The shrinking municipal bonds market helped munis-related exchange traded funds outperform in the fixed-income space in 2014. However, the favorable supply and demand dynamics may be about to change and begin holding back the munis market.
Over the past year, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) rose 8.7%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) gained 9.7% and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) increased 10.0%.
The dwindling munis market and improving U.S. economy helped the muni bonds return 9.8% in 2014, compared to the 7.5% return from investment-grade corporate debt and 6% from Treasuries, reports Ken Kohn for Bloomberg. [Boring is good! Municipal Bonds Return 9.26% in 2014]
Specifically, a combination of last year’s maturing debt of $281.9 billion and $226.5 billion in early redemptions exceeded new debt supply of $361.6 billion. Consequently, in 2014, the munis bond market shrank 4% to $3.5 billion. [Muni ETFs Supported by Lowest New Issuance Since 2001]
However, supply is set to pick up in 2015 as municipal bond sales rise and the amount of redemptions and maturing debt dip. States and local governments are expected to sell $8.6 billion in bonds over the next 30 days, compared to $6.4 billion planned sales for the coming month a week ago. Meanwhile, municipalities have stated that there will be $12.1 billion in redemptions and an additional $8.5 billion of debt matures in the next 30 days, compared to $26.1 billion total that was expected a week prior.
High-yield muni debt also experienced a great year, rising 12.8%. The Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD) was up 14.7% over the past year while SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB) was 17.1% higher.
However, the space is looking increasingly risky as the spread on low-investment-grade BBB revenue bonds dropped to 0.85 percentage point, compared to 2.9 percentage points at the start of 2013, Bloomberg reports.
“In high yield, it’s likely we’ll see more muted returns than 2014, but still positive,” Peter Hayes, head of munis at BlackRock, the world’s largest money manager, said in the Bloomberg 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.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.