The secondary market seems poised for municipal bond prices to move higher. Dealers appear 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. [Muni ETFs: Opportunity in Plain Sight]
Over the past six business days we’ve seen increased trading in the Market Vectors Short Municipal Index ETF (NYSEArca: SMB) and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM). Selling emerged in Market Vectors High-Yield Municipal Index ETF (NYSEArca: 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.
Market Vectors High-Yield Municipal Index ETF
James Colby is a portfolio manager and senior municipal strategist at Van Eck Global, responsible for Market Vectors municipal bond investments.