Muni bonds have been hit hard in the last few days, making these staid investments rather treacherous at least for the short term.
Normal year-end housecleaning by bond dealers, a large new-issue calendar, talk in Washington about limiting municipals' tax exemption, a downgrade of Puerto Rico, a bump-up in rates and finally, some profit-taking by investors, have contributed to a sell-off over the past week or so.
“There are a lot of bonds moving around [but] it's very weak on the bid side” since dealers don't want to take on inventory, said Matt Fabian, managing director at Municipal Market Advisors Inc.
“It's the end of year, and a lot of dealers are … apprehensive about buying too many bonds and taking them into the New Year. That's normal,” added Kenneth Naehu, head of fixed Income at Bel Air Investment Advisors LLC.
“At the same time you've had a pullback in rates — 20 basis points on the [10-year] Treasury,” Mr. Naehu said, which has hit munis even harder.
In addition, more than $10 billion of new issues came to market last week.
That's a large amount, Mr. Fabian said, especially when big buyers aren't participating.
Continued talk in Washington about limiting the tax exemption enjoyed by municipal debt combined with a downgrade of Puerto Rico last Thursday contributed to the skittish market.
The largest muni bond ETF, the iShares National AMT-Free Muni Bond ETF (MUB), fell 1.17% last Friday, another 0.81% Monday, and was down about a half point again Tuesday.
The fund tracks the investment grade segment of the U.S. municipal market.
“We're starting to see some bargain hunters today,” Mr. Naehu said.
Municipals had been overbought, he added, and with “a bit of bubble in the marketplace, you're going to have some of these pullbacks.”