ETF Trends
ETF Trends

Municipal bond exchange traded funds are finally pulling back as a stronger U.S. economy pushed up interest rates and municipalities begin issuing more debt.

Over the past month, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) fell 1.6%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) declined 1.6% and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) decreased 1.4%.

According to Barclays PLC, municipal bonds posted their first monthly dip in returns since December 2013, ending a record-tying 13 straight months of gains, reports Aaron Kuriloff for the Wall Street Journal.

“I think volatility is probably going to be the theme for this year,” Peter Hayes, head of municipal bonds at BlackRock Inc., said in the article.

Weighing on the munis market, local municipalities have issued $68.5 billion in bonds this year through Friday, a record for the period and 88% increase year-over-year. Citigroup predicts issuance could reach $380 billion for 2015, compared to $314.9 billion for 2014. Cities, states and other government entities are taking advantage of the low yield environment to refinance outstanding debt. Consequently, the spurt in supply is driving municipal bond prices lower.

Meanwhile, long-term interest rates are inching higher, following improved U.S. economic data and speculation that the Federal Reserve could begin hiking interest rates as soon as June. The benchmark 10-year Treasury yield jumped to as high as 2.25% Friday from the 1.67% low at the start of February.

Consequently, the sudden influx of new muni bonds, coupled with interest rate concerns, have ruffled investors as many are worried that the munis market could mirror the 2013 sell-off when the Fed began discussing plans to end its bond purchasing program.

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