Investor Education

Looking Forward in the Bond Market

As investment adviser to an extensive array of municipal bond funds, Dreyfus utilizes Standish Mellon Asset Management Company investment professionals to manage its tax-exempt funds.

Steve Harvey

This quarter we invited Steve Harvey, Senior Portfolio Manager of Tax-Sensitive Strategies at Standish, to give us some insights and updates on the bond market.

Can you provide an update on the municipal market so far in 2012?

Municipal bonds have fared well during the first part of 2012, as the limited supply of new issues, higher state tax receipts and relatively strong credit fundamentals have been generally supportive of bond prices.

In addition, we have seen investors in search of higher yield alternatives relative to other asset classes moving back into municipal bond funds – a dramatic shift compared to the same time last year.

What is your outlook for the second half of 2012?

We believe uncertainty regarding the upcoming election, U.S. fiscal and tax policies, as well as overseas issues, may affect bond prices in the months ahead.

Another consideration over the near term is the higher federal tax rates, as well as a new Medicare tax on investment income, which are scheduled to take effect in 2013. If these do take effect as currently scheduled, it’s likely that investor demand for municipals, which generate income that is exempt from federal income taxes, may increase as income from competing investment alternatives could be taxed more heavily.

Where do you see the greatest investment opportunities in the municipal market over the near term?

Currently, if appropriate for long-term investment objectives, intermediate municipal bond funds offer a potentially desirable balance between total return potential and historically moderate volatility, given today’s environment. Income-oriented investors, however, can also consider the potentially higher yields offered by owning high-quality, longer-term municipal bond funds, since yields of such bond funds (while potentially being more volatile) are currently on par with, or in some cases slightly higher than, those of comparable-term government guaranteed treasuries.

Finally, we see opportunities among higher-quality revenue bond sectors, which we believe currently offer good valuations and are likely to be better insulated from potential economic slowdowns due to their historically steady revenue income.

Dreyfus is here to help you make the best decision for your individual needs. If you’d like more information on municipal bond investments, please call us at 1-800-443-9794 to speak to a Dreyfus representative that specializes in Fixed Income.

Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. Download a prospectus that contains this and other information about a fund, and read it carefully before investing.

Bonds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines.

Income from municipal bonds may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax (AMT) for certain investors. Capital gains, if any, are taxable. Please consult your tax advisor for more detailed information on tax issues and advice as they relate to your specific situation.

The comments made by the author are provided as a general market overview and should not be considered investment advice or predictive of any future market performance. These views are current as of June 2012, and are subject to change rapidly as economic and market conditions dictate.