Seasonal trends have an array applications across multiple asset classes, including municipal bonds. Municipal bonds typically weaken during the fourth quarter, but that does not mean fixed income investors should ignore these bonds and the related ETFs.
Popular municipal bonds ETFs include the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) and the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca: TFI).
“The fall months are typically weak for muni bonds and although this year has generally bucked seasonal trends, it looks that way again this year,” reports CNBC. “True to form, muni bonds have been sliding. The Bloomberg Barclays Municipal Bond Index is down 1.43 percent since the end of August and now has a return of -1.11 percent for the year. That won’t help send your kids to college, but relatively speaking, it’s a pleasant surprise in an otherwise rough year for bond investors.”
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Muni Factors To Consider
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
The Federal Reserve has boosted interest rates three times, weighing on an array of longer-dated bonds. Municipal bonds have not been immune to those declines as MUB and TFI are down an average of 2% year-to-date.
“In the rising interest rate environment, the muni index decline compares very well with U.S. Treasury bonds -2.12 percent and U.S. investment grade corporate bonds -3.1 percent, through Oct. 16,” according to CNBC.
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Another rate hike later this year could further hinder municipal bonds’ performance.
“The current weakness, however, could extend for a while if interest rates resume their rise and market supply and demand factors become more negative,” notes CNBC.
While tax cuts are making other asset classes more attractive than munis, the municipal bond market still boasts some solid fundamentals.
“The fundamentals underlying muni credit profiles are also improving thanks to the strong economy. Personal income tax revenues and property taxes are up 5 percent and 6.5 percent in the last year, according to Hession. Muni defaults have totaled less than $2 billion so far this year, with virtually all of that related to FirstEnergy Solutions, a power generating business of the Ohio-based utility that declared bankruptcy earlier this year,” according to CNBC.
For more information on the munis market, visit our municipal bonds category.