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Muni Bond ETFs Slip on Rate Concerns


The largest municipal bond ETF is down about 3% the past month as yields move higher on talk the Federal Reserve may soon begin tapering its bond purchases.

The iShares National AMT-Free Muni Bond ETF (MUB) was trading at a discount of 1.5% to indicative value on Wednesday morning.

In fact, MUB is selling at its biggest discount to its underlying assets in almost two years, Bloomberg reports.

“We haven’t yet really seen investors moving out of the fund in response to rate concerns, though it does seem like they have slowed down their purchases,” said Matthew Tucker, head of iShares fixed-income strategy at BlackRock, in the article.

Yields on 30-year munis have climbed to the highest level in about a year, while yields on the benchmark 10-year munis have exceeded the interest rate on similar-maturity Treasuries, according to the story. [Muni Bond ETFs Face Rising Rate Headwinds]

MUB pays a 30-day SEC yield of 1.73%.

Muni bonds are held by many wealthy investors because the income is exempt from federal taxes.

MUB and other muni debt ETFs took a hit in late 2012 on speculation the asset class would lose its tax advantages under a fiscal cliff compromise. However, those fears didn’t pan out.

The recent sell-off in muni bond ETFs has been triggered by rising interest rates.

The asset class also faces lingering questions over shaky finances at many state and local governments.

For example, Jefferson County, Alabama, reached an agreement to pay its largest creditors $1.84 billion, or 60% of what they’re owed, as part of a plan to end the biggest U.S. municipal bankruptcy by the end of the year, Bloomberg reported Wednesday.

Controversial analyst Meredith Whitney is also back in the headlines with a new book that “sets out to show that the fortunes of debt-burdened coastal states are waning, while interior states that emerged from the financial crisis relatively unscathed are poised to gain the most,” MarketWatch reports.

“The book serves as something of a follow-up to a now-famous 2010 interview on 60 Minutes where her words were taken as a prediction of a near-term wave of municipal bond defaults,” according to the report. “That made her a maligned figure in the municipal bond world as muni investors ditched the market en masse after her call. This book is her first full-fledged response to her critics.”

iShares National AMT-Free Muni Bond ETF

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