Chart of the day: Why munis now

As shown in the chart (above), the yield spread between investment grade AAA and BBB municipal bonds was 214 bps at the end of June. If this relationship narrows to its long-term average (132 bps), investors could potentially realize 82 bps of performance in addition to the 3.66% YTD total return delivered by the Barclays Municipal Bond Index as of the end of June. However, the long-term average could potentially be well below 132 bps if it were not for the extreme dislocation caused by the 2008 financial crisis. According to Barclays, adjusting for the 2008 sell-off, the long-term average would be 77 bps. This means the performance opportunity might be as much as 137 bps. If issuance of new bonds remains at its current slow pace, then demand may force a continued contraction. James Colby is the senior municipal strategist for Market Vectors ETFs