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Slow and Steady Muni Bond ETFs Are Taking the Lead

This article was originally published on ETFTrends.com.

Municipal bonds and related exchange traded funds may not be the most exciting asset category, but they have been holding up relatively well in the fixed-income space.

"Muni performance has been nothing to write home about, but it's been better than just about every other fixed income segment," Tom Hession, managing partner at Riverbend Capital Advisors, told CNBC.

Munis have been holding up or at least have not done as poorly as other bond asset categories during the current interest rate hike cycle. Year-to-date, the iShares National Muni Bond ETF (NYSEArca: MUB) fell 1.6%, which is still better than similar duration bond ETFs. For instance, the iShares 7-10 Year Treasury Bond ETF (IEF) decreased 3.6%, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) dropped 4.8% and iShares Core US Aggregate Bond ETF (AGG) dipped 2.6% so far this year.

"Munis tend to do relatively well in a rising rate environment," Hayes said, crediting their higher coupons and callability for insulating against rate increases. "They outperform when rates are rising and underperform when rates are falling."

Nevertheless, that does not mean munis are exempt from any declines. The current weakness is expected to extend for a while if the Federal Reserve continues to push up interest rates, and market supply and demand factors become more negative.

The municipal bond market has also benefited from a diminished supply in debt issues as a result of the tax reform bill passed last year. Due to the uncertainty over the tax-exempt status of muni incomes, along with other potential rule changes in the market, issuers originally inundated the market with new issuance at the end of the last year, which lead to one of the worst January months for munis on record but cleared out any new supply that would have hit the market for 2018.

"The low supply of bonds has definitely helped the market this year," Brian Nick, chief investment strategist at Nuveen, told CNBC.

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

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