After posting one of their best annual gains since 2011, municipal debt securities, along with related exchange traded funds, may begin to slow down.
The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has increased 9.0% year-to-date and gained 10.3% over the past year. [MuniNation: Crosscurrents May Benefit Municipals]
Now, PIMCO and Morgan Stanley warn that returns in 2015 may be less than half the 8.7% rise in the broad municipal bonds market in 2014 after interest rates likely bottomed out this year, reports Michelle Kaske for Bloomberg.
Michael Zezas, chief municipal strategist at Morgan Stanley, argues that muni market gains will diminish as the Federal Reserve ends its bond-purchasing program and preps for higher interest rates.
“You’ve already run it fairly far,” Joe Deane, head of munis for Pimco, said in the article. “From these levels, to have this kind of a return, you would have to take interest rates down to some dramatic levels. I don’t see that being in the cards.”
Additionally, with investors chasing after this year’s rally, demand has pushed borrowing costs down to generational lows, which could allow municipalities to cheaply increase financing for public works.
MUB now shows a 1.66% 30-day SEC yield, or a 2.93% taxable equivalent 30-day SEC yield.