ETF Trends
ETF Trends

After its first monthly decline of the year, the municipal bonds market and related exchange traded funds are now trading at their cheapest relative to Treasuries in nine months.

The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) fell 0.9% over the past month. Nevertheless, MUB is up 8.1% year-to-date. MUB has a 6.43 year effective duration and a 1.62% 30-day SEC yield, or a 2.86% tax equivalent yield. [Why an ETF May Make Sense for Munis Exposure]

Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) fell 0.8% over the past month and is still up 7.8% year-to-date. IEF has a 7.6 year effective duration and a 2.03% 30-day SEC yield.

As a result of the brief pullback in the munis market, benchmark 10-year municipal bond yields are now at around 2.28% while 10-year Treasury bond yields are at 2.34%.

The ratio of the two interest rates is used as a measure of relative value between the two asset classes, and at 98%, the ratio is now close to its highest since February, revealing that munis have weakened relative to Treasuries, reports Brian Chappatta for Bloomberg.

Fixed-income investors have accepted the lower yields on munis relative to Treasuries due to the tax perks of investing in municipal debt.

As a result of the outperformance in the munis market this year, the ratio between the two interest rates averaged 92.6% in 2014, compared to 98% five-year average.

However, the munis market is moving toward its first monthly loss as states and cities start issuing their most new bond sales to end a year since 2011. According to Bank of America Merrill Lynch data, the munis market is down 0.28% so far this month. Bond prices and their yields have an inverse relationship, so a rising yield corresponds with falling price.

“You’re starting to feel the pressure a little bit as far as the supply building,” John Dillon, managing director at Morgan Stanley Wealth Management, said in the article.

The municipal bond market has been supported by an uneven supply and demand dynamic as states remained wary about increasing their balance sheets. States and cities borrowed $261 billion for the year ended Nov. 14, compared to $267 billion for the same period last year.

However, with yields down to generational lows last month, more issuers may begin to borrow. For instance, municipalities are expected to issue $10.1 billion in debt over the next 30 days, the most for the period since 2011. [Rising Supply Could Pressure Muni Bond ETF Gains]

iShares National AMT-Free Muni Bond ETF

For more information on the munis market, visit our municipal bonds category.