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Russ Koesterich
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Russ Koesterich, CFA, Managing Director, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a founding member of the Blackrock Investment Institute, delivering BlackRock's insights on global investment issues. Mr. Koesterich's service with the... More
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The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now: How Deficit Economics Will Change our Global Financial Climate
  • Weekly Market Intelligence | 2.22.2011 0 comments
    Feb 22, 2011 8:54 PM
    Taken from iSharesblog.com

    As we head into this short week after the holiday, there are a couple main themes I think investors should be paying attention to.  First, US equity investors are starting to look a bit complacent, providing the opportunity to take advantage of low implied volatility.  Second, the recent changes in municipal bond flows suggest some stabilization in that market.

    Early last week, the VIX Index (which measures implied volatility on the US large cap S&P 500 Index) reached its lowest level in 9 months.  When the VIX is low, it suggests that investors don’t expect much in the way of future volatility – in other words investors are fairly complacent about downside risk.

    Historically at about 20, implied volatility in the US traded between 15 and 16 last week.  This seems unusually low.  While the market is clearly on the mend and valuations still look reasonable, it’s hard to justify below average volatility when you consider all the headwinds still facing equity markets – sovereign debt issues, high US unemployment, a fragile consumer sector, and potential unrest in the Middle East. In particular, when you look at the factors that typically drive market expectations of volatility – credit and economic conditions – you would expect the VIX to be trading around 20 to 25 rather than 15 to 20.

    Second topic – back in mid-November we made the call that municipal bond yields were starting to look attractive, even though supply issues were likely to keep pressure on munis over the near term. Since then, municipals sold off sharply in December and January but appear to be stabilizing.  First, yields on general obligation municipals are now at a significant premium to taxable Treasuries. Second, supply is coming down from the heightened levels we witnessed back in the fall. And finally, flows out of the sector appear to be bottoming out.

    While municipal bond mutual funds just experienced a 14th straight week of outflows, we’re starting to see positive flows into the iShares S&P National AMT-Free Municipal Bond Fund (MUB), suggesting that the ETF market may be leading on the recognition of value. For long-term investors looking for yield, the US municipal market now looks to be offering good value. In terms of implementation, given our expectations for rising yields, we would favor a short muni strategy, such as the iShares S&P Short Term National AMT-Free Municipal Bond Fund (SUB), to help minimize duration risk.

    Source: Bloomberg

    Bonds and bond funds will decrease in value as interest rates rise. A portion of the Fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.

     

    The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Standard & Poor’s, nor does this company make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the company listed above.

    Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by clicking the Prospectuses link. Read the prospectus carefully before investing.

    Investing involves risk, including possible loss of principal.

    The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. The iShares Blog contributors are affiliated with BlackRock Fund Distribution Company (“BFDC”), which assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock Institutional Trust Company, N.A. (“BlackRock”), none of which is affiliated with SEI.

    The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

    The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.

    Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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