The municipal bond market and related exchange traded funds will continue to benefit from the supply-demand but investors could see short-term volatility from default speculation, notably in Puerto Rican debt.
“I think the tailwinds are still very positive for municipal bonds,” Jim Colby, portfolio manager for Market Vectors’s suite of municipal bond ETFs, said on Van Eck Global.
Specifically, Colby points to the ongoing divergence between demand and supply as investors, notably those in the higher income brackets, enjoy the tax-exempt perks of holding municipal debt while states are reluctant to increase their balance sheets. [Muni Nation: The Best Defense is a Good Offense]
For example, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) comes with a 1.58% 30-day SEC yield or a 2.79% taxable equivalent 30-day SEC yield for those in the highest income bracket, and the Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) has a 2.05% 30-day SEC yield and a 3.40% taxable equivalent 30-day SEC yield for those in the highest income bracket. [Muni Bond ETFs: Considerations & Factors to Watch]
“There has been one theme, one overriding theme, that has driven performance right from the very get-go of 2014, and that has been a supply-demand imbalance,” Colby said. “By that, I mean the demand for municipal bonds, fundamentally created by coupon, maturities and bond call investment, has completely overwhelmed the supply of new issuance in the municipal bonds marketplace.”
Colby also anticipates that the supply imbalance will run through the rest of the year and even into the first quarter of 2015