Your Money: Cuts in Pa. benefits should boost bonds

Pennsylvania lawmakers are looking to cut current and future employee benefit programs to reduce the state's burgeoning pension liability and avoid a ratings downgrade.

What does that mean for the state's municipal bonds? It's good news, actually. If the state achieves better fiscal austerity, which helps credit ratings, the prices of Pennsylvania's municipal bonds should benefit.

Municipal bonds appear cheaper than they have been in recent months, given the sell-off in fixed income, says James Colby, portfolio manager and senior municipal strategist with Market Vectors ETFs. One hard-hit area has been municipal bonds. The wider sell-off in the fixed-income market included muni bonds, which experienced the steepest drop since the last quarter of 2010.

Colby views as "misinterpreted" the news last month by the Federal Reserve on the outlook for market and economic growth. Fed chairman Ben Bernanke remarked that the central bank could decrease its bond purchases in the near future, prompting the bond market into a strong sell-off.

The drop in muni bonds at the same time wasn't warranted, Colby believes. The continued growth of the economy will further enhance credit quality of most municipal issuers. And with inflation staying relatively tame, as measured by the Consumer Price Index, the yields offered by some municipal bonds are beating inflation.

"With CPI at 1.7 percent, I believe the 'real' rate of return on municipals now is compelling," Colby says. Ten-year AAA municipal bond yields at 2.80 percent deliver more than 1 percent of inflation-free income. Thirty-year AAA bonds yielding 4.13 percent now offer nearly 2.50 percent of inflation-free income."

The sell-off has potentially set a floor under muni bond prices, Colby adds, and the sudden rise in rates may postpone many new issues. Colby is talking about his book, to some degree, since he helps to oversee approximately $2 billion in municipal bond exchange-traded funds, which includes the Market Vectors High-Yield Municipal Index ETF (HYD), Market Vectors Intermediate Term Municipal Index ETF (ITM), and Market Vectors Short Municipal Index ETF (SMB).

Still, he says the spread - or the reward for taking a risk on different-rated issuers - between municipals is "now more appropriate, in my view, than any time since the crash of 2008."

We've all been watching the protests in Egypt and wondering what the outcome will be for the markets in the Middle East.

But Bill Witherell, chief global economist at Cumberland Advisors, says his portfolios don't hold any Egyptian or any other Middle East and North African positions. His firm reviews all available international Exchange-Traded Funds (ETFs) using data and measures provided by the ETF Analytics Service of IndexUniverse and the ETF service of Ned Davis Research, in Venice, Fla., and selects only those ETFs that meet standards of tradability and efficiency. The Middle East and Egypt ETFs didn't make the cut: They aren't liquid enough, Witherell says

"This approach results in our not including in our portfolios the several ETFs for the Middle East region that have had strong advances this year but have very limited liquidity," he adds.

Among regional exchange-traded funds are SPDR S&P Emerging Middle East & Africa (symbol: GAF), WisdomTree Middle East Dividend (symbol: GULF) and Market Vectors Gulf States (MES).

"We also would not use the one Egyptian ETF, Market Vectors Egypt (EGPT), which not only trades poorly but also has a relatively high expense ratio of 0.96 percent and as of the end of June was down over 25 percent year-to-date," Witherell says.