Market Commentary - December 15, 2010

Municipal Bonds

A sudden jump in municipal bond yields is raising fears in the main source of financing for states and municipalities. In addition, municipal bond funds in November witnessed their first weekly net outflows since the spring according to Investment Company Institute due, in part, to higher than expected volatility. Adding fuel to fire was the result of California’s municipal bond auction on November 18th that sold $10bb at higher yields than was expected by many bond market participants – no doubt, due to lower than expected tax receipts and underfunded pension and health-care schemes in the state.

The widely held view is that municipal bond defaults in general are highly unlikely – S&P's latest statistics show a mere 0.3% overall default rate historically. However, headline risks such as the Republican party's general reluctance to increase federal aid to states' coffers, looming future obligations for state employees, and the last minute rush to issue additional Build America Bonds (a part of the stimulus package that may not be renewed next year) are all contributing to further speculation. While municipal bond investors should expect volatilities to continue in the near term, there are no signs of significant default risk emerging.

Attached in the following pages is a market perspective on the municipal bond market by DWS. We believe it is timely article that illustrates the various market forces behind the current increase in volatility.

View Market Commentary - Muni Opinion

The views are those of Y. Allen Kim, Investment Research Director, Research Department, Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance.

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