Fixed-income investors should moderate their municipal bond exchange traded fund outlook after an unprecedented nine consecutive months of gains pushed benchmark yields below two percent and states begin to increase financing on the cheap.
Year-to-date, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) and SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) have increased 8.8% and 8.9%, respectively. [Time to Temper Your Municipal Bond ETF Expectations]
So far this month, muni debt has gained 1.2%, rising at its fastest fastest pace for October since a 1.4% return in 2001, reports Brian Chappatta for Bloomberg. Meanwhile, benchmark 10-year muni yields touched 1.94% on Oct. 16, its lowest level since May 2013.
MUB, which has a 6.37 year effective duration, shows a 1.6% 30-day SEC yield, or a 2.82% taxable equivalent SEC yield for those in the highest income bracket. TFI, which has a 7.28 year duration, shows a 1.85% 30-day SEC yield, or a 3.27% taxable equivalent yield.
With the muni debt market looking a little frothy, some are beginning to trim back their exposure.
“We’ve taken a little bit off the table in the last few days,” Peter Hayes, head of munis at New York-based BlackRock, said in the article. “Nobody really expects rates to rally significantly from here. In fact, I think everybody is waiting for a little bit of a pullback. That’s what we’ll wait for.”
The munis market has been steadily gaining as a dearth in supply and rising demand helped support prices. States and cities have issued $219 billion in fixed-rate, long-term debt this year, or 8% below last year’s level.
However, with rates depressed, more states and cities are increasing spending to finance new projects. Consequently, the increased supply could pressure the muni bond market ahead.
For instance, New York issued 30-year sales-tax bonds at a 2.87% yield, its lowest borrowing cost in at least half a century. additionally, the state added $150 million of debt to the deal through reduced rates.
Municipalities across the U.S. have planned about $10.5 billion of sales for the next 30 days, the most in four weeks. [This Muni ETF Keeps Climbing]
“Munis are fully valued, overbought and potentially exposed to a backup, particularly if we get heavy supply over the remainder of the year,” Chris Alwine, head of munis at Vanguard, said in the article.
iShares National AMT-Free Muni Bond ETF
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.