Exchange traded funds that hold municipal bonds rose Tuesday as the fixed-income ETFs shook off a warning from Moody’s that it may downgrade its triple-A credit ratings on five states.
The $2.2 billion iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) gained 0.3% on Tuesday. The ETF climbed after reports that leaders in Washington have made progress in negotiations on cutting the U.S. deficit before the debt ceiling deadline.
Moody’s said it has placed five states on review for downgrade: Maryland, New Mexico, South Carolina, Tennessee and Virginia.
“In connection with Moody’s July 13 action placing the Aaa government bond rating of the United States on review for downgrade, Moody’s announced that it would assess the ratings of Aaa-rated states to gauge their sensitivity to sovereign risk,” the ratings agency said.
“Should the U.S. government’s rating be downgraded to Aa1 or lower, these five states’ ratings would likely be downgraded as well,” Moody’s added.
Muni bond ETFs plunged late last year after noted analyst Meredith Whitney predicted a wave of defaults as a result of stretched state budgets and other woes. However, they have bounced back and the iShares ETF was up 6.5% year to date as of July 18, according to Morningstar.
Bloomberg reported Whitney is losing credibility as her prediction of widespread defaults isn’t playing out. Defaults in state and local government debt fell 60% in the first half of 2011 compared with the year-ago period, according to the report.
Yet there have been rumblings in the muni bond market. Minnesota’s government recently shut down after a budget impasse, while New Jersey reportedly needs a bank loan to cover a revenue deficit. [State Deficits May Rattle Muni Bond ETFs]
Whitney in an interview last month said she stands by her controversial call on muni bonds. [Muni Bond ETFs Rise as Meredith Whitney Sticks to Her Guns]
iShares S&P National AMT-Free Municipal Bond Fund
