Exacerbated by Detroit’s bankruptcy filing, Illinois’ unfunded pension obligations and Puerto Rico distress, municipal bond exchange traded funds were battered as rates steadily rose since the start of May.
Muni bond yields have increased faster than other fixed-income assets his year, according to a S&P Dow Jones Indices note. Bond prices and yields have an inverse relationship, so a rising yield corresponds to falling prices.
The overall S&P Municipal Bond Index, which tracks over 73,000 securities with over $1.4 trillion in assets, fell 2.6% year-to-date.
The S&P National AMT-Free Municipal Bond Index, which follows investment grade munis, fell 3.3% year-to-date. The iShares National AMT-Free Muni Bond ETF(NYSEArca: MUB) is down 3.5% year-to-date.
Meanwhile, the S&P Municipal Bond High Yield Index declined 4.1% year-to-date. The e Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD) fell 9.4% year-to-date and the SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB) dropped 6.7%. Both ETFs include significant exposure non-investment grade municipal bonds.
The S&P Municipal Bond Puerto Rico Index remains on track for it’s worse performing year since index inception. The Index is down 20.49% year to date (total return) and the average bid price of bonds in the index has fallen 25.5% since the start of the year. State funds with triple tax-exempt Puerto Rico muni bonds are paying the price for their reach into the higher yields offered by these bonds at the start of 2013, according to S&P Dow Jones Indices.
In comparison, the S&P U.S. Issued High Yield Corporate Bond Index has gained 6.3% year-to-date, with the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) up 5.7% this year. The S&P U.S. Issued Investment Grade Corporate Bond Index is up 1.7% year-to-date. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), though, is down 2.0% this year.
The following chart reveals the taxable equivalent yield on tax-exempt investment grade bonds tracked in the S&P National AMT-Free Municipal Bond Index, the yield on investment grade corporate debt and 10-year U.S. Treasuries.
Source: S&P Dow Jones Indices
For information on munis, visit our municipal bonds category.
Max Chen contributed to this article.