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Muni Bond ETFs Rise on State Fiscal Outlook, Europe Woes

tlydon@globaltrend.com (Tom Lydon)

California’s higher-than-expected budget deficit of $16 billion is a reminder of the fiscal difficulties many states are facing after the 2008 financial meltdown.

Governor Jerry Brown said the shortfall grew from $9.2 billion in January in part because tax collections have not come in as high as expected and the economy isn’t growing as fast as hoped for, the Associated Press reports.

Despite the well-documented fiscal challenges many states face, investors continue to pour money into municipal bond funds and ETFs.

Investors are buying U.S. muni bond funds at the fastest clip since 1993 in a market with the lowest tax-free yields in a generation, according to Bloomberg News.

“A slowdown in defaults and an improving state fiscal outlook are also making munis a haven amid concern that Europe’s sovereign debt crisis is deepening,” the report said.

Last year, investors pulled money from local-government bonds after noted analyst Meredith Whitney forecast massive defaults. The prediction hasn’t come true.

“Instead, states’ tax collections have exceeded levels from before the 18-month recession that ended in June 2009 and more than half project cash surpluses to end their budget years, boosting investor confidence,” Bloomberg reported.

The largest ETFs in the muni bond category include iShares S&P National AMT-Free Municipal Bond Fund (MUB - News), SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (SHM - News) and PowerShares Insured National Municipal Bond Portfolio (PZA - News).

MUB has posted a total return of 3.5% year to date. The ETF has a 12-month yield of 3.1%, according to manager BlackRock.

On a risk-adjusted basis, muni bonds are performing better in 2012 than corporate bonds, Treasuries, commodities and U.S. stocks, Bloomberg reported.

“If you look at tax-equivalent yields, they look attractive versus other fixed-income markets,” said Daniel Solender, portfolio manager at Lord Abbett & Co., in the article. “The returns look good too. People see the returns and want to participate.”

iShares S&P National AMT-Free Municipal Bond Fund