Reserve beg a revisit to the definition of "duration."  This impacts how clients should think about positioning on the yield curve for their muni exposure.

     

    The Shape of the Muni Curve: Where is the Opportunity? 

     


    Source: Municipal Market Advisors (MMA) as of 1/10/12. This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted.


    1"Duration" is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. 

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    2011 Recap: Still Waiting For The Storm http://www.vaneck.com/muni-nation-blog/2011-recap-still-waiting-for-the-storm-01-04-12/ I strongly debate that describing the U.S. municipal bond marketplace as a "backwater," "insular" or a "shadow asset class" is inaccurate and inappropriate. As restated by the Federal Reserve, with a little push from the analysts at Citigroup, U.S. muni bonds are currently a confirmed $3.7 trillion marketplace (up from a previous valuation of $2.1 trillion in 2010), with average credit quality, among its more than 60,000 issuers, currently in the double-A range.

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    Muni Nation 1/4/2012 3:20:27 PM
  • Munis are confirmed $3.7 trillion marketplace
  • Strong second-half surge boosted 2011 performance
  • Soundness of credit quality put default worries to rest

  • I strongly debate that describing the U.S. municipal bond marketplace as a "backwater," "insular" or a "shadow asset class" is inaccurate and inappropriate. As restated by the Federal Reserve, with a little push from the analysts at Citigroup, U.S. muni bonds are currently a confirmed $3.7 trillion marketplace (up from a previous valuation of $2.1 trillion in 2010), with average credit quality, among its more than 60,000 issuers, currently in the double-A range.

    With the broad municipal market up by 10.70% at year end (as measured by the Barclays Capital Municipal Bond Index), and even comparing very favorably to other asset classes in 2011, including equities, the naysayers are still waiting for the rain

    Still burning in our minds are the assertions made a year ago about an impending credit crisis which led to 29 weeks of outflows and price declines for munis. With little evidence of an economic recovery, either domestically or internationally, it was a struggle for market participants to "prove" the worth and value of the asset class.

    By mid-year, the realities of the soundness of the credit quality of the municipal market overcame the trepidations of individual investors. States were balancing their budgets and the "waves of defaults" did not occur. Performance, especially with single-A and double-A rated securities, highlighted a strong second half-year surge. 

    Though very real concerns for a fitful economic rebound will continue to eat away at some local economies, I believe municipals are likely to continue to prove their worth with positive performance into the new year.

    †Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. 

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