Muni Bonds Come Under Scrutiny: These ETFs May be Affected

by: Tom Lydon

Municipal bonds have been long used as a tax shelter for high-net worth investors, but the backers of these bonds have fallen on hard times. States and cities that issue municipal bonds are in fiscal distress, and investors are taking a closer look at these securities and related ETFs.

Some states have taken extreme steps or out-of-the-ordinary tactics to balance budgets as revenues decline and bills rise, and bond holders seem to think favorably about the actions taken, with March nearly setting a record for new muni bond sales, reports Paul Sullivan for The New York Times.

One of the main credit rating agencies has also recently re-evaluated how it rates municipalities, which readjusts the criteria in rating municipal and corporate bonds. The new ratings have pushed up California’s ratings three notches, but it still doesn’t change the fact that California’s budgets are in dire straits.

More points about muni bonds that may interest you include:

  • Historically, the default rate of muni bonds is minuscule. If an investor were to sell bonds before a maturity date, one may get less than what you paid for, especially given the fiscal problems in some states. Still, some states may issue a forced rollover into a new bond to pay off the old in where the bond holder is issued another bond once the original matures.
  • It should be noted that munis issued by the state where an investor pays taxes receives a greater tax break than those bonds held of another state. Additionally, federal taxes set to rise next year may make muni bonds even more attractive as a tax shelter for investors.
  • Muni bond observers believe that all the bad news have already been priced into muni bonds. However, the second argument is that it is still a risky time to buy, since rise in prices may not necessarily reflect the actual health of the municipality. Use a trend following strategy to protect yourself.
  • Grail McDonnell Intermediate Municipal Bond ETF (NYSEARCA:GMMB)
  • PIMCO Short Term Municipal Bond Strategy Fund (NYSEARCA:SMMU)
  • PIMCO Intermediate Municipal Bond Strategy Fund (NYSEARCA:MUNI)
  • PIMCO CA Municipal Income Fund (NYSE:PCQ)
  • PowerShares Insured National Muni Bond (NYSEARCA:PZA)
  • iShares S&P National Municipal Bond (NYSEARCA:MUB)
  • SPDR Barclays Capital Municipal Bond (NYSEARCA:TFI)
  • Market Vectors Long Municipal (NYSEARCA:MLN)

Max Chen contributed to this article.

Disclosure: None