Municipal bonds and related muni bond ETFs are bouncing back from the losses earlier in the year as U.S. states and cities cut back on new issues.
Year-to-date, iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) dipped 0.4%, SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca: TFI) fell 0.8% and VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSEArca: ITM) dropped 0.9%, erasing most of the losses from February through April.
Prices on munis have more or less recovered from their worst first-quarter slump in 15 years as municipalities continue to reduce borrowing, reports Heather Gillers for the Wall Street Journal.
Municipalities borrowed $156 billion over the first half of the year, or down 17% from last year. Citigroup researchers project borrowings could fall as much as 25% by the end of 2018 year-over-year.
Meanwhile, the sudden dearth in supply has helped prop up valuations of existing debt and diminished borrowing costs for some governments, notably riskier bond deals.
“It’s a seller’s market,” Howard Cure, director of municipal-bond research at Evercore Wealth Management, told the WSJ. “We’re trying to be careful about that aspect of it and not go down that path of sacrificing for a little extra yield and having a big decline in credit quality.”
Related: Municipals Offer Safe Yields
Bloomberg Barclays Municipal Bond Total Return Index
The benchmark Bloomberg Barclays Municipal Bond Total Return Index gained 0.87% in the second quarter after declining 1.11% in the first quarter, the biggest decline of any first quarter in the past 15 years.
Vikram Rai, head of municipal strategy at Citigroup, argued that the pullback in muni supply was a result of Congress’s decision last year to end tax exemptions for early refinancing on outstanding muni debt. Borrowers rushed to sell munis amid talk of other legislative proposals, like a ban on tax-exempt issuance by hospitals and universities, which weren’t ultimately implemented.
“The rush to market toward the end of 2017 emptied out a lot of the forward pipeline,” Rai said.
Furthermore, the splash from the 2008 financial crisis is still making waves. Muni bonds typically are eligible to refinance a decade after they are issued, and issuance of new debt plunged 24% in 2008, which has lead to a smaller-than-typical group of bonds eligible for refinancing this year.
For more information on the munis market, visit our municipal bonds category.