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Muni ETFs Extend Losing Streak on Tax Jitters, Bond Flood


The largest exchange traded fund indexed to municipal bonds was down for the seventh straight session Monday on fears the asset class may lose some of its tax advantages and as borrowers saturate the market with new issuance.

One compromise in the fiscal cliff negotiations could be taxing at least a portion of municipal-bond interest paid to wealthy investors, The Wall Street Journal reported last week. [Muni Bond ETFs Tumble on Tax-Break Speculation]

Municipal bonds are a $3.7 trillion market. Some high-income investors find muni yields attractive relative to other bonds because the income is tax-exempt, although there is rising speculation that could change.

The largest ETF in the category, iShares S&P National AMT-Free Municipal Bond Fund (MUB) , traded at a discount to indicative value for the first time since July “as states and cities flooded the market with the most borrowing in six months,” according to Bloomberg News.

On Friday, the muni bond ETF traded at a discount of 0.52%, according to Morningstar data.

Yields on 10-year muni bonds rose to the highest since Nov. 7 last week as borrowers issued about $20 billion of long-term debt, the most since June, Bloomberg reports.

“It reflected the market’s difficulty in handling the heavy new-issuance calendar,” said Matt Fabian at Municipal Market Advisors, in the story.

Also weighing on muni bond ETFs was a Moody’s credit downgrade of Puerto Rico last week.

“Perhaps ironically, a safer haven area on the risk spectrum has taken a bit of a recent nose-dive,” writes Gary Gordon at ETF Expert on the recent action in muni bonds.

“Keep in mind, part of the muni bond attraction over the last six months can be traced to the expectation that tax rates on capital gains and dividends might rise for the wealthy next year,” he added. “Some folks clearly shifted assets into tax-exempt municipal bonds. Now, that tax-exempt status is under fire.”

iShares S&P National AMT-Free Municipal Bond Fund


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