The municipal bond market is experiencing a boom as more states seek to capitalize on low rates to issue new debt to cover rising costs. Municipal bond exchange traded funds continue to strengthen as income hunters look for more attractive yield-generating assets in a lower-for-longer rate environment.
Over the past three months, the iShares National Muni Bond ETF (NYSEArca: MUB) rose 1.8%, Vanguard Tax-Exempt Bond ETF (NYSEArca: VTEB) gained 2.2%, and SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca: TFI) was up 1.9%.
According to Refinitiv data, muni bonds for new projects hit $252 billion in 2020, after municipal bond issuance in 2020 was at its highest in a decade. The new borrowing put the total amount of outstanding municipal debt above $3.9 trillion for the first time since 2013, the Wall Street Journal reports.
Cash-strapped states have been increasing their debt load to cover shortfalls associated with Covid-19 and to pay back old debt. The coronavirus pandemic has exacerbated already tight state budgets.
While the market experienced a deluge in new issuance, investor demand has kept up pace. The near zero Federal Reserve benchmark rates have left investors looking everywhere for yields, and muni bonds have produced some steady returns in a low-rate environment. The Bloomberg Barclays Municipal Bond Index gained 4.7% since the start of 2020, or about the average yearly return over the past decade.
“There’s no yield anywhere so munis are still attractive on a relative basis,” Jon Barasch, director of municipal evaluations at financial analytics company ICE Data Services, told the WSJ.
For example, the iShares National Muni Bond ETF shows a 0.86% 30-day SEC yield, or a 1.53% taxable equivalent 30-day SEC yield for those in the highest income bracket. Meanwhile, yields on benchmark 10-year Treasury notes were hovering around 1.138% on Tuesday.
Looking ahead, the outcome of the recent Georgia Senate runoff elections raised hopes for state and local government creditworthiness, as Democratic Party control of both houses of Congress raises bets for additional fiscal aid to states and local governments.
For more information on the munis market, visit our municipal bonds category.