And finally, as is typical this time of year, dealers may be reigning in liquidity as they may not wish to hold significant amounts of inventory going into the year-end cycle. With more sellers than buyers, prices have fallen on municipal bonds.
It’s at times like this when the benefits of the ETF structure have a chance to shine. During these types of market corrections, the ETF structure provides transparency and allows for price discovery in an often opaque and illiquid asset class. Municipal bond prices may continue to be volatile until Washington provides clarity on the tax treatment, but in the meantime, the price of municipal bond ETFs such as MUB can provide timely insights into investor sentiment during this period of uncertainty.
Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy.
Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies. A portion of a municipal bond fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.