Municipal bonds haven't been trashed by massive defaults as some analysts predicted. Muni bonds and exchange traded funds are even thriving as an alternative to historic low-yielding Treasuries.
"Month-to-date and year-to-date performance of all muni high-yield bond sectors (with the exception of tobacco) has been positive," James Colby, Portfolio Manger and Senior Municipal Strategist, responsible for Market Vectors municipal bond investments, wrote in a blog. "The technicals of demand overpowering supply … are still in place."
Despite the economic pressures, Colby predicts that larger cities and states have done quite well during the slower recovery, "at least well enough to convince investors that potential value resides in issuers rated BBB as compared to those rated AAA."
Colby points to the yield spread between the Barclays Municipal Bond BBB Index to Barclays Municipal Bond AAA Index, which has narrowed from 2.33% at the end of April to 2.17% as of May 25.
According to Municipal Market Advisors, the highest quality 10-year muni bond is paying about 2%, whereas the benchmark 10-year Treasury is yielding about 1.5%. Historically, munis pay 15% to 20% less than Treasuries, reports CNNMoney.
"Municipalities are going in the right direction," Philip Condon, DWS Investments' chief fixed-income strategist, said in the CNNMoney article.
Ratings agencies have not raised any warning flags on muni bond issuers. According to Moody's, only 11 defaults out of 17,700 bond issues sampled occurred over the 2010-11 period, writes Dr. Jay H. Abrams, Chief Municipal Credit Analyst, at FMSBonds.
"We expect municipal debt defaults will remain infrequent and isolated events, rather than systemic events, despite unprecedented credit pressure," according to the Moody's report.
Some muni bond ETFs include:
- Market Vectors High Yield Municipal Index ETF (NYSEARCA:HYD)
- SPDR Barclays Capital Short Term Municipal Bond ETF (NYSEARCA:SHM)
- SPDR Barclays Capital Municipal Bond ETF (NYSEARCA:TFI)
- Powershares Insured National Municipal Bond Portfolio ETF (NYSEARCA:PZA)
- iShares S&P National AMT-Free Muni Bonds Fund (NYSEARCA:MUB)
- iShares S&P Short Term National AMT-Free Municipal Bond Fund ETF (NYSEARCA:SUB)
- Market Vectors Intermediate Municipal ETF (NYSEARCA:ITM)
Max Chen contributed to this article.
Disclosure: I am long HYD.
Additional disclosure: Tom Lydon's clients own HYD.