Munis In March: Flows In Focus

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

So far this year, municipal bond ("muni") funds have seen inflows of approximately $15 billion.

This is the best start to a year in more than a decade, with evidence that demand is being stimulated by investors in higher tax rate states seeking a degree of relief from the pain forced upon them by President Donald Trump's new limit of $10,000 on the Federal deductibility of state and local taxes (SALT), which includes property taxes.

These record inflows have, on the basis of historic averages, driven tax-exempt municipal bonds, with maturities from two years out to ten years, to look rich compared to U.S. Treasuries.

In particular, the 10-year AAA rated muni to U.S. Treasury ratio (77.3%) is at its richest since the first quarter of 2010.

  • So far this year, municipal bond ("muni") funds have seen inflows of approximately $15 billion. This is the best start to a year in more than a decade, with evidence that demand is being stimulated by investors in higher tax rate states seeking a degree of relief from the pain forced upon them by President Donald Trump's new limit of $10,000 on the Federal deductibility of state and local taxes (SALT), which includes property taxes.

    These record inflows have, on the basis of historic averages, driven tax-exempt municipal bonds, with maturities from two years out to ten years, to look rich compared to U.S. Treasuries. In particular, the 10-year AAA rated muni to U.S. Treasury ratio1 (77.3%) is at its richest since the first quarter of 2010.

    10-Year AAA Municipal to 10-Year U.S. Treasury Bond Ratio

    Source: Thomson Reuters Municipal Market Data. As of 3/6/2019.

    In light of the above, we believe investors should consider positioning their portfolios in the intermediate and long parts of the curve using the VanEck Vectors® AMT-Free Intermediate Municipal Index ETF (NYSE:ITM), the VanEck Vectors® AMT-Free Long Municipal Index ETF (NYSE:MLN) or a combination of both. Another option, given the shift in the U.S. to a more benign interest rate environment is the VanEck Vectors® CEF Municipal Income ETF (NYSE:XMPT), which offers an attractive yield, and we believe is well positioned to benefit if the underlying closed-end fund discounts continue to narrow.

    Post Disclosure

    1 MunicipalBonds.com: "The Municipal/Treasury Ratio, M/T ratio or muni-Treasury ratio, as it is more commonly known, is a comparison of the current yield of municipal bonds to U.S. Treasuries. It aims to ascertain whether or not municipal bonds are an attractive buy in comparison. The ratio uses indices from the Thomson-Reuters Municipal Market Data (MMD) series," https://www.municipalbonds.com/education/exploring-the-municipaltreasury-ratio/

    Thomson Reuters Municipal Market Data AAA Curve is a proprietary yield curve that provides the offer-side of "AAA" rated state general obligation bonds, as determined by the MMD analyst team. The "AAA" scale (MMD Scale), is published by Municipal Market Data every day at 3:00 p.m. eastern standard time with earlier indications of market movement provided throughout the trading day. The MMD AAA curve represents the MMD analyst team's opinion of AAA valuation, based on institutional block size ($2 million+) market activity in both the primary and secondary municipal bond market. In the interest of transparency, MMD publishes extensive yield curve assumptions relating to various structural criteria which are used in filtering market information for the purpose of benchmark yield curve creation.

    An investment in either VanEck Vectors® AMT-Free Intermediate Municipal Index ETF (ITM®) or VanEck Vectors® AMT-Free Long Municipal Index ETF (MLN®) (the "Funds") may be subject to risks which include, among others, municipal securities, credit, interest rate, call, California, New York, special tax bond, transportation bond, water and sewer bond, market, operational, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and concentration risks, all of which may adversely affect the Funds. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Funds' income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.

    The performance of VanEck Vectors CEF Municipal Income ETF (the "Fund"), 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. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value.

    Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

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    Please note this represents the views of the author and these views may change at any time and from time to time. MUNI NATION 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-VanEck 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 VanEck. MUNI NATION is a trademark of Van Eck Associates Corporation.

    All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. Certain indices may take into account withholding taxes. An index's performance is not illustrative of a fund's performance. Indices are not securities in which investments can be made.

    The 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. The AAA and BBB indices are sub-sets of this broader index.

    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.

    The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.

    Diversification does not assure a profit or protect against loss.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

  • Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.