ETF Trends
ETF Trends

Starting in the late 1950s, Rod Serling produced a successful television series called The Twilight Zone, which began every episode with the following introduction: “You’re traveling through another dimension, a dimension not only of sight and sound but of mind. A journey into a wondrous land whose boundaries are that of imagination. That’s the signpost up ahead: Your next stop, the Twilight Zone!”

I think it’s appropriate for MUNI NATION to replace “The Twilight Zone” with “The Rate Hike Zone,” as a way to convey the fixation that market participants have with the long awaited but seemingly distant and uncertain Federal Reserve decision to allow rates to rise. Although there are many historical references to the reaction of markets to higher rates, the conditions underlying this event are now different. They are different because underlying the current environment is an understanding that we are in a manufactured rate structure, with a slowly growing economy and, so far, not a whiff of inflation.

The Rate Hike Zone reference further highlights the journey of uncertainty that market participants are currently experiencing; in my view, they want to be told what to do once they arrive at “the signpost up ahead” as well as how to prepare for it now.

Reflections upon conditions that exist in the municipal market, in my view, are positive for municipal bonds in 2015, substantially for the reasons I have enumerated in the past. They are:

  • Measurable demand is stronger than supply
  • Improvement of overall credit quality is supported by an improving economy now bolstered by lower fuel costs
  • The continuation of a three-year trend toward lower credit impairments1

These might give investors reason to believe in the value of the muni asset class. This seems to me a journey “whose boundaries are less than that of imagination” and more of practicality.

James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.

1Source: Municipal Market Advisors (MMA). As of 12/2/14.