Check Your Fear And Favor Fundamentals

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Includes: AFB, BAF, BBF, BBK, BFK, BKN, BLE, BSD, BYM, CXH, DMB, DMF, DSM, DTF, EIM, EIV, EOT, EVN, EXD, FMB, FMN, IIM, IQI, KSM, KTF, LEO, MEN, MFL, MFM, MFT, MHD, MMU, MNP, MQT, MQY, MUA, MUB, MUE, MUH, MUS, MVF, MVT, MYD, MYF, MYI, MZF, NAD, NEA, NEV, NIM, NMI, NUV, NUW, NVG, NXP, NXQ, NXR, NZF, OIA, PMF, PML, PMM, PMO, PMX, PRB, PVI, PZA, RVNU, TFI, VFL, VGM, VKI, VKQ, VMO, VTEB, XMPT
by: VanEck

As of this writing, much looms over the horizon: The U.S. presidential election is only 30 days away, a possible move by the Federal Reserve is back on the table, economic impacts from the Brexit vote have yet to be fully realized, and a significant increase of new municipal issuance is likely. All these factors have caused yields to rise and certain valuations to change.

Recent Dynamics Create Attractive Entry Points

The Bloomberg Barclays Municipal Bond Index1 posted a negative total return in September, generating returns of -0.50% and bringing year-to-date returns to +4.01%. This is the first month of negative returns after a run of 14 consecutive months of positive performance. Month-to-date (as of October 7), we've seen a similar story with the index posting a negative total return of -0.62%.

A clear path to uncertainty is never what investors in the municipal market desire, but I suggest that if these first 10 days of October have been less than desirable, it should be considered a period of healthy adjustment. I believe new attractive entry points into the municipal asset class are a positive for investors.

Fundamentals Suggest Positive 2016 Finish

Taxable-equivalent yields remain attractive. Ratios of municipal high yield to corporate high yield as well as municipals to U.S. Treasuries remain well above their long-term averages. These factors continue to be favorable for municipals. Any near-term adjustments may strengthen these measures.

I suggest that muni investors can weather many of these uncertainties, to the benefit of the asset class as a whole. While volatility is likely, there are fundamental factors in play that I believe will likely provide a positive finish to 2016.

Source of all data: Barclays, as of October 7, 2016.

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

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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer's financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. 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.

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