The Fed's extended low-interest-rate policy will continue to be a bonus for muni bond investors, according to James Colby, portfolio manager and senior municipal strategist at Van Eck Global.
In an environment where municipal bond yields are already at historic highs relative to Treasury yields, Mr. Colby said the Federal Reserve's most recent commitment to keeping Treasury yields low just makes munis look that much more attractive.
“The Fed's signal is good for muni investors because the relationship of muni to Treasury yields is already at a favorable level,” he said.
Mr. Colby, who manages more than $1 billion in five municipal bond exchange-traded funds, said the muni market also got a boost when Congress recently decided not to eliminate the tax exemption on muni bond income.
“There is so much discussion concerning tax reform that the muni bond tax exemption is clearly an issue that can and will continue to be discussed,” he said. “But for a while, President Obama's supercommittee was debating whether the supposed wealthy should continue to get the benefits of a tax exemption on muni bonds, and that seems to be off the table for now.”
The Barclays Capital Municipal Bond Index gained 2.3% in January, while the Barclays Capital High Yield Municipal Bond Index gained 3.7%.
“This [performance] illustrates both the strong search and demand for yield, as well as the renewed confidence in an asset class which was shunned just a year earlier,” he said.
On the heels a well-publicized negative outlook for muni bonds a year ago, municipal bond mutual funds experienced five consecutive months of net outflows at the start of 2011.
By contrast, muni fund flows through Jan. 25 represented five consecutive months of net inflows.
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