Municipal debt and bond-related exchange traded funds have been outperforming Treasuries and could maintain their momentum ahead as more investors turn to the relatively stable and strong asset.
“The audience for the asset class continues to expand with increasing interest from non-traditional domestic and foreign buyers,” according to the BlackRock Municipals Group. “As demand is largely driven by past performance and rate volatility, we expect inflows to continue given the strong returns and relatively less volatile nature of the asset class.”
Year-to-date, the intermediate-term iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) rose 2.6%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) gained 3.1% and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) increased 3.3%. Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which tracks intermediate-term Treasuries, was up 2.2%.
BlackRock attributes the outperformance in munis to favorable supply and demand dynamics. Specifically, new issuance was unseasonably low at $23.2 billion, or down 21% year-over-year and 30% below the 10-year average.
Furthermore, the divergence in global central bank policy, lower inflation expectations and rather soft Federal Reserve rhetoric have calmed fears of a sudden spike in interest rates.