What the Fed's Next Move Means for Munis

James Colby, Senior Municipal Strategist and author of the Muni Nation blog at Van Eck Global, sits down with Senior Market Reporter Chip Barnett to talk about the Federal Reserve’s next moves on interest rates. He looks at the rate situation this year and into 2016 and discusses the effect a rate hike will have on the municipal bond market.

BARTNETT: Hi, I'm Chip Barnett from the Bond Buyer. I'm here today with James Colby from VanEck. Welcome.

COLBY: Chip, thank you for having me.

BARTNETT: We're going to talk about the Fed. The FOMC meeting is coming up on the 16th and 17th. Everybody wants to know what are they going to do. What do you think? Is a rate hike in the cards?

COLBY: I think it clearly is in the cards. I think the Fed would love to see the numbers that are being produced right now suggests that the economy is still on this upward trajectory. That they can get this rate cut and in the market and in place going into the end of the year. Whether they really do it or not, it's hard to say. It's hard to read those tea leaves. Why? Because we've had such dislocation coming out of China. The Greek concerns are still present, although behind the headlines, they're still important. Some of the economic numbers suggest that we're not firing on all cylinders, yet growth is there.

It's at 2% plus 2% level which is what the Fed had hoped for. Inflation, maybe not. But still, I think the Fed's intent is to try to get a rate hike now. The market has been anticipating it for over a year and a half. It's time to move ahead.

BARTNETT: What do you think about next year? Do you think that the timing is more important or the pace of the hikes?

COLBY: The pace is important and I think it's important for the Fed to signal that there will be a series of hikes. Maybe series is too strong a word, but maybe two more in the calendar year of 2016 that we can foresee right now. That's important because clearly they've seen what's happened in August, the financial instability of the markets. The Fed really wants to make sure that going into 2016 that they are clear as far as their intent, they're clear as far as what they see proven in the economy, and what they hope to achieve using stimulus or removing the stimulus as it is from the marketplace.

COLBY: What effect do you think this is going to have Muni? You think they're going to rally? Do you think they're gonna be subdued?

BARTNETT: Honestly, rates in the muni market, if you measure it by the MMD scale have already locked in a 25, if not larger incremental rate increase by the Fed. The accommodation is already there. What impact is a Fed raising rates going to have on munis? I think very minimal. In fact, I think it sets the stage for the opportunity to sell the muni asset class as a real viable alternative to others that are more volatile. Earn your income, earn your tax advantage income and with rate increase in place. That's one thing that we don't have to talk about. We don't have to discuss.

COLBY: Do you think this is going to have a positive effect on muni bond funds and other flows.

BARTNETT: I think that, as my prior answer indicated, yes. I think it will allow them and us, as an ETF provider to go to our clients and say, "Let's not worry about rates. We don't have that to worry about anymore. The markets will reset based on fundamentals." The fact is that we are very attractive on a taxable equivalent basis to almost every other asset class. Why not? I should think that they'll do well going into the fourth quarter.