The largest muni debt ETF has rallied to a record high as investors pile into the bonds on expectations tax rates will rise next year and boost the appeal of the sector’s tax-exempt status.
Demand for iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) has been strong as evidenced by the ETF trading at a premium to indicative value since July 16, the longest streak since March, Bloomberg News reports.
MUB holds $3.5 billion in assets and pays a 12-month yield of 2.9%.
“Investors are looking for ways that they can pick up yield, especially munis, which have the tax advantage on the income,” said Matthew Tucker, head of iShares fixed-income strategy, in the report. [Muni Bond ETF Rally]
Yet the muni bond rally has raised concerns the asset class has “gotten pricey and risky at the same time,” reports Jason Zweig at The Wall Street Journal.
In 2012, about $51 billion has flowed into municipal-bond mutual funds and ETFs. “To put that in perspective: Municipal-bond funds have been around since 1976, and fully a 10th of their $510 billion in total assets came in over the past 11 months,” he writes.
All that buying has driven muni yields down to their lowest since at least the 1960s, the WSJ notes. Bond yields and prices move in opposite directions.
Another potential risk for muni bond ETFs is that Congress may tinker with the tax-exempt status of the asset class to boost government revenue. Although munis have faced similar talk before, the financial pressure on Washington is so dire that “the threat is real,” George Friedlander, chief municipal strategist at Citigroup, said in the report.
iShares S&P National AMT-Free Municipal Bond Fund