State Deficits May Rattle Muni Bond ETFs

July 5th at 7:12am by Tom Lydon

Exchange traded funds that invest in municipal bonds have bounced back somewhat after stumbling badly in late 2010 when a noted analyst predicted hundreds of billions of dollars of defaults.

Yet muni bond ETFs fell last week as investors mulled news that Minnesota was forced to resort to shutting down regular operations over the Fourth of July weekend.

Unable to come to a budget accord, the Minnesota governing body closed most of the state’s governmental bodies last Friday, operating bare minimum services over the holiday weekend, reports Tami Luhby for CNNMoney. Governor Mark Dayton and Republican lawmakers who control the legislature stand at an impasse with no outlined schedule for talks over the remaining $1.4 billion deficit.

State parks were closed, highway stops were shutdown, road construction projects were put on hold and licensing for teachers and businesses ceased, among other things. Around 23,000 state workers are slated to be laid off, but they will be able to return once the budgetary problems are rectified.

Adding to states’ financial woes, New Jersey is looking to acquire a $2.25 billion bank loan from JPMorgan Chase & Co. (NYSE: JPM) to shore up the growing revenue deficit for its new fiscal year, writes Darrell Preston for Bloomberg. [Stock ETFs Hold the Line Despite Bearish Headwinds.]

Meredith Whitney, an analyst who warned on Citigroup’s (NYSE: C) balance sheet before the credit crisis, touched off a firestorm last year when she forecast a rash of defaults in the muni bond market. She has faced a backlash on Wall Street over her controversial call, but the recent developments in New Jersey and Minnesota only strengthen her case. [Muni Bond ETFs Rise as Meredith Whitney Sticks to Her Guns.]

Muni bond ETFs include:

  • iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB)
  • SPDR Barclays Capital Municipal Bond ETF (NYSEArca: TFI)
  • PowerShares Insured National Municipal Bond Portfolio (NYSEArca: PZA)

For more information on U.S. state bonds, visit our municipal bonds category.

iShares S&P National AMT-Free Municipal Bond Fund

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.