Tax incentives and a shrinking supply of new debt issuance help municipal bond exchange traded funds march higher, with muni yields falling to a 16-month low.

The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has increased 8.5% year-to-dated.

The muni market is seeing a drop in supply of new bonds as cities adhere to fiscal austerity in the wake of the financial crisis and turn to private entities, or P3s, to gain direct credit lines with banks, reports Vivianne Rodrigues for Financial Times.

“States and municipalities are generally doing a better job controlling their spending, and are not willing to embark on large projects while the economic outlook is still a bit uncertain,” Rob Taylor, head of municipal finance at Barclays, said in the article. “That, combined with the fact that there’s been other sources of funding, such as direct bank lending, points to a drop in new issuance in 2014.”

Consequently, muni debt sales have declined to $202.3 billion through the end of September, compared to $215.1 billion for the same period last year.

Meanwhile, demand for muni assets are on the rise, with investors adding $762 million to muni funds in the week through Oct. 8, the largest inflow since May 7, Bloomberg reports.

The tax-exempt debt securities are attracting more attention due to concerns over global growth and volatility in the equities space.