In an extended low-yield environment, municipal bonds and related exchange traded funds have continued to perform, attracting billions in new inflows this year.
According to Lipper data, muni bond funds had over $632 billion in assets as of June 1, a record high, after investors funneled a net $22.5 billion into muni-related funds in 2016, the best start to a year since 2009, the Wall Street Journal reports. In contrast, investors yanked $40 billion from equity funds this year.
Among ETF options, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), the largest muni-related ETF, attracted $904.9 million in net inflows for 2016, according to ETF.com, after rising 2.5% year-to-date.
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The increased flows into the munis market is attributed to ongoing concerns about the slow pace of global growth and prospects of an extended low interest-rate environment, especially after the recent disappointing jobs report.
Moreover, low and even negative yields on global government bonds have made U.S. assets, including munis, increasingly more appealing relative to other fixed-income assets. For example, foreign investors have increased the amount of municipal debt they hold by 44% to $85 billion from 2009 through 2015, according to the Federal Reserve.
Meanwhile, in a year of heightened volatility, munis have provided a haven for investors during the sharp swings. Moreover, munis have steadily strengthened on rising demand and diminished supply, driving yields to near-record lows – yields on the Barclays Municipal Bond Index was at a record low of 1.75% in mid-May.
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Yields “aren’t all that attractive anymore, yet we continue to see inflows into the funds,” James Kochan, chief fixed-income strategist at Wells Fargo Funds Management, told the Wall Street Journal. “It doesn’t take much to produce negative returns from these levels.”
[related_stories]Despite the threat of a Federal Reserve rate hike, market observers do not predict a major pullback in munis, pointing to tax breaks that help munis offset the low yields on debt offered. For instance, MUB shows a 1.32% 30-day SEC yield and a 2.32% taxable equivalent 30-day SEC yield.
Additionally, John Miller, co-head of fixed income at Nuveen Asset Management, argued that the imbalance between demand and supply of munis is likely to keep prices elevated in the short term, even if the Fed raised rates.
“There’s a bit less fear around the implications of that,” Miller told the WSJ. “Even though munis are at low yields relative to history, they’re at high yields relative to the rest of the world.”
iShares National AMT-Free Muni Bond ETF