Municipal bond exchange traded funds are spiking as rates drop to record lows, prompting worries this corner of the fixed-income market is getting ahead of itself.
“The municipal bond market has been on a seven-week march to all-time low rates (yields),” says James Colby, an ETF portfolio manager at Van Eck. “Given the voracious appetite that investors have had for munis, I would have expected that the natural order would be for the market to take a pause — even to back-up a bit as investors reassess relative value. Traders have begun to refer to bonds as trading at nosebleed prices, which suggests a market moving too high, too fast.”
Van Eck oversees several muni bond ETFs, including Market Vectors Long Municipal Index (NYSEArca: MLN).
Muni bond prices are rising after the Fed pledged to hold interest rates until late 2014. [Muni Bond ETFs Enjoy Big Rally]
The $2.7 billion iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) has gained 17.3% over the past year. MUB is up 4.3% year-to-date. [Municipal Bond ETFs Turn in Solid Year]
“Cash is still flowing into open-end mutual funds, and the forward calendar of new issues coming to market does not yet satisfy the reinvestment demand lurking in the shadows,” Colby writes in a commentary on muni bonds. “Despite these nosebleed prices, it appears that investors continue to view munis as a relative value play, given their high level of creditworthiness.”
Meredith Whitney’s famous prediction on “60 Minutes” of massive defaults in the muni bond market hasn’t panned out.