Municipal bond exchange traded funds are seeing money move in and low defaults have the sector enjoying its best start to a year since 1990 in terms of performance.
“Investors are rushing back to municipals as evidenced by strong inflows of $6 billion in January. A combination of factors are boosting investor demand: a lower supply of muni bonds given the tepid new issuance calendar, and renewed acceptance of munis as a harbor of credit quality and liquidity,” says Jim Colby, portfolio manager and senior municipal strategist with Van Eck Global.
The solid performance of muni bond ETFs “illustrates both the strong search and demand for yield, as well as the renewed confidence in an asset class which was shunned just a year earlier,” he added.
Market Vectors High Yield Muni ETF (NYSEArca: HYD) is up about 4% in 2012 and 15% over the past 12 months. [Muni Bond ETFs on a Roll as Yields Hit Record Lows]
According to a press release, Market Vectors municipal bond ETFs have recently crossed over into $1 billion in combined assets under management.
The Federal Reserve’s commitment to keep rates low for the next three years is supportive of municipals, Colby said, since yields typically follow those of U.S. Treasuries.
Also, removing one potential impediment, senior White House economic advisors have told state and local officials that tax-exempt bond interest is “off the table” and will not be part of the administration’s proposed 28% cap on the value of exclusions, deductions and other tax preferences for wealthy taxpayers. “This is likely to boost confidence for muni investors,” he noted, along with improving credit quality.
However, muni bond investors need to be mindful of the potential the Dodd-Frank legislation may have on the market. Ratings agencies may change the way they rank the creditworthiness of the bonds, which may result in “super downgrades.” [Could ‘Super Downgrades’ Hit Muni Bond ETFs?]
iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB)
For more information on munis, visit our municipal bonds category.
Max Chen contributed to this article.