Largest muni ETF's premium grows as fund exodus abates

The shift to a premium for muni ETFs points to a potential return to earnings

Jan 14, 2014 @ 9:48 am

+ Zoom
(Bloomberg News)

The biggest exchange-traded fund tracking the $3.7 trillion municipal bond market is selling at the highest premium to the value of its assets since May, an early sign that local debt may avoid a second year of losses.

After the worst year since 2008 for city and state debt, the shift to a premium for muni ETFs points to a potential return to earnings, said Mikhail Foux, a credit analyst at Citigroup Inc. Local securities may earn 4% to 6% in 2014, he said.

The $3.1 billion iShares National AMT-Free Muni Bond ETF sold at 0.28% more than the worth of its holdings as of Jan. 10, the highest since May, data compiled by Bloomberg show. The fund is mirroring the broader tax-exempt market as investors are pushing yields down from a three-month high set in December, said Bart Mosley, co-president of Trident Municipal Research.

“Historically, it's a precursor of abating outflows and stronger performance of munis,” Foux said of the swing to a premium. “We continue to be somewhat bullish on munis.”

Citigroup's forecast underscores Wall Street banks' varying 2014 outlooks for the market, which states and municipalities nationwide use to pay for schools, bridges and roads.

2014 PROSPECTS

Morgan Stanley's main forecast for this year calls for returns ranging from a loss of as much as 3.8% to a 0.2% gain as an improving economy leads the Federal Reserve to trim its bond-buying program, pushing up interest rates, the bank said in a Jan. 7 report.

Tax-exempt securities lost 2.9% last year, Bank of America Merrill Lynch data show. The last time munis posted two straight annual losses was 1980-81, according to Barclays PLC data.

Created in 2007, MUB is an exchange-traded fund. ETFs are similar to mutual funds that track indexes of equities, bonds or commodities. Yet they can be bought and sold during the trading day and their prices may rise or fall more than the value of the assets they hold.

Demand has revived as munis are rallying this month and as a months-long cash exodus from muni mutual funds is slowing. Benchmark 10-year munis yield 2.74%, down from as high as 3.05% last month, Bloomberg data show. The rate reached 1.52% in December 2012, the lowest since at least January 2009.

“People have been trained to think of interest rates just being too low,” said Mosley at Trident. “And that's just not true anymore.”

Mosley estimates that MUB will earn in 2014 what the fund's bonds yield on average, which is 3.04%, Bloomberg data show.

As individual investors return to munis, they can benefit from potential yield swings resulting from reduced holdings by Wall Street brokers and dealers, said George Friedlander, chief municipal strategist at Citigroup.

The companies, the municipal market's middlemen, held $18 billion of munis as of Sept. 30, the least since June 2002, according to Federal Reserve data.

“With a relatively thin and volatile market, there will be entry points for investors,” Mr. Friedlander said.

The latest fund data shows individuals, who own about 60% of the market either directly or through mutual funds, are growing more bullish.

Investors pulled about $19 million from U.S. muni mutual funds last week, the least since withdrawals began in May, according to Lipper U.S. Fund Flows data.

“There's still room for some more outflows, but ultimately we'll get close to stable or zero,” Mr. Friedlander said.

Meanwhile, in the market for local debt, issuers have scheduled about $7.4 billion of sales in the next 30 days, Bloomberg data show. The tally is below the one-year average of $9.2 billion, marking an issuance lull that is helping drive up investors' appetite for tax-free bonds.

The benchmark 10-year muni yield compares with 2.83% on similar-maturity Treasuries.

The ratio of the interest rates, a measure of relative value, is about 97%, close to the lowest since May, compared with a five-year average of 99%. The lower the figure, the more expensive munis are compared with federal securities.

(Bloomberg News)

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

Stephanie Bogan: What's really holding advisers back from achieving their goals

The only thing holding financial advisers back from accomplishing what they want is the assumptions they're making, according to Stephanie Bogan, founder of Educe Inc.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print