The recent selling in the fixed-income space may provide opportunities for investors to jump back into tax-exempt muncipal bond exchange traded funds.
“The recent correction in rates and muni-to-Treasury ratios has re-introduced value in the market, and we expect both retail and crossover buyers will take notice,” according to BlackRock. “We remain optimistic that the recent turbulence in the market will soon be an opportunity and the asset class will revert back to positive performance.”
Over the past month, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) was down 0.7%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) was 0.9% lower and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) dipped 1.3%.
The fixed-income market was upended in May as investors tried to make sense of the mixed economic data and the Federal Reserve’s changing stance on interest rate normalization. [Muni Nation: 2Q’15 – No June Swoon But Finish Strong?]
“The upside to a third down month is that the correction has created levels (higher yields and ratios) not seen in many months,” BlackRock said. “We expect this will attract both retail and non-traditional buyers back to the tax-exempt asset class.”
On the fundamentals side, muni bond issuance increased to $31.9 billion, up 14.5% year-over-year, with states trying to take advantage of the historically low rates while they still can. Demand, on the other hand, somewhat declined after healthy inflows into the fixed-income market over the first four months of the year.
Nevertheless, the recent spate of selling pressure and rising yields may provide an opportunity for investors. The muni-to-Treasury ratio has increased and is closer to their one-year maximum than their one-year average.
“The attractive taxable/tax-exempt ratio should continue to capture investor interest and, as such, underpin the market,” BlackRock added.
For instance, MUB has a 1.79% 30-day SEC yield but shows a 3.16% tax equivalent 30-day SEC yield for those in the highest income bracket. ITM has a 2.37% 30-day SEC yield and a 3.92% tax equivalent 30-day SEC yield. TFI has a 2.21% 30-day SEC yield and a 3.9% tax equivalent 30-day SEC yield.
Additionally, we are entering a historically favorable summer period for the munis market, with a net-negative supply potentially re-emerging to help support gains ahead.
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.