An index of investment grade muni bonds that forms the basis of the largest ETF in the category is down 5% so far in June and is on track for its worst month in nearly five years as Treasury yields jump.
The S&P National AMT-Free Municipal Bond Index is off by 4.97% in June so far, the worst month since September 2008 when the index was down 5.13%, according to a note Tuesday from J.R. Rieger, vice president of fixed income indices at S&P Dow Jones Indices.
Yields on bonds in the index have risen by nearly a full percentage point since the end of May.
The benchmark is the tracking index for the $3.4 billion iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which was launched in 2007. The fund was higher Tuesday but is still down nearly 7% for the trailing month after a sharp sell-off. Interest rates have jumped the past month on speculation the Federal Reserve may ease back on its purchases of Treasury bonds and mortgages.
Trading volume in the muni bond ETF has jumped in recent weeks. Also, the selling pressure in the illiquid muni bond market has caused ETFs tracking the fixed-income sector to trade at discounts to net asset value. [Muni Bond ETF Discounts May Signal Buying Opportunity]
Speculative-grade muni bond ETFs have been hit even harder.
High-yield municipal bonds tracked in the S&P Municipal Bond High Yield Index have seen a negative return of 7.08% for June so far, the worst month since December 2008 when the index lost 9.12%, according to S&P Dow Jones Indices.
Market Vectors High-Yield Muni ETF (NYSEArca: HYD) is down nearly 12% the past month. The fund was trading at a discount of nearly 3% to intraday indicative value on Tuesday afternoon, according to Morningstar data.
Market Vectors High-Yield Muni ETF
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