Trading Munibond Funds With Munibonds Futures by Dennis Meyers, Ph.D.
Designing a trading system is simply establishing a set of rules and back-testing them in the market. And there are different approaches and different markets to
trade. Here's one example of developing a system to time entries into and exits out of municipal bond funds.
What are municipal bond funds? They are mutual funds that hold only municipal bonds in their portfolio. These
funds have gained some popularity in recent years because the interest from these fund types are exempt from federal taxes. Of these funds, no-load municipal bond funds provide the perfect trading vehicle for small investors who cannot buy municipal bonds directly. Here's a new indicator that uses municipal bond futures to forecast the direction of no-load municipal bond funds.
BUT FIRST, A LITTLE BACKGROUND
I began to look at no-load municipal bond funds in 1991 after I became unhappy with over-the-counter municipal bond dealers. Owning a munibond fund is very different from owning a munibond. Municipal bonds are difficult to trade in the over-the-counter market because of the large spreads and lack of a continuous market. Municipal bonds are usually bought and held until the bonds are called or reach maturity. Even though the market value of the bond moves up and down during your holding period, you can be assured of receiving the maturity value stated in the
bond certificate at call or maturity (given if there is no default by the municipal issuer).