Are Muni Bonds a Crisis in the Making? Nine ETFs Offering Exposure

by: Tom Lydon

Rising yields on certain U.S. municipal infrastructure bonds reveal growing concerns among investors that some local governments are facing a greater risk of default, which might give municipal bond ETF investors some pause.

A relative increase in some bonds reflects skepticism among some analysts that some regions will be able to pay back their debts, reports What’s more worrisome for investors with capital in related funds is that the rising yields on Build America Bonds come even though most analysts believe the federal government would be very likely to intervene should a state or municipality be forced into bankruptcy.

William Selway for BusinessWeek reports that the current U.S. financial overhaul will alter the municipal bond business by curbing Wall Street’s sway over its regulator, increasing oversight of advisors and protecting governments that enter derivative deals.

State and local governments were hit with billions of dollars in unexpected expenses when interest-rate swaps designed to protect against rising borrowing costs backfired amid the financial crisis. This is what has ignited the intervention by Congress.

Provisions include:

  • The 2,300-page bill lawmakers agreed on last week would strip banks and securities firms of their majority control of the Municipal Securities Rulemaking Board.
  • Require local-government financial advisers to register with regulators and impose rules on banks that sell derivatives such as interest-rate swaps to local governments.

On the risk scale, municipal bonds fall just under Treasury bonds and defaults can happen, but they are very rare. It’s wise to be mindful of this risk, though. You can find a complete list of municipal bonds on our ETF Analyzer by typing “municipal” in the search box. The Analyzer reveals that the top-performing funds in the last month are:

  • iShares 2017 S&P AMT-Free Municipal Series (MUAF): up 1.2% in the last month; yield 2.6%
  • PIMCO Intermedia Municipal Bond Strategy Fund (NYSEARCA:MUNI): up 1.2% in the last month; yield 2.6%
  • iShares 2016 S&P AMT-Free Municipal Series (MUAE): up 1.1% in the last month; yield 2.2%
  • SPDR Barclays Capital New York Municipal Bond (NYSEARCA:INY): up 1% in the last month; yield 3.8%

Sorting the Analyzer by yield, the top funds are:

  • Market Vectors High Yield Municipal (NYSEARCA:HYD): yield 5.2%
  • PowerShares Insured National Municipal Bond (NYSEARCA:PZA): yield 4.6%
  • PowerShares Insured California Municipal Bond (NYSEARCA:PWZ): yield 4.5%
  • PowerShares Insured New York Municipal Bond (NYSEARCA:PZT): yield 4.5%
  • Market Vectors-Lehman Brothers AMT-Free Long Municipal (NYSEARCA:MLN): yield 4.3%

Tisha Guerrero contributed to this article.

Disclosure: None