Investors, concerned over a cutback in Fed quantitative easing and higher rates, have been shifting away from municipal bond exchange traded funds, but the move may have been premature.
The triple-A rated 10-year muni benchmark was hovering around 2.27% last Thursday, or up 46 basis points month-over-month, reports Ben Eisen for MarketWatch.
Municipal bond investors have redeemed $1.47 billion from bond funds in the week ended June 12, with retail investors driving most of the trades.
According to alternative-trading platform TMC Bonds LLC, the daily average muni bond trades is up 28.2% year-to-date, but trade sizes were down 21.2%. Last month, as talks about a Fed "tapering" gained momentum, average trades increased 35.2% while trade sizes were 23.1% smaller. So far in June, average trades are up 40.8%.
However, the recent plunge in munis may have been an overreaction.
"The recent rise in yields coupled with any additional increase that may come from typical June challenges may result in an opportunity for municipal bond investors…," Anthony Valeri, market strategist at LPL Financial, said in the article. "We believe high-quality intermediate to longer-term maturity bonds suffered the brunt of recent weakness, were inordinately punished, and, in our view, may stand to benefit most from seasonal strength. Both segments possess more attractive valuations relative to short-term bonds and would benefit more from any subsequent decline in yields."
Additionally, James Colby, portfolio manager and senior municipal strategist at Market Vectors, also reminds investors that muni bonds offer attractive taxable equivalent yields. For instance, Colby calculates that an investor in the 39.6% income bracket may earn a taxable equivalent yield on munis of as high as 3.63%.
The iShares National AMT-Free Muni Bond ETF (NYSEARCA:MUB) has declined 3.3% over the past month. The ETF is now trading near its 52-week low. MUB has a 1.92% 30-day SEC yield.
Some other muni bond ETFs include:
- SPDR Nuveen Barclays Capital Municipal Bond ETF (NYSEARCA:TFI): 2.0% 30-day SEC yield.
- PowerShares Insured National Municipal Bond Portfolio (NYSEARCA:PZA): 3.2% 30-day SEC yield.
Investors can also consider short-term muni ETFs, including:
- SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (NYSEARCA:SHM): 0.45% 30-day SEC yield.
- iShares S&P Short Trm National Muni Bond (NYSEARCA:SUB): 0.27% 30-day SEC yield.
- Market Vectors Short Municipal Index ETF (NYSEARCA:SMB): 0.93% 30-day SEC yield.
Max Chen contributed to this article.