Municipal Bond ETF Rally Still Has Legs
Municipal bond exchange traded funds are moving in their best rally in five years, with yields near the lowest since June, and there may be more room to run.
The largest municipal bond related ETF, the iShares National AMT-Free Muni Bond ETF (MUB) , has gained 4.4% year-to-date. MUB has a 2.16% 30-day SEC yield, or a tax equivalent 30-day SEC yield of 3.81% for those in the highest income bracket.
Conditions “remain favorable for the muni market, as muni demand shows signs of recovering and supply is manageable,” Tom Weyl, director of muni research for Barclays, said in a Bloomberg article. [Muni ETFs Stand Out in Fixed-Income Space]
Muni bond funds attracted $274 million in assets for the week ended April 9, the most since the period through Feb. 19. Meanwhile, new muni debt issuance has declined in the first quarter to its slowest pace since 2011.
Broad state and local debt securities have gained 4.5% so far this year, the strongest start since the 4.9% increase in 2009, outperforming U.S. Treasuries and corporate bonds, which rose 2.3% and 3.9%, respectively. The iShares 7-10 Year Treasury Bond ETF (IEF) is up 3.7% and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is up 4.0% year-to-date.
Benchmark 10-year munis now yield 2.48%, closing in its lowest since June. Bond prices and yields have an inverse relationship, so a rising price corresponds with lower yields.
More investors turned to munis in the first quarter ahead of Tax day to offset higher taxes due to the expired Bush-era taxes last year.
“The first quarter of 2014 turned out to be surprisingly good for tax-exempts,” Citigroup’s Mikhail Foux and Vikram Rai said in the article. “At current levels tax-exempts do not have much upside, and rates are expected to start moving higher.”
The Citigroup’s analyst, though, believe that it is “time to take profits” because returns are “likely to be much less impressive” in 2014.
iShares National AMT-Free Muni Bond ETF
For more information on munis, visit our municipal bonds category.
Full disclosure: Tom Lydon’s clients own shares of LQD.
