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The largest U.S.-listed municipal bond exchange traded fund has started trading at a discount to its net asset value for the first time in five months.

The iShares S&P National AMT-Free Muni Bonds Fund (NYSEARCA:MUB) first started trading at a discount to its NAV Thursday and continues to trade at a discount. The ETF has already fallen below its 50-day exponential moving average and is now testing its 200-day supporting level.

ETFs hold a basket of securities to mimic an underlying benchmark. When the ETF's price is lower than the NAV, the ETF is said to be at a "discount" - the ETF is valued less than the fund's overall holdings. If the ETF's price is above the NAV, the ETF is said to trade at a "premium" - the ETF is trading higher than what the underlying holdings are worth.

After peaking in February, the muni bond ETF has fallen to its lowest level since December.

The improving labor market prompted to the Federal Reserve to provide a more optimistic outlook for the economy, which depressed U.S. Treasuries, along with municipal bonds, according to a Bloomberg report.

In the week ended March 9, investors dumped $10.4 billion in fixed-rate munis, the most since November. As muni prices declined, yields shot up 0.17% for the week, the largest rise since October.

"A more bearish sentiment is growing," Matt Fabian, an analyst at Municipal Market Advisors, said in the article. "Munis had already weakened last week because of the incremental supply in the market that pushed prices lower. Now you have the weakness in Treasuries. It's reasonable prices would fall."

iShares S&P National AMT-Free Muni Bonds Fund

Click to enlarge

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: A Bearish Signal For Muni Bond ETFs?