A traditionally sleepy corner of the fixed-income market has seen a relatively large move to the downside this week. Muni bond ETFs have tumbled on speculation wealthier investors may see the tax breaks reduced on income from municipal debt.
The largest ETF in the category, iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB), was down for the sixth straight day to close the week. The fund slipped 0.6% on Friday while Market Vectors High Yield Municipal Index (NYSEArca: HYD) dropped 2.5% in afternoon dealings. HYD is down nearly 4% for the week on heavy volume.
“A rare area of potential agreement between the White House and Republicans in the fiscal-cliff debate could come as a surprise to many investors: Both sides are willing to consider taxing at least a portion of municipal-bond interest paid to higher-income households,” The Wall Street Journal reported this week.
Municipal bonds are a $3.7 trillion market. [Can Muni Bond ETFs Extend Streak in 2013?]
Muni ETFs have been solid performers on expectations tax rates on capital gains and dividends for stocks will rise next year for some investors following President Obama’s re-election and as the fiscal cliff looms. Higher tax rates could make muni bonds more attractive because their income is tax exempt.
However, there has been talk recently of curbing or even eliminating the tax break. Investors apparently see a greater likelihood of this happening after this week’s WSJ story.
House Speaker John Boehner is willing to consider curbing the tax-exempt status of municipal-bond interest, subject to negotiations with the White House, the newspaper reported.