Muni Bond Troubles Worsen

Municipal bonds began to have trouble a couple of weeks ago because of problems in the auction rate securities market. But in recent days, muni bonds have fallen off a cliff.

The S&P National Municipal Bond Index consisted of 3,069 US muni bonds as of last September, and it attempts to measure the performance of the muni bond market. Last year, iShares created an ETF that tracks this index (MUB), and as shown below, the price has dropped dramatically in recent days. Looking around the media space, there hasn't been much talk of these declines yet, but rest assured that quite a few investors are taking hits on their portfolios due to these declines.

Today's current decline of 1.53% (as of 1:30 PM ET - MUB subsequently closed down 1.71%) would be the biggest one-day decline in the ETF's history.

click to enlarge

Comments

[Rocky]

The results for Feb. 29 were much worse according to articles in the Weekend WSJ and the latest Barron's. However, these "yield rallies" did not appear to be fully reflected in Friday's closing mutual fund prices. The Vanguard LT California Tax Free Bond Fund was off by only 0.73%. Will Friday's muni bond prices turn out to be a one day wonder, or are long term muni mutual funds being grossly misspriced? We'll find out in the coming week.