Muni Bonds, ETFs Experience Heavy Outflows | ETF Trends

Municipal bond exchange traded funds have experienced high redemptions this year, with the $3.7 trillion muni market set to shrink for a fourth straight year.

The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), the largest muni ETF with a little over $3 billion in assets under management, shrunk by $374.9 billion in the third quarter and saw $226.8 billion in outflows year-to-date. The SPDR Nuveen Barclays Capital Municipal Bond ETF (NYSEArca: TFI) also saw $101.7 billion in out flows over the third quarter and $219.9 billion in outflows year-to-date.

According to the Federal Reserve, the overall muni bond market shrank 3.9% in the third quarter year-over-year as states held back from making additional loans in an economy, reports William Selway for Bloomberg. [Scarcity Issues Surround Build America Bond ETFs]

The cutback in new muni bond issuance, though, helped support prices in the tax-exempt market. Bond prices, which have an inverse relationship to interest rates, have been declining as investors pushed up benchmark yields on 10-year Treasuries this year.

In the three months through September, households, which own almost half of all municipal securities, cut holdings at an annual pace by $111 billion, while mutual funds cut their allocations by $82 billion, according to Fed data.

The iShares MUB ETF comes with a 2.73% 30-day SEC yield, or a 4.82% tax equivalent 30-day SEC yield, and shows an effective duration of 7.3 years. The fund is down 3.5% year-to-date.