ETFs tracking the relatively illiquid municipal bond sector traded at significant discounts to net asset value on Friday, pushing prices down even more as interest rates rise.

The iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) was in the red again Friday and is hovering around its lowest point since May 2011. [Rising Rates, Sequestration Hit Build America Bond ETFs]

Also, MUB closed Friday’s session at a 3.4% discount to intraday indicative value, according to Morningstar. Market Vectors High-Yield Muni ETF (NYSEArca: HYD) ended the session at a 6.5% discount.

Tax-exempt muni bonds have not been spared from the damage in fixed-income markets as Treasury yields rise on speculation the Federal Reserve will reduce its bond purchases if the economy continues to improve.

“The muni market is in a free-fall today,” said David Manges, muni trading manager at BNY Mellon Capital Markets, in a Bloomberg report Thursday. “It’s tough to get a sense of value or benchmark spreads because prices are so fluid.”

MUB lost 1.7% on Friday and was down for the fifth straight day. The ETF lost nearly 5% for the week as trading volume spiked.

Next page: Detroit underscores fiscal woes; Muni ETF discounts

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