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Municipal Bond ETFs Could Continue To Strengthen

|Includes: iShares National Muni Bond ETF (MUB)

Municipal bond exchange traded funds could continue to strengthen in the month ahead as supply falls off with muni debt sales set to decline and the amount of redemptions and maturing debt on the rise.

Year-to-date, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB)gained 0.6%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) rose 0.8%,Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) increased 1.0% and Vanguard Tax-Exempt Bond Index Fund (NYSEARCA: VTEB) returned 0.7%. [An Alternative Muni Bond ETF Strategy]

Despite municipal bond yields returning to financial crisis lows, investors have kept piling into muni debt, and this fixed-income market may continue to strengthen on improved fundamentals.

States and localities plan to issue $5.9 billion of muni bonds over the next month, whereas a week ago, the calendar showed $10.8 billion planned for the coming month, reports Ken Kohn for Bloomberg.

Moreover, municipalities have announced $7.6 billion in redemptions and an additional $8.4 billion of debt maturities over the next month, compared to $15.3 billion total scheduled in the prior week.

Consequently, the municipal bond market could find continued support from the dip in supply.

Investors continue to favor the muni market, despite the low yields. The yield spread of 30-year debt over 2-year securities fell to as little as 1.96 percentage points, the lowest since February 2008, Bloomberg reports.

The falling yields on later dated munis reveal investors' waning outlook on rising yields from half a century lows.

"We've come a long way in a few months, but going forward, munis can hold onto this flatness or flatten even further," John Dillon, managing director at Morgan Stanley Wealth Management, told Bloomberg. "Individuals have this greater comfort that long-term rates aren't going to get away from them, and they're getting the idea that reinvesting in two-year paper isn't producing any kind of return."

For more long-term municipal debt exposure, ETF investors can look at the Market Vectors AMT-Free Long Municipal Index ETF (NYSEArca: MLN), which has a 11.7 year duration and a 2.75% 30-day SEC yield, or a 4.55% taxable equivalent 30-day SEC yield.

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