U.S. Markets closed

Rising State Spending Could Hinder Muni ETF Rally


Slowing down the rally in municipal bond exchange traded funds, the muni market expanded last quarter for the first time in over a year, with issuers from California to New York set to sell billions in debt offerings over the next month, the largest wave of supply since December.

The iShares National AMT-Free Muni Bond ETF (MUB) has increased 7.2% year-to-date but has dipped 0.1% over the past month.

The munis market increased by $600 million to $3.66 trillion as of June 30, marking the first expansion since the first quarter of 2013, reports William Selway or Bloomberg.

Municipalities have only sold $191 billion in long-term fixed-rate bonds in 2014, a 13% decline for the same period year-over-year. The diminished supply has helped fuel a rally in the muni market for the first eight months of the year. [Frugal Communities Keep Debt Low, Rally in Muni ETFs Going]

However, the trend could be reversing. Issuers from California to New York are planning about $12 billion of debt offerings over the next 30 days, according to a separate Bloomberg report.

“The supply, with the other rate pressures, it’s going to have an effect,” Adam Buchanan, vice president of sales and trading at Ziegler, said in the article. “People on the buy-side are going to try to take advantage of the other factors to try to get some better rates.”

With the expected increase of state offerings ahead, yields on benchmark 10-year munis have increased to 2.29%, close to their highest since Aug. 4.

California and New York make up the two largest state weights in MUB at 22.4% and 20.1% of the ETF’s overall allocations, respectively. Alternatively, investors can also track California and New York munis through state-specific muni ETFs.

For California exposure, investors can take a look at the iShares California AMT-Free Muni Bond ETF (CMF) , SPDR Nuveen Barclays California Municipal Bond ETF (CXA) and PowerShares Insured California Municipal Bond Portfolio (PWZ) . [Strong Finances Boost Appeal of California Muni ETFs]

The iShares New York AMT-Free Muni Bond ETF (NYF) , PowerShares New York AMT-Free Municipal Bond Portfolio (PZT) and SPDR Nuveen Barclays NY Muni Bond (INY) provide exposure to New York debt. [New York Muni ETFs Look Even Safer]

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