With the Federal Reserve delaying its interest rate hike, municipal bond exchange traded funds maintained their momentum, with benchmark yields dipping to new lows.
The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) was slightly higher Wednesday, ending in the black for the 12th session in a row. MUB is up 3.2% year-to-date.
Broad investment-grade municipal bond ETFs, including MUB, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM), were all trading at new 52-week highs. Year-to-date, TFI gained 4.0% and ITM rose 3.6%.
Additionally, high-yield muni ETFs, including VanEck Vectors High Yield Municipal Index ETF (NYSEArca: HYD) and SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB), also hit 52-week highs. HYD increased 5.5% and HYMB advanced 5.7% so far this year.
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The muni market rallied, with the yield on an index of 10-year AAA-rated municipal bonds fell to 1.48%, the lowest since Bloomberg data began in January 2009, reports Brian Chappatta for Bloomberg.
The tax-exempt muni market has strengthened for 11 consecutive months as investors continued to pile into the fixed-income market without the Federal Reserve signalling higher interest rates anytime soon. The Fed left rates unchanged Wednesday and signaled it still planned on two rate hikes this year, despite slowing economic growth.
“We are quite uncertain about where rates are heading in the longer term,” Fed Chair Janet Yellen told a news conference after the rate decision.
Municipal bonds continue to experienced robust demand from U.S. investors as reliable source of yield, especially among taxable accounts due to the debt securities’ favorable tax-exempt status.
[related_stories]Additionally, Citi Research head of municipal bond strategy Vikram Rai pointed out that we are also seeing increased demand among foreign investors as yields on international government debt have gotten so low that overseas investors see a yield advantage in U.S. munis, even if they don’t benefit from the tax advantages, reports Amey Stone for Barron’s.
“Our recent conversations with overseas clients indicate that foreign demand for municipals is on the rise, and this view is also supported by the recent Fed flow of funds data, which show that as of Q1 2016, foreign investors have added $6.7 billion to their municipal holdings over the last year and $2.0 billion over the last quarter. At present, foreign investors account for 2.4% of all municipal holdings,” Rai said.
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With rising domestic and foreign demand for U.S. munis, Rai sees strengthening fundamentals will continue to support the municipal bond market ahead.
“As a result, we believe that technicals will be supportive for municipals, not just in June but through the rest of the summer as well,” Rai added.
For more information on the munis market, visit our municipal bonds category.
iShares National AMT-Free Muni Bond ETF