ETFs tracking the relatively illiquid municipal bond sector traded at significant discounts to net asset value on Friday, pushing prices down even more as interest rates rise.
The iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) was in the red again Friday and is hovering around its lowest point since May 2011. [Rising Rates, Sequestration Hit Build America Bond ETFs]
Also, MUB closed Friday’s session at a 3.4% discount to intraday indicative value, according to Morningstar. Market Vectors High-Yield Muni ETF (NYSEArca: HYD) ended the session at a 6.5% discount.
Tax-exempt muni bonds have not been spared from the damage in fixed-income markets as Treasury yields rise on speculation the Federal Reserve will reduce its bond purchases if the economy continues to improve.
“The muni market is in a free-fall today,” said David Manges, muni trading manager at BNY Mellon Capital Markets, in a Bloomberg report Thursday. “It’s tough to get a sense of value or benchmark spreads because prices are so fluid.”
MUB lost 1.7% on Friday and was down for the fifth straight day. The ETF lost nearly 5% for the week as trading volume spiked.
Next page: Detroit underscores fiscal woes; Muni ETF discounts
There are other factors weighing on muni bond ETFs.
Kevyn Orr, Detroit’s emergency manager, recently announced the troubled city would miss a $40 million unsecured-bond payment, The Economist reports.
“Detroit would be the largest-ever American city to go bust, but hardly the first,” The Economist said. “America’s $3.7 trillion muni-bond market has long had its doomsayers. Is this their moment? The situation remains grim.”
Muni bond sales were postponed this week due to market conditions. “Most likely issuers will wait for the market to stabilize in the next few days or weeks before coming back,” Reuters reported.
The ETF discounts highlight the selling pressure in muni bonds.
On Thursday, State Street stopped accepting cash redemption orders for municipal bond ETFs from dealers, the Financial Times reports.
The bond market is “notoriously illiquid with many bonds trading infrequently or rarely which makes intra-day valuations difficult, particularly in times of increased market volatility,” reports Chris Flood for the FT. State Street “had decided on Thursday to remove that cash trading facility to protect existing investors in its muni bond ETF range but in-kind creations and redemptions were unaffected.”
Typically, only about 2% of the muni market is traded on any given day, making ETF discounts common during times of high volatility.
iShares S&P National AMT-Free Municipal Bond Fund
For more information on munis, visit our municipal bonds category.
Max Chen contributed to this article.