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Muni Bond ETFs Look Attractive Compared to Treasuries


After the U.S. shutdown scare, municipal bonds fell behind the rally in Treasuries. As a result, the widening yield ratio could now signal a buying opportunity for muni bond exchange traded funds.

Municipalities saw an increase in borrowing, which drove local bonds to the cheapest in almost two months against Treasuries, with yields on 10-year munis reaching about 111 percent of that on federal debt securities this week, reports Brian Chappatta for Bloomberg.

The $3.7 trillion muni market has generated a 0.1% return this month, compared to 0.6% for Treasuries.

“Given the elevated muni-Treasury yield ratios and a large increase in supply, this presents itself as an opportunity for the municipal investor,” Gary Pollack, head of fixed income for the Deutsche Bank unit, said in the article.

Despite the recent flurry in borrowing activity, municipal bond supply could ebb and bolster the market. According to Bank of America, muni debt gained in the a year’s final three months in seven of the past 10 years. Phil Fischer, head of muni research at Bank of America, and Chris Mauro, head of muni strategy at RBC, project 2013 muni issuance of $325 billion to $330 billion, which would be the second-smallest in the past five years.

Recently, muni fund investors were looking at Puerto Rico, a U.S. territory with $70 billion in tax-free muni bonds, and the territory’s growing fiscal challenges, reports John Waggoner for USA Today. [Believe It: A Puerto Rico Muni ETF May Debut]

Some broad muni bond ETFs include iShares National AMT-Free Muni Bond ETF (MUB) , which has a 2.76% 30-day SEC yield; SPDR Nuveen Barclays Municipal Bond ETF (TFI) , which has a 2.65% 30-day SEC yield; and Market Vectors Intermediate Municipal Index ETF (ITM) , which has a 2.57% 30-day SEC yield.

Investors who are uncertain about the outlook for general obligation bonds in the wake of Detroit’s bankruptcy filing can also consider the db X-trackers Municipal Infrastructure Revenue Bond Fund (RVNU) . RVNU has a 4.42% 30-day SEC yield as of Sept. 30. [A Muni Bond ETF that Sidesteps Default Worries]

For more information on munis, visit our municipal bonds category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.