Municipal bond exchange traded funds racked up impressive returns in 2011 but there are worries the fixed-income funds could take a hit this year on downgrades as rating agencies revamp their methodologies.
Muni bonds may see “super downgrades” of two or more notches that could have a dramatic effect on prices, Investment News reports.
Peter Hayes, head of municipals at BlackRock , told advisors he expects super downgrades to accelerate throughout the year, according to the article.
“We’re expecting a radical change in the methodology of the ratings agencies because of Dodd-Frank,” he said, referring to new rules after the financial crisis. BlackRock is the manager of the iShares ETFs.
“Investors in municipal bonds also will have to consider the effect of likely tax policy changes, which should become clearer in the second half of the year,” according to the report. “The ultimate outcome, though, will be decided by the outcomes of the presidential and congressional elections,” Hayes added.
Muni bond ETFs have enjoyed a huge rally as rates drop to all-time lows. [Muni Bond ETFs on a Roll as Yields Hit Record Lows]