Falling Muni Bond ETFs Trade at Discounts as Rates Climb

June 21st at 5:18pm by Tom Lydon

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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