Investors Pile Into Muni Bond ETFs

Even with the specter of higher interest rates looming, some investors are not shying away from municipal bond exchange traded funds.

To this point, 2015 has been a banner year for inflows to fixed income ETFs and data indicate muni ETFs are getting in on that action. Investors “have added about $1 billion to ETFs that purchase state and local bonds, the fastest annual start since the funds started in 2007,” reports Michelle Kaske for Bloomberg.

The $4.4 billion iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has garnered a significant chunk of that $1 billion, added almost $388 million in new assets this year. However, investors have not shied away from more speculative muni ETFs.

For example, the SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB) and the Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD) have added over $126 million combined this year. That after HYD and HYMB added $576 million and $156.7 million, respectively in new assets last year. [Investors Keep Flocking to Muni ETFs]

HYMB’s 30-day SEC yield is 4.09% while HYD’s is 4.4%. HYMB’s modified adjusted duration is almost nine years. The $1.5 billion HYD has a modified duration of 9.42 years, according to Market Vectors data.

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. [Muni ETFs Face Supply Risk]

Muni debt is close to their cheapest since December 2013 relative to Treasuries. Looking at the rates on state and local bonds relative to federal debt, the ratio of interest rates hit 106 percent Thursday, which suggest that municipal bonds have weakened relative to the federal debt. Historically, the muni-to-Treasuries ratio has been below 100% since interest on state and local debt is tax-exempt, which make the assets more attractive for high-income investors.