The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has fallen to test a key trend line that has provided strong support for nearly two years.

The muni bond ETF is in the red for 2013 on worries the asset class may lose its tax advantage.

Also, this week, Illinois reached a settlement with the Securities and Exchange Commission over charges it committed securities fraud when it issued $2.2 billion worth of municipal bonds from 2005 to early 2009, ABC News reports.

MUB, the muni fund, is currently testing its 200-day simple moving average, a level it hasn’t traded below since April 2011. Rising interest rates would be another headwind for muni bond funds.

“Individual investors fled U.S. municipal bonds in 2012, pulling a record $238.1 billion out of the market in the final quarter of the year,” Reuters reports.

Muni bond ETFs fell sharply in December 2012 on fears Congress would curb or eliminate the tax-free status of muni bonds in the fiscal cliff deal, but it didn’t happen. [Muni Bond ETFs Keep Tax-Sheltered Status — For Now]

“In general municipal-bond funds are most suitable for use in taxable accounts by investors in high tax brackets. The reason is that interest income from municipal bonds is tax-exempt at the federal level,” says Morningstar analyst Timothy Strauts in a profile of MUB.

However, Morgan Stanley analysts predict there is a 30% chance muni bonds could lose their tax exemption, Barron’s reports.

“The ‘fiscal cliff’ compromise answered the question as to whether interest on municipal bonds would be taxed in 2013. Municipal bonds avoided all the various proposals that had been put forth to eliminate or reduce the level of their tax exemption. In fact, the increase in the top marginal income tax rate to 39.6% from 35.0% may make municipal bonds even more attractive to some high income investors,” says Morningstar’s Strauts.

“After a sell-off in December the municipal-bond market has rallied as investors have shaken off concerns about potential changes to muni bonds’ tax treatment in the near term,” he added. “But the long-term tax status of municipal bonds is far from resolved in Congress.”

MUB holds assets of $3.6 billion and charges an expense ratio of 0.25%. The ETF pays a distribution yield of 3.08%, according to manager BlackRock.

iShares National AMT-Free Muni Bond ETF

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