Muni Bond ETFs Enjoy Big Rally

January 10th at 10:00am by John Spence

An exchange traded fund that invests in municipal bonds is on a five-day winning streak amid reports that supply is tight in this area of the fixed income market.

The iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) has rallied nearly 3% over the past week. [Muni Bond ETF Rises Despite Default Warning]

“Gains in the ETF are outpacing the underlying debt because money managers who have run out of bonds to buy are using it to mimic returns in the municipal market,” Bloomberg reported Monday.

“The supply in the muni market’s been highly constrained,” Dodd Kittsley, head of the due diligence group at BlackRock Inc.’s iShares unit, told Bloomberg. “The premium’s really a reflection of MUB as an access vehicle for the market and reflects this asymmetric liquidity in the underlying.”

The muni bond ETF had a good year in 2011, rising about 13%, according to Morningstar. Predictions of massive defaults in 2011 from noted analyst Meredith Whitney didn’t pan out. [Municipal Bond ETFs Turn in Solid Year]

Other muni bond ETFs include SPDR Nuveen Barclays Capital Short Term Municipal Bond (NYSEArca: SHM), iShares S&P Short Term National AMT-Free Municipal Bond ETF (NYSEArca: SUB) and SPDR Barclays Capital Municipal BondETF (NYSEArca: TFI).

Despite the rally in municipal bonds last year, the spread between municipal bonds and Treasuries is now the widest since 2009, writes Russ Koesterich, iShares global chief investment strategist. “This is as much a reflection of Treasuries being expensive as it is evidence that municipals are cheap,” he said. “Still, current spreads do offer investors an opportunity for a significant after-tax pickup in income. Second, municipal finances continue to improve, with state revenues up approximately 4% in 2011.”

iShares S&P National AMT-Free Municipal Bond Fund


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